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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
COMMISSION FILE NO. 0-12641
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[LOGO]
IMAGING TECHNOLOGIES CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0021693
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
11031 Via Frontera
San Diego, California 92127
(619) 613-1300
(Address of Principal Executive Offices and Registrant's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.005 PAR VALUE
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
At October 9, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $20,625,000, based on the
last trade price as reported by The Nasdaq SmallCap Market. For purposes of this
calculation, shares owned by officers, directors, and 10% stockholders known to
the registrant have been excluded. Such exclusion is not intended, nor shall it
be deemed, to be an admission that such persons are affiliates of the
registrant.
At October 9, 1998, there were 12,801,078 shares of the registrant's Common
Stock, $0.005 par value, issued and outstanding.
Information required by Part III of this Form 10-K is incorporated therein by
reference from the Company's definitive Proxy Statement with respect to its 1998
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120
days after June 30, 1998.
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FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K may
contain forward-looking statements that involve a number of risks and
uncertainties, including those discussed below at "Risks and Uncertainties."
While this outlook represents management's current judgement on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested below.
Readers are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual Report. The
Company undertakes no obligation to publicly release any revisions to
forward-looking statements to reflect events or circumstances arising after
the date of this document. See "Risks and Uncertainties." References in this
Annual Report on Form 10-K to "ITEC" and the "Company" are to Imaging
Technologies Corporation and its wholly-owned direct and indirect
subsidiaries, Personal Computer Products, Incorporated, a California
corporation (PCPI), NewGen Imaging Systems, Incorporated, a California
corporation (NewGen), and Prima International a California corporation
(Prima), Color Solutions, Inc, a California corporation (CSI) and McMican
corporation a California corporation (McMican), ITEC Europe, Ltd, formed under
the laws of the United Kingdom, (ITEC Europe) and AMT Accel Uk Ltd, formed
under the laws of the United Kingdom (AMT).
PART I
ITEM 1.
BUSINESS
Imaging Technologies Corporation develops, manufactures, and distributes
high-quality digital imaging solutions. The Company produces a wide range of
printer and imaging products for use in graphics and publishing, digital
photography as well as other niche business and technical markets. Beginning
with a core technology in the design and development of controllers for
non-impact printers and multifunction peripherals, the Company has expanded
its product offerings to include monochrome and color printers, external
print servers, digital image storage devices, and software to improve the
accuracy of color reproduction.
ITEC manufactures advanced digital color and monochrome output devices for
the publishing, prepress, graphic design, on-demand printing, business and
technical office, and digital photography markets, as well as other niche
applications. The new generation of products incorporate advanced printer and
imaging controller technologies to produce faster, enhanced image output at
competitive prices. All of ITEC's color laser and dye-sublimation printers
are "ColorBlind Aware" incorporating the Company's proprietary
ColorBlind-Registered Trademark- Color Management software.
ITEC's Xtinguisher-TM- line of external print servers are designed to enable
printing of high-quality images on digital color copiers. This is an
extension of ITEC's technical strengths in embedded controllers. In the
digital photographic imaging and storage market, ITEC offers specialized
memory modules, PC cards and associated readers, digital cameras, removable
hard disks, and solid state data storage devices. ITEC manufactures data
storage modules, as well as distributes imaging and storage solutions.
The Company's ColorBlind-Registered Trademark- Color Management software is a
suite of applications, utilities and tools designed to create, edit and apply
industry standard ICC (International Color Consortium) profiles that produce
accurate color rendering across a wide range of peripheral devices. "ColorBlind
Aware" is being recognized as an industry standard for color accuracy as
manufacturers integrate ColorBlind's Color Management resources into their
product designs.
ITEC benefits from technology alliances with industry leaders, Adobe Systems
Inc. (Adobe) and NEC Electronics, to develop embedded printer controller
and digital imaging technology. As one of only a handful of authorized
Adobe-Registered Trademark- PostScript-Registered Trademark-Development
Partners, ITEC produces printer controllers that provide modularity, and
performance advantages for its OEM customers. ITEC's customers also benefit
by outsourcing their engineering development and manufacturing to ITEC, thus
achieving faster time-to-market.
Imaging Technologies Corporation (NASDAQ: ITEC) was incorporated in March, 1982
under the laws of the State of California, and reincorporated in May, 1983 under
the laws of the State of Delaware. The Company's principal executive offices
are located at 11031 Via Frontera, San Diego, California 92127. The Company's
main phone number is (619) 613-1300.
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MARKET OVERVIEW
ITEC's principal markets encompass many aspects of digital imaging, printing
and image storage technology. The Company's primary market segments include
digital memory storage, used to capture and transfer the image from the
digital camera to a computer for manipulation and placement; image management
technology to control the function of the printer or digital copier; as well
as digital printers and proofing devices that take the image to the plate
making stage. Throughout the imaging process, color integrity is an important
underlying requirement. Factors that the Company believes will influence
these markets in the future include the widespread use of color applications
at the desktop, demand for higher quality color reproduction, expanded use of
the Internet for document dissemination, growth of office networks and the
increased acceptance and use of digital photography.
The desktop color laser printer market is a rapidly-growing segment of the
computer printing industry. The total color laser market grew 42% from 1996
to 1997, and International Data Corporation ("IDC") estimates that the
shipments of desktop color laser printers are expected to grow at a 1997-2002
compound annual growth rate of 56%. The Company believes this is largely due
to increased user education on the benefits of color in office documents and
the availability of higher quality, easier to use, lower priced desktop color
laser printers. In 1997, the color laser printer market was made up of 78%
desktop color laser printer shipments, and 21% color laser copier shipments.
IDC estimates that by 2002, desktop color laser printer shipments are
expected to increase to 91% of the total and that total printer shipments in
the US are expected to reach 22 million units.
Changes in the technology of document creation, management, production and
transmittal are transforming the imaging market. The growth of networks, the
increased availability and dissemination of documents on the Internet, and
the rapid adoption of color at the desktop have significantly changed the way
printing and document management is being administered. In just a few short
years, the market has gone from dedicated printers and scanners at the
workstation, to a document workflow with network shared imaging solutions and
remote document delivery and distribution. "Print and Distribute" has given
way to "Distribute and Print". Imaging professionals are dealing with an
increasingly complex and distributed workflow. Powerful authoring
applications enable the creation of documents, the components of which
originate from multiple locations around the world. Adobe Systems'
Acrobat-Registered Trademark- Portable Document Format (PDF)-Registered
Trademark- and PostScript-Registered Trademark- printing technologies are
becoming increasingly important elements in the document imaging workflow due
to their ability to improve the efficiency of digital master document
transmission and the reliability of printing at remote locations. As large
corporations master the challenges of image and document management, the
resultant solutions trickle down to small business and the home office
environment.
The transition from traditional film-based photography to digital technologies
is driving a revolution in photographic imaging. This revolution is producing
rapid growth in the use of digital products and tools. Today there are about 120
different digital still cameras on the market for under $1,000.
ITEC believes that the overriding demands of the imaging market are for higher
resolution, faster printing, easier and more consistent color rendering, and a
reduced dependence on device specific applications. In the future, imaging
productivity will drive the market as customers shift from the current print and
distribute mode, to an on-demand global distribute and print environment.
BUSINESS STRATEGY
The Company's mission is to be a global market leader in digital imaging by
delivering higher-quality, easier to use solutions and engineering greater
value into each product. ITEC is focused on the continued development and
manufacturing of advanced integrated digital imaging solutions. The primary
products ITEC is targeting include embedded printer controller technology for
non-impact printers (laser, dye-sublimation and ink jet); external digital
print controllers and print servers for the Print-On-Demand market;
specialized printers and digital proofers for the graphics and publishing
markets, and other niche business applications; color management software
products; and data storage modules for digital imaging.
PRINTER CONTROLLER PRODUCTS
ITEC's core intelligence is in the design, development, and integration of
digital printing controller technology. The printer controller manages the
intelligent functions of the modern laser or other non-
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impact printer. The controller is a powerful image management microcomputer
that directs the output functions of the printer, including the layout, form,
font, and function of the printed image. ITEC engineers and manufactures
embedded imaging controllers for original equipment manufacturers (OEMs).
ITEC's customers benefit by outsourcing their engineering development and
manufacturing, thus achieving faster time-to-market. In an age of constantly
changing technology, the ability to achieve faster time-to-market is critical
to product success.
ITEC has established relationships with leading OEMs around the world and
with Adobe Systems, Inc. As one of only three independent authorized
Adobe-Registered Trademark- PostScript-Registered Trademark-Development
Partners, ITEC has the ability to embed the core technology of PostScript
into every image management product. Adobe-Registered Trademark-
PostScript-Registered Trademark- is the most widely accepted printing and
imaging technology for corporations, publishers, and government agencies. Of
all commercial publications printed, 75% are imaged on PostScript-Registered
Trademark- devices. These include monochrome and color printers, imagesetters
and plate making devices, as well as direct digital printing systems.
The newest release, Adobe-Registered Trademark- PostScript-Registered
Trademark-3-TM-, takes the PostScript standard beyond a page description
language into a fully optimized printing system that addresses a broad range
of new requirements in today's increasingly complex document workflow. By
incorporating PostScript-Registered Trademark- technology, ITEC's controllers
can deliver advanced features and universal operating environment in the
digital document arena.
ITEC produces a range of integrated controller solutions for printers and
multifunction peripherals. The Company's new line of ImageScript-Registered
Trademark- embedded imaging controllers are sold to OEM customers for
integration into digital color and monochrome printers. ImageScript represents a
milestone in controller technology. With true Adobe-Registered Trademark-
PostScript-Registered Trademark- 3-TM- compatibility, a powerful RISC (reduced
instruction set computer) processor, image enhancement coprocessors and
resolution up to 1200 dpi, the ImageScript controller accommodates a wide range
of new printer designs. The flexible architecture of the ImageScript controller
allows the OEM customer to select from a range of options including processor
speed, resolution and communication/networking connectivity.
PRINT-ON-DEMAND
The Print-On-Demand market is a natural extension for ITEC's technical strengths
in embedded print controllers, as well as ITEC's color management technology.
The combination of digital color copiers and powerful external controllers are
the foundation for the Print-On-Demand movement. Where once we had photocopy
machines that scanned and output one printed page at a time, today digital copy
machines bypass the desktop printer in the digital workflow and go directly to
reproducing quantities of collated and bound documents.
The Xtinguisher-TM- line of network print servers is designed to enable
printing of high-quality images on digital color copiers, as well as wide
format color printers. This new line of Windows-Registered Trademark-
NT-based servers incorporate Adobe-Registered Trademark-
PostScript-Registered Trademark-to improve performance and enhance image
quality. A single Xtinguisher-TM- server is designed to simultaneously support
several copiers. Integrated into each Xtinguisher workstation is ITEC's
ColorBlind-Registered Trademark- Color Management.
For the monochrome digital duplicator market, ITEC produces an Adobe-Registered
Trademark- PostScript-Registered Trademark- 3-TM- raster image processing (RIP)
controller. This controller is sold to OEM manufacturers and integrated into
digital duplicators. Unlike a copier, digital or analog, a digital duplicator
creates a print master that is placed on a drum within the unit. The drum then
transfers the image to the paper using lithography ink. A digital duplicator is
referred to as a "stencil duplicator" or more generically as a modern day
equivalent of the Mimeograph machine. Digital duplicators are used for short run
printing due to significant cost savings over conventional copy machines when
printing in relative volume. Primary users of digital duplicators include
quick-print shops, churches, schools, and government offices. ITEC's digital
duplicator controller has a universal architecture that allows it to manage the
output functions of a wide range of duplicator products produced by most of the
major manufacturers.
DIGITAL PRINTERS
ITEC's new line of laser printers are network compatible and incorporate
Adobe-Registered Trademark- PostScript-Registered Trademark- 3-TM- technology to
provide higher performance, enhanced image quality, and advanced page
processing.
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Under the ITEC and NewGen brand names, the Company sells an expanding range
of products in both monochrome and color.
The Company's product strategy is to produce higher-value added printers that
meet the more exacting requirements of specialized segments of the market.
The ColorImage-Registered Trademark- 2400 color laser printers feature
proprietary printer controller technology and color management software
developed by ITEC. With resolution up to 1200 dpi, a powerful RISC processor,
a special image enhancement chip, and a precision toner delivery system,
these printers are designed to produce quick, convenient color or monochrome
output in the business or technical office environment. The
ColorImage-Registered Trademark- lasers are the first of a new generation
that integrate ITEC's key technical strengths in image enhancement and
placement, embedded controller function, and color management and represent
the Company's first entry into the office color market.
The new LaserImage-TM- 1200 series of laser printers are designed to quickly
produce full-bleed proofs for pre-press and graphic arts applications. These
printers are a workgroup solution for quickly printing complex documents or high
volumes. LaserImage-TM- 1200 printers feature Adobe-Registered Trademark-
PostScript-Registered Trademark- 3-TM- with a RISC processor-based controller
technology designed and engineered by ITEC. These printers are available in a
number of network compatibility and paper size configurations to satisfy
specific prepress proofing and workgroup requirements.
In the digital prepress market, ITEC's ColorImage-Registered Trademark- 3120
is designed to provide accurate color prepress proofs. The
ColorImage-Registered Trademark- 3120 is a dual technology (dye-sublimation
and thermal) continuous tone color printer which is capable of producing full
bleed tabloid/A3 sized (12.4" x 19.8") output of digital color comps and
proofs for computer-to-plate and direct-to-press applications as well as
photo-realistic renderings. The color output on the ColorImage-Registered
Trademark- 3120 is highly accurate and repeatable.
ITEC is expanding its product offerings in the digital photographic market
with its next generation digital color photographic printer. The
ColorImage-Registered Trademark- 3000 is a dye-sublimation color printer that
produces continuous tone color images targeted for the mid-to-high-end
digital photography market. The ColorImage-Registered Trademark- 3000
delivers digital photographs with the look and feel of traditional glossy
photographs. Precise control of the thermal printing combines with a new
high-density ink to produce vivid saturated colors, smooth gradations, and
print-to-print color uniformity.
COLOR MANAGEMENT
Easy to use, predictable and consistent, color is one of the largest single
problems facing the imaging industry. The way different devices deal with color
is referred to as the color space. Unfortunately the color space for printed
materials (CMYK: cyan, magenta, yellow and black) is different from the color
space for devices such as cameras, scanners and monitors (RGB: red, green,
blue). Because these color spaces are different in size and the colors they
contain, a color management system is needed so users can convert their files
for use with the different devices. Conversion among color spaces is typically
performed by a color management method (CMM). But the CMM must know something
about the characteristics of each device to perform the color management as
accurately as possible. The varying characteristics of each device are captured
in a device profile. The ICC - International Color Consortium - has established
a standard for the format for these ICC profiles.
ITEC's ColorBlind-Registered Trademark- Color Management software is a suite of
applications, utilities and tools that allows users to precisely profile each
device in the color workflow including scanners, monitors, digital cameras,
printers and other specialized digital color input and output devices. Devices
are profiled in conformance with the internationally accepted ICC standards.
Once profiled, ColorBlind balances these profiles to produce accurate,
consistent and reliable color rendering from input to output.
"ColorBlind Aware" is being recognized as an industry standard for color
accuracy, as printer scanner and monitor manufacturers integrate ColorBlind's
Color Management resources into product designs. ColorBlind is sold as a
standalone application or licensed by OEM's for resale in conjunction with
peripherals.
DIGITAL IMAGE STORAGE
Continued expansion of the digital photographic market creates increasing
opportunities for ITEC's "dfilm-TM-" (digital film) line of digital photographic
storage products and accessories. As consumers use and share their digital
pictures, demand increases for the digital media to quickly transfer the image
from the camera to the computer or printer for hardcopy output. ITEC
manufactures a range of digital imaging storage products to fit most of the
digital cameras on the market today.
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"dfilm-TM-" is the equivalent of traditional chemical-based film in the new
generation of digital cameras. The "dfilm-TM-" products feature Flash memory
modules for high-speed transfer of stored images and data. The "dfilm"
modules also have applications in many portable devices such as handheld
personal computers running the Windows CE-Registered Trademark- operating
system.
OPERATIONS
EXPANDED INTERNATIONAL PRESENCE.
The Company intends to pursue international markets as key avenues for growth
and to increase the percentage of sales generated in international markets.
In Fiscal 1998, 1997, and 1996, sales outside the United States represented
approximately 56%, 57% and 81% of the Company's net sales, respectively. In
1998, the Company established a European Headquarters to facilitate its
European sales operations. Located in Bracknell, Berkshire, near London, ITEC
Europe provides both sales and support functions to customers within the UK,
European Community (EC) and Eastern European Block for ITEC's printer and
imaging products. In addition, at the close of Fiscal 1998, ITEC acquired the
European-based assets and operations of AMT. AMT was the European sales and
distribution arm of Singapore-based Lam Soon, manufacturer of dot matrix,
laser and inkjet printers and plotters for specialized applications.
The Company expects export sales to continue to represent a significant
portion of its sales. International sales and operations are subject to
risks such as the imposition of governmental controls, export license
requirements, restrictions on the export of critical technology, currency
exchange fluctuations, political instability, trade restrictions, changes in
tariffs, difficulties in staffing and managing international operations and
collecting accounts receivable. In addition, the laws of certain countries
do not protect the Company's products and intellectual property rights to the
same extent as the laws of the United States. As the Company continues to
expand its international business, there can be no assurance that these
factors will not have an adverse effect on the Company.
MARKETING AND DISTRIBUTION CHANNELS
ITEC's products are marketed and sold through an established distribution
channel of value-added resellers (VARS), manufacturer's representatives,
retail vendors, and systems integrators. ITEC has a network of dealers and
distributors in the United States and Canada, in the EC and on the European
Continent, as well as a growing number of resellers in Africa, Asia, the
Middle East, Latin America, and Australia. ITEC supports its worldwide
distribution network and end-user customers through centralized
manufacturing, distribution, and repair operations headquartered in San
Diego, which serve North and South America, the Pacific Rim and Asia. In
addition, ITEC Europe, located in a suburb of London, manages distribution
and service for customers in Europe, Africa and the Middle East. As of June
30, 1998, the Company directly employed 32 individuals involved in marketing
and sales activities. The sales and marketing operation is headquartered in
ITEC's Silicon Valley offices in Northern California.
The Company's sales are principally made through distributors which may carry
competing product lines. Such distributors could reduce or discontinue sales
of the Company's products which could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that these independent distributors will devote the resources
necessary to provide effective sales and marketing support of the Company's
products. In addition, the Company is dependent upon the continued viability
and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique
factors affecting the Company's markets. The Company believes that its
future growth and success will continue to depend in large part upon its
distribution channels. There can be no assurance that actual bad debts from
the Company's distributors will not exceed recorded allowances resulting in a
material adverse effect on the Company. To expand its distribution channels,
the Company has entered into select OEM arrangements that allow it to address
specific market segments or geographic areas. In order to prevent inventory
write-downs, to the extent that OEM customers do not purchase products as
anticipated, the Company may need to convert such products to make them
salable to other customers.
PRODUCTION AND SOURCES OF SUPPLY
ITEC presently outsources the production of most of its manufactured products
through a number of vendors located in Northern and Southern California. These
vendors assemble products, utilizing components purchased by the Company from
other sources or from their own internal inventory. The terms of supply
contracts are negotiated separately in each instance. The Company believes that
its present vendors have sufficient capacity to meet projected market demand for
the Company's products or that alternate production sources are available
without undue disruption. ITEC has not experienced any difficulty over the past
several years in engaging contractors or in purchasing components.
ITEC's contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. ITEC, in turn, includes
appropriate software, performs additional tests on the products, then packages
and ships products into the distribution channels. In addition to buying such
items as printed circuit boards and other components from outside vendors, the
Company purchases and/or licenses software programs, including operating systems
and intellectual property modules (pre-written software code to execute a
specifically defined operation). ITEC purchases these products from vendors who
have licenses to sell such software to the Company from the originators of such
software, and has, from time to time, directly licensed system software that is
either embedded or otherwise incorporated in certain ITEC products.
While most components are available locally from multiple vendors, certain
components used in the Company's products are only available from single
sources. Although alternate suppliers are readily available for many of
these components, for some components the process of qualifying replacement
suppliers, replacing tooling or ordering and receiving replacement components
could take several months and cause substantial disruption to the Company's
operations. Any significant increase in component prices or decrease in
component availability could have a material adverse effect on the Company.
RESEARCH AND DEVELOPMENT
The markets for the Company's products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in unit
selling prices due to competitive pressures over the life of a product are
common. The Company's future success will depend on its ability to continue
to develop and manufacture competitive products and achieve cost reductions
for its existing products. In addition, the Company monitors new technology
developments and coordinates with suppliers, distributors and dealers to
enhance existing products and lower costs. Advances in technology will
require increased investment to maintain the Company's market position. The
Company's financial condition and results of operations could be adversely
affected if the Company is unable to develop and manufacture new, competitive
products in a timely manner.
COMPETITION
The markets for the Company's products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The Company's ability to compete in its markets
depends on a number of factors within and outside its control, including the
success and timing of product introductions by the Company and its
competitors, selling prices, product performance, product distribution,
marketing ability and customer support. A key element of the Company's
strategy is to provide competitively priced, quality products. There can be
no assurance that the Company's products will continue to be competitively
priced. The Company has reduced prices on certain of its products in the
past and will likely continue to do so in the future. Price reductions, if
not offset by similar reductions in product costs, will affect gross margins
and may adversely affect the Company's financial condition and results of
operations. See "Risks and Uncertainties--Short Product Lives and
Technological Change" and "Business--Competition."
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INTELLECTUAL PROPERTY
ITEC's software products, hardware designs, and circuit layouts are
copyrighted. However, copyright protection does not prevent other companies
from emulating the features and benefits provided by the Company's software,
hardware designs or the integration of the two. The Company protects its
software source code as trade secrets and makes its Company proprietary
source code available to OEM customers only under limited circumstances and
specific security and confidentiality constraints. In many product hardware
designs, the Company develops application-specific integrated circuits
(ASICs) which encapsulate proprietary technology and are installed on the
circuit board. This can serve to significantly reduce the risk of duplication
by competitors, but in no way ensures the complete lack of potential for a
competitor to replicate a feature or the benefit in a similar product. The
Company currently holds no patents. Because computer and printer imaging
technology is such a rapidly changing business environment, the Company
believes the effectiveness of patents, trade secrets, and copyright
protection are less important in influencing long term success than the
experience of the Company's technical team, contractual relationships, and a
continuous focus on technical advancement.
The Company has obtained U.S. registration for several of its trade names or
trademarks, including: PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, ImagePress, and ImageNet. These trade names are used to
distinguish the Company's products in the marketplace. Pending trademarks for
which registration is currently being sought include: dfilm, Xtinguisher,
ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP.
From time to time, certain competitors have asserted patent rights relevant
to the Company's business. The Company expects that this will continue. The
Company carefully evaluates each assertion relating to its products. If the
Company is not successful in establishing that asserted rights have not been
violated, the Company could be prohibited from marketing the products that
incorporate such technology. The Company could also incur substantial costs
to redesign its products or to defend any legal action taken against the
Company. If the Company's products should be found to infringe upon the
intellectual property rights of others, the Company could be enjoined from
further infringement and be liable for any damages. The Company relies on a
combination of trade secret, copyright and trademark protection and
non-disclosure agreements to protect its proprietary rights. There can be no
assurance, however, that the measures adopted by the Company for the
protection of its intellectual property will be adequate to protect its
interests, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
PERSONNEL RESOURCES
Imaging Technologies Corporation employed a total of 124 individuals worldwide
as of June 30, 1998. None of ITEC's employees are represented by any union. Of
this number 14 are involved in corporate administration and finance, 56 are in
engineering and research and development, 13 are in manufacturing operations, 32
are in sales and marketing and 9 are in technical support. Of that number,
ITEC's European Headquarters employed 10 individuals.
RISKS AND UNCERTAINTIES
FUTURE CAPITAL NEEDS
There can be no assurance with respect to the Company's future profitability
or revenue growth. Losses may occur on a quarterly or annual basis for a
number of reasons outside the Company's control. See "Potential Fluctuation
in Quarterly Performance." The growth of the Company's business will require
the commitment of substantial capital resources. If funds are not available
from operations, the Company will need additional funds. The Company may seek
such additional funding through public and private financing, including debt
or equity financing. Adequate funds for these purposes, whether through
financial markets or from other sources, may not be available when needed or,
if available, not on terms acceptable to the Company. Insufficient funds may
require the Company to delay, reduce or eliminate some or all of its planned
activities.
POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE
The Company's quarterly operating results can fluctuate significantly depending
on factors such as the timing of product announcements and subsequent
introductions of products by the Company and its competitors, availability and
cost of components, timing of shipments of the Company's products, mix of
product families shipped, market acceptance of new products, seasonality,
currency fluctuations, changes in prices by the Company and its competitors, and
price protection for selling price reductions offered to distributors and OEMs.
In addition, the timing of expenditures for staffing and related support costs,
advertising, trade show attendance, promotion, research and development
expenditures, and, of course, changes in general economic conditions can impact
quarterly performance. Any one of these factors could have a material adverse
effect on the Company's results of operations. The Company may experience
significant quarterly fluctuations in total revenues as well as operating
expenses with respect to future new product introductions. In addition, the
Company's component purchases, production and spending levels are based upon
forecast demand for the Company's products. Accordingly, any inaccuracy in
forecasting could adversely affect the Company's financial condition and results
of operations. Demand for the Company's products could be adversely affected by
a slowdown in the overall demand for computer systems, printer products or
digitally printed images. The Company's failure to complete shipments during a
quarter could have a material adverse effect on the Company's results of
operations for that quarter. Quarterly results are not necessarily indicative of
future performance for any particular period.
HIGHLY COMPETITIVE INDUSTRY
The markets for the Company's products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The Company's ability to compete in its markets
depends on a number of factors within and outside its control, including the
success and timing
7
<PAGE>
of product introductions by the Company and its competitors, selling prices,
product performance, product distribution, marketing ability and customer
support. A key element of the Company's strategy is to provide competitively
priced, quality products. There can be no assurance that the Company's
products will continue to be competitively priced. The Company has reduced
prices on certain of its products in the past and will likely continue to do
so in the future. Price reductions, if not offset by similar reductions in
product costs, will affect gross margins and may adversely affect the
Company's financial condition and results of operations. See "Short Product
Lives and Technological Change."
SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in unit
selling prices due to competitive pressures over the life of a product are
common. The Company's future success will depend on its ability to continue to
develop and manufacture competitive products and achieve cost reductions for its
existing products. In addition, the Company monitors new technology developments
and coordinates with suppliers, distributors and dealers to enhance existing
products and lower costs. Advances in technology will require increased
investment to maintain the Company's market position. The Company's financial
condition and results of operations could be adversely affected if the Company
is unable to develop and manufacture new, competitive products in a timely
manner.
DEVELOPING MARKETS AND APPLICATIONS
The markets for the Company's products are relatively new and are still
developing. The Company believes that there has been growing market acceptance
for color printers and related technologies and supplies. There can be no
assurance that such markets will continue to grow. Other technologies are
constantly evolving and improving. There can be no assurance that products based
on these other technologies will not have a material adverse effect on the
demand for the Company's products.
DEPENDENCE ON ADOBE RELATIONSHIP
The Company's relationship with Adobe as an authorized Co-development Partner to
implement the inclusion of Adobe's PostScript language on printer controllers
and in software products is an integral part of its business strategy. There can
be no assurance that this relationship will be successful or that it will remain
in force for some time to come. Loss of the Adobe relationship could have a
substantial negative effect on future revenues.
DEPENDENCE UPON SUPPLIERS
At present, many of the Company's products use technology licensed from outside
suppliers. The Company relies heavily on Adobe for upgrades and support of the
PostScript language. In the case of its font products, the Company licenses such
fonts from outside suppliers, including Adobe, who also own the intellectual
property rights to such fonts. The reliance on third-party suppliers involves
risk, including limited control over potential hardware and software
incompatibilities with the Company's products. Furthermore, there can be no
assurance that all of the suppliers of products marketed by the Company will
continue to license their products to the Company indefinitely, or that these
suppliers will not license to other companies simultaneously.
RISKS RELATED TO ACQUISITIONS
During Fiscal 1998, ITEC made a number of acquisitions to complement its
technical position in the imaging market. CSI, a producer of color management
software was acquired in a stock transaction. McMican, a two-year-old
manufacturer of digital memory products for data storage and exchange between
digital cameras and imaging systems was acquired in a stock transaction. ITEC
also acquired the assets of AMT, the European sales and distribution
subsidiary of Singapore-based Lam Soon. AMT had been ITEC's master stocking
distributor of printers and supplies in the EC and on the European Continent.
The Company's future performance will depend in part on its ability to
integrate and grow these acquired businesses.
Acquisitions involve a number of risks, including: the integration of acquired
products and technologies in a timely manner; the integration of businesses and
employees with the Company's business; the management of
geographically-dispersed operations; adverse effects on the Company's reported
operating results from acquisition-related charges and amortization of goodwill;
potential increases in stock compensation expense and increased compensation
expense resulting from newly-hired employees; the diversion of management
attention; the assumption of unknown liabilities; potential disputes with the
sellers of one or more acquired entities; the inability of the Company to
maintain customers or goodwill of an acquired business; the need to divest
unwanted assets or products; and the
8
<PAGE>
possible failure to retain key acquired personnel. Client satisfaction or
performance problems with an acquired business could also have a material
adverse effect on the reputation of the Company as a whole, and any acquired
business could significantly under perform relative to the Company's
expectations. The Company is currently facing all of these challenges and its
ability to meet them over the long term has not been established. As a
result, there can be no assurance that the Company will be able to integrate
acquired businesses, products or technologies successfully or in a timely
manner in accordance with its strategic objectives, which could have a
material adverse effect on the Company.
In order to grow its business, the Company may continue to acquire businesses
that it believes are complementary. The successful implementation of this
strategy depends on the Company's ability to identify suitable acquisition
candidates, acquire such companies on acceptable terms, integrate their
operations and technology successfully with those of the Company, retain
existing customers and maintain the goodwill of the acquired business. There can
be no assurance that the Company will be able to identify additional suitable
acquisition candidates, acquire any such candidates on acceptable terms,
integrate their operations or technology successfully, or retain customers or
maintain the goodwill of the acquired business. Moreover, in pursuing
acquisition opportunities, the Company may compete for acquisition targets with
other companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition. In addition, the Company would likely face the same integration
issues described above with respect to any future acquisitions. If the Company
is unable to manage internal or acquisition-based growth effectively, the
Company would be materially and adversely affected.
Due to all of the foregoing, the Company's execution on an acquisition
strategy or any individual completed or future acquisition may have a
material adverse effect on the Company. In addition, if the Company issues
equity securities as consideration for any future acquisitions, existing
stockholders will experience further ownership dilution and such equity
securities could have rights, preferences, privileges or other rights
superior to those of the Common Stock. See "--Future Capital Needs," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent, in part, on its ability to attract and
retain qualified management and technical personnel. Competition for such
personnel is intense, and the inability to attract additional key employees or
the loss of one or more key employees could adversely affect the Company. There
can be no assurance that the Company will retain its key personnel.
COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES
ITEC presently outsources the production of most of its manufactured products
through a number of vendors located in California. These vendors assemble
products, utilizing components purchased by the Company from other sources or
from their own internal inventory. The terms of supply contracts are
negotiated separately in each instance. The Company believes that its present
vendors have sufficient capacity to meet projected market demand for the
Company's products or that alternate production sources are available without
undue disruption. ITEC has not experienced any difficulty over the past
several years in engaging contractors or in purchasing components.
ITEC's contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. ITEC, in turn, includes
appropriate software, performs additional tests on the products, then
packages and ships products into the distribution channels. In addition to
buying such items as printed circuit boards and other components from outside
vendors, the Company purchases and/or licenses software programs, including
operating systems and intellectual property modules (pre-written software
code to execute a specifically defined operation). ITEC purchases these
products from vendors who have licenses to sell such software to the Company
from the originators of such software, and has, from time to time, directly
licensed system software that is either embedded or otherwise incorporated in
certain ITEC products.
While most components are available locally from multiple vendors, certain
components used in the Company's products are only available from single
sources. Although alternate suppliers are readily available for many of these
components, for some components the process of qualifying replacement
suppliers, replacing tooling or ordering and receiving replacement components
could take several months and cause substantial disruption to the Company's
operations. Any significant increase in component prices or decrease in
component availability could have a material adverse effect on the Company.
9
<PAGE>
POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS
The Company's software products, hardware designs, and circuit layouts are
copyrighted. However, copyright protection does not prevent other companies
from emulating the features and benefits provided by the Company's software,
hardware designs or the integration of the two. The Company protects its
software source code as trade secrets and makes its Company proprietary
source code available to OEM customers only under limited circumstances and
specific security and confidentiality constraints. In many product hardware
designs, the Company develops ASICs which encapsulate proprietary technology
and are installed on the circuit board. This can serve to significantly
reduce the risk of duplication by competitors, but in no way ensures the
complete lack of potential for a competitor to replicate a feature or the
benefit in a similar product. The Company currently holds no patents. Because
computer and printer imaging technology is such a rapidly changing business
environment, the Company believes the effectiveness of patents, trade
secrets, and copyright protection are less important in influencing long term
success than the experience of the Company's technical team, contractual
relationships, and a continuous focus on technical advancement.
The Company has obtained U.S. registration for several of its trade names or
trademarks, including: PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, ImagePress, and ImageNet. These trade names are used
to distinguish the Company's products in the marketplace. Pending trademarks
for which registration is currently being sought include: dfilm, Xtinguisher,
ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP.
From time to time, certain competitors have asserted patent rights relevant
to the Company's business. The Company expects that this will continue. The
Company carefully evaluates each assertion relating to its products. If the
Company is not successful in establishing that asserted rights have not been
violated, the Company could be prohibited from marketing the products that
incorporate such technology. The Company could also incur substantial costs
to redesign its products or to defend any legal action taken against the
Company. If the Company's products should be found to infringe upon the
intellectual property rights of others, the Company could be enjoined from
further infringement and be liable for any damages. The Company relies on a
combination of trade secret, copyright and trademark protection and
non-disclosure agreements to protect its proprietary rights. There can be no
assurance, however, that the measures adopted by the Company for the
protection of its intellectual property will be adequate to protect its
interests, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
INTERNATIONAL OPERATIONS
The Company conducts business globally. Accordingly, the Company's future
results could be adversely affected by a variety of uncontrollable and
changing factors including foreign currency exchange rates; regulatory,
political or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; government spending
patterns; and natural disasters, among other factors. In Fiscal 1998, the
Company experienced contract cancellations and the write-off of significant
receivables related to continuing economic deterioration in foreign
countries, particularly in Asian countries. Any or all of these factors could
have a material adverse impact on the Company's future international business
in these or other countries and on the Company's financial condition and
results of operations.
DEPENDENCE ON EXPORT SALES
The Company intends to pursue international markets as key avenues for growth
and to increase the percentage of sales generated in international markets.
In Fiscal 1998, 1997, and 1996, sales outside the United States represented
approximately 56%, 57% and 81% of the Company's net sales, respectively. In
1998, the Company established a European Headquarters to facilitate its
European sales operations. Located in Bracknell, Berkshire, near London,
ITEC Europe provides both sales and support functions to customers within the
United Kingdom, EC and Eastern European Block for ITEC's printer and imaging
products. In addition, at the close of Fiscal 1998, ITEC acquired the
European-based assets and operations of AMT. AMT was the European sales and
distribution arm of Singapore-based Lam Soon, manufacturer of dot matrix,
laser and inkjet printers and plotters for specialized applications.
The Company expects export sales to continue to represent a significant
portion of its sales. International sales and operations are subject to risks
such as the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, currency exchange
fluctuations, political instability, trade restrictions, changes in tariffs,
difficulties in staffing and managing international operations and collecting
accounts receivable. In addition, the laws of certain countries do not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. As the Company continues to expand
its international business, there can be no assurance that these factors will
not have an adverse effect on the Company.
RELIANCE ON INDIRECT DISTRIBUTION
The Company's products are marketed and sold through an established
distribution channel of VARs, manufacturer's representatives, retail vendors,
and systems integrators. ITEC has a network of dealers and distributors in
the United States and Canada, in the EC and on the European Continent, as
well as a growing number of resellers in Africa, Asia, the Middle East, Latin
America, and Australia. ITEC supports its worldwide distribution network and
end-user customers through centralized manufacturing, distribution, and
repair operations headquartered in San Diego, which serve North and South
America, the Pacific Rim and Asia. In addition, ITEC Europe Ltd., located in
a suburb of London, manages distribution and service for customers in Europe,
Africa and the Middle East. As of June 30, 1998, the Company directly
employed 32 individuals involved in marketing and sales activities. The sales
and marketing operation is headquartered in ITEC's Silicon Valley offices in
Northern California.
The Company's sales are principally made through distributors which may carry
competing product lines. Such distributors could reduce or discontinue sales
of the Company's products which could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that these independent distributors will devote the resources
necessary to provide effective sales and marketing support of the Company's
products. In addition, the Company is dependent upon the continued viability
and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique
factors affecting the Company's markets. The Company believes that its future
growth and success will continue to depend in large part upon its
distribution channels. There can be no assurance that actual bad debts from
the Company's distributors will not exceed recorded allowances resulting in a
material adverse effect on the Company's financial condition and results of
operations. To expand its distribution channels, the Company has entered into
select OEM arrangements that allow it to address specific market segments or
geographic areas. In order to prevent inventory write-downs, to the extent
that OEM customers do not purchase products as anticipated, the Company may
need to convert such products to make them salable to other customers.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock historically has fluctuated
significantly. The Company believes that factors such as general stock market
trends, announcements of developments related to the Company's business,
fluctuations in the Company's operating results, general conditions in the
computer
10
<PAGE>
peripheral market and the markets served by the Company or in the worldwide
economy, a shortfall in revenue or earnings from securities analysts'
expectations, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or
other intellectual property rights and developments in the Company's
relationships with its customers and suppliers could cause a further
significant fluctuation in the price of the Company's Common Stock. In
addition, in recent years the stock market in general, and the market for
shares of technology stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations that are
unrelated to the Company's operating performance.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company has procured a new business system that is year 2000
compliant and plans are to implement the new system in Quarters three and
four of the 1999 fiscal year ending June 30, 1999.
Management does not anticipate that the Company will incur significant operating
expenses or be required to invest heavily in other computer systems improvements
to be year 2000 compliant. The Company plans to devote the necessary resources
to resolve significant year 2000 issues in a timely manner; however, if the
Company, its customers, vendors or others with whom it does significant business
are unable to resolve external processing issues in a timely manner, it could
result in material adverse effect on the Company.
The Company has performed an analysis of all of its products manufactured
after January 1, 1997 and has determined that all such products are year 2000
compliant. This analysis covered the Company's printer controller technology,
laser and dye-sublimation printers, as well as software products and computer
and digital camera memory modules. The Company's printers do not currently
contain any internal clock devises that monitor or recognize the change of
the date and therefore the change of year from 1999 to 2000 should not effect
their operation. However, software drivers are used to modify and direct the
output and performance of these printers. While these drivers do not generate
time-specific codes, they mirror time codes resident in the applicable
operating system. In the event a modification is required to a software
driver to accommodate year 2000 modifications instituted by a manufacturer of
a software package, computer platform or operating system that the Company is
currently supporting, the Company currently plans to update that driver
free-of-charge and make it available to customers for down-loading from the
Internet.
ABSENCE OF DIVIDENDS
No cash dividends have been paid on the Company's Common Stock to date and the
Company does not anticipate paying cash dividends in the foreseeable future.
ITEM 2.
PROPERTIES
ITEC owns no real property. The Company leases approximately 14,000 square feet
of space in a facility located at 11031 Via Frontera, San Diego, California
92127, at a monthly lease rate of approximately $10,750. This facility houses
corporate management and engineering offices. That lease expires on January 31,
1999. In addition, the Company leases approximately 12,000 square feet of space
in a nearby facility that houses manufacturing, operations and finance located
at 10966 Via Frontera, San Diego, California 92127, at a monthly lease rate of
approximately $7,600. The lease expires on May 31, 1999.
ITEC operates a software research and development center in Cardiff, California.
The Company leases approximately 3700 square feet of space located at 120
Birmingham Drive, Cardiff, California 92007, at a monthly lease rate of
approximately $6,400. The lease expires on November 30, 1998. Adjacent to that
11
<PAGE>
facility, at 2053 San Elijo Avenue, Cardiff, California 92007, the Company
leases approximately 2600 square feet of space at a monthly lease rate of
approximately $2800. The lease expires on June 30, 1999.
ITEC operates a memory product development and sales office in Newport Beach,
California. The Company leased approximately 1,200 square feet of space located
at 120 Newport Center Drive, Suite 245, Newport Beach California. The monthly
lease rate is approximately $2,400. The lease expires on October 31, 1999.
In Northern California, ITEC leases approximately 5,000 square feet of space in
a facility located at 3350 Scott Boulevard, Building No. 7, Santa Clara,
California 95054, at a monthly lease rate of $5,800. This facility houses sales
and marketing staff. The lease expires on June 30, 2002.
ITEC's European headquarters, ITEC Europe Ltd., leases approximately 3,000
square feet in a facility located outside London, England, The address is ITEC
House, Unit 9 Milbanke Court, Milbanke Way, Bracknell Berkshire RG12 1RP. This
facility houses sales, distribution and technical support personnel. The monthly
lease rate is U.S. $5,600 and it expires on March 31, 2003.
On April 22, 1998, the Company announced the closure of ITEC's printer
manufacturing, distribution and sales operations in Costa Mesa, California. That
facility encompassed approximately 27,000 square feet of space located at 3545-A
Cadillac Avenue, Costa Mesa, California 92626. The plant was closed at lease
expiration on July 31, 1998. The monthly lease rate was $13,900. The equipment
and operations at the Costa Mesa site were relocated to a facility adjacent to
the corporate headquarters in San Diego.
ITEM 3.
LEGAL PROCEEDINGS
The Company, because of the nature of its business, is from time to time
threatened or involved in legal actions. The Company, does not believe any of
the legal actions now pending against the Company will result in a material
adverse effect on the Company and, further, does not consider that any such
proceedings fall outside ordinary, routine litigation incidental to the
business of the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE>
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market, and quoted
on The Nasdaq Small Cap Market (symbol: ITEC).
The following table sets forth the high and low bid quotations of the
Company's Common Stock for the periods indicated as reported by The Nasdaq
Small Cap Market or NASD electronic bulletin board. Prices shown in the table
represent inter-dealer quotations, without adjustment for retail markup,
markdown, or commission, and do not necessarily represent actual transactions
and reflect the 1-for-5 reverse stock split effectuated by the Company on
February 24, 1997.
<TABLE>
<CAPTION>
High Low
-------------------------------------------------------
<S> <C> <C>
Year ended June 30, 1996
First quarter $ 2.50 $ 1.25
Second quarter 2.65 .90
Third quarter 4.70 1.90
Fourth quarter 12.80 3.75
Year ended June 30, 1997
First quarter $ 11.88 $ 7.50
Second quarter 10.00 4.69
Third quarter 5.94 4.37
Fourth quarter 7.13 3.25
Year ended June 30, 1998
First quarter $ 7.19 $ 5.50
Second quarter 6.69 4.25
Third quarter 4.63 2.75
Fourth quarter 4.19 2.25
</TABLE>
The number of holders of record of the Company's Common Stock, $.005 par
value, was approximately 3,000 at June 30, 1998.
ITEC has never declared, or paid, any cash dividends on ITEC's Common Stock.
ITEC currently intends to retain earnings, if any, after any payment of
dividends on its 5% Convertible Preferred Stock, for use in its business and
therefore, does not anticipate paying any cash dividends on ITEC's Common Stock.
Holders of the 5% Convertible Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, but only out of amounts legally available
for the payment thereof, cumulative cash dividends at the annual rate of $50.00
per share, payable semi-annually, and commencing on October 15, 1986. ITEC has
never declared, or paid any cash dividends on ITEC's 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 1998 were $497,000.
13
<PAGE>
ITEM 6.
SELECTED FINANCIAL DATA
The consolidated statement of operations data with respect to the years ended
June 30, 1998, 1997 and 1996 and the consolidated balance sheet data at June
30, 1998, and 1997, set forth below are derived from the consolidated
financial statements of the Company included in Item 8 below, which have been
audited by Boros & Farrington APC, independent accountants. The selected
consolidated financial data set forth (in thousands, except per share data)
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 7 beow, and
the Company's consolidated financial statements and the notes thereto
contained in Item 8 below. Historical results are not necessarily indicative
of future results of operations.
Statement of operations data:
<TABLE>
<CAPTION>
1998 1997 1996*
----------------------------
<S> <C> <C> <C>
NET REVENUES
Sales of Product 30,740 26,081 9,522
Engineering Fees 2,327 5,860 2,379
License Fees and Royalties 1,350 296 603
----------------------------
Net Total Revenues 34,417 32,237 12,504
COSTS & EXPENSES
Cost of Products Sold 22,536 17,022 7,942
Selling, General and Administrative 10,269 10,460 3,849
Cost of Engineering & Purchased R&D 2,475 4,243 2,135
Amortization of Capitalized Software - - 233
Special Charges 8,941 - 2,058
----------------------------
----------------------------
INCOME (LOSS) FROM OPERATIONS (9,804) 512 (3,713)
----------------------------
NET INCOME (LOSS) (10,163) 723 (3,665)
EARNING (LOSS) PER COMMON SHARE
Basic $(0.90) $0.07 $(0.77)
Diluted $(0.90) $0.06 $(0.77)
----------------------------
</TABLE>
* EXCLUDES $116 OF EXTRAORDINARY GAIN ON CONVERSION OF NOTES PAYABLE
Balance Sheet Data:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Cash $ 3,023 $ 255
Working capital 315 4,818
Total assets 20,961 14,075
Long-term obligations 1,828 228
Preferred stock 2,780 420
Total shareholders' equity 4,604 7,877
</TABLE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Imaging Technologies Corporation develops, manufactures, and distributes
high-quality digital imaging solutions. The Company produces a wide range of
printer and imaging products for use in graphics and publishing, digital
photography as well as other niche business and technical markets. Beginning
with a core technology in the design and development of controllers for
non-impact printers and multifunction peripherals, the Company has expanded
its product offerings to include monochrome and color printers, external
print servers, digital image storage devices, and software to improve the
accuracy of color reproduction.
ITEC has acquired four separate businesses during the past eighteen months
that have expanded the Company's strategic position in the digital imaging
market. In addition, the Company has altered its focus away from some of its
traditional revenue sources and has been required to make expenditures to
support these changes. As of the end of Fiscal 1998, the Company's business
continues to be in a significant transitional phase and there are important
short-term operational and liquidity challenges. Accordingly, year-to-year
financial comparisons may be of limited usefulness now and for the next
several quarters due to these important changes in the Company's business.
Historically, a portion of the Company's income was derived from
non-recurring engineering fees and royalty income from a relatively small
number of OEM customers. Over the past three years, the Company has
experienced shortfalls in income as a result of engineering contracts with
OEM manufacturers for products that were never completed by the OEM, were
never introduced into the market and shipped or were cancelled by the
customer before ITEC completed the deliverables portion of the contract. The
timing and amount of income from these customers ultimately depended on sales
levels and shipping schedules for the OEM products into which the Company's
products were incorporated. The Company had no control over the shipping date
or volumes of products shipped by its OEM customers, and there was no
assurance that any OEM would continue to ship products that incorporate the
Company's technology. Failure of these OEMs to achieve significant sales of
products incorporating the Company's technology and fluctuations in the
timing and volume of such sales had in a materially adverse effect on the
Company.
The Company's current strategy is to develop and commercialize its own
technology. The Company intends to increase penetration of its current target
markets and to continue pursuing clearly defined commercial market
opportunities that enable it to leverage its core technologies. The Company
has established a number of strategic partnerships with industry leaders,
such as Adobe Systems and NEC Electronics for product development, marketing
and sales. Through these strategic partnerships, ITEC seeks to obtain
specific market knowledge and enhanced understanding of market demands and
needs, access to funding for continued product development, product and
customer validation and a channel for market penetration.
To execute successfully its current strategy, the Company will need to
improve its working capital position. The report of the Company's
independent auditors accompanying the Company's June 30, 1998 financial
statements includes an explanatory paragraph indicating there is a
substantial doubt about the Company's ability to continue as a going concern,
due primarily to the decreases in the Company's working capital and net
worth. To address the Company's working capital needs, on September 17,
1998, the Company raised an aggregate of $4.38 million through the issuance
of shares of its Common Stock and subordinated notes to several private
investors. While this financing improved the Company's working capital
position, the Company needs to raise additional funds to operate its business
effectively. The Company has recently engaged a financial advisor to assist
with additional fund raising efforts and the Company intends to attempt to
raise additional funds in the near future. There can be no assurance,
however, that the Company will be able to complete any additional debt or
equity financings on favorable terms or at all, or that any such financings,
if completed, will be adequate to meet the Company's capital requirements.
Any additional equity or convertible debt financings could result in
substantial dilution to the Company's stockholders. If adequate funds are
not available, the Company may be required to delay, reduce or eliminate some
or all of its planned activities. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company.
See "--Liquidity and Capital Resources" and "Item 1. Business--Risks and
Uncertainties--Future Capital Needs."
CORPORATE RESTRUCTURING
Beginning in April 1998, the Company implemented a plan to realign the
management and create a divisional structure within the organization. ITEC
consolidated all of its independent operating subsidiaries under a single
financial and operational structure. The Company undertook this
restructuring based in part upon its belief that by breaking down the
barriers between the subsidiaries and organizing the Company around functions
the Company would be able to improve the effectiveness of its established
sales channels and to enhance cross-selling opportunities. The Company
also believes that this structure will improve the management and
commercialization of its diverse technology base. In addition to the
structural realignment, ITEC closed the 27,000 square-foot printer
manufacturing and distribution facility it operated in Costa Mesa,
California, at lease end, and relocated those operations to a new
12,000-square-foot facility adjacent to the Corporate Headquarters in San
Diego. The Company also relocated most of its marketing and sales activities
from Costa Mesa to ITEC's existing operation in the San Jose region of
Northern California. By streamlining operations and locating manufacturing
and distribution in one centralized plant, the Company expects to eventually
realize an annualized savings of approximately $1.5 to $2 million, primarily
as a result of workforce reductions, decreased factory space requirements and
the elimination of redundant operations.
14
<PAGE>
STRATEGIC ACQUISITIONS
In Fiscal 1998, the Company made several strategic acquisitions to reinforce
its technology position and expand sales channels. ITEC purchased privately
held McMican Corporation. The new division operates as the Storage Products
division of ITEC, producing specialized memory modules. McMican's "dfilm-TM-"
line of data storage products feature Flash memory modules for high-speed
transfer of stored images and data. "dfilm-TM-" modules have applications in
portable digital cameras and many other portable devices such as handheld
personal computers running the Windows CE-Registered Trademark- operating
system.
In fiscal 1998 ITEC merged with Color Solutions, Inc., a three-year-old
software development firm located in Cardiff, California. Color Solutions'
ColorBlind-Registered Trademark- software allows users to precisely profile
peripherals such as scanners, monitors, digital cameras, printers and other
specialized color digital devices, all based on internationally-accepted ICC
color standards. Color management is a key element for the printing and
graphics industry, but also color reproduction in the textile, motion
picture, and ceramics industries.
At the close of Fiscal 1998, ITEC acquired the assets of AMT, the European
sales and distribution subsidiary of Singapore-based Lam Soon. Lam Soon is
worldwide manufacturer of dot matrix, inkjet and specialized laser printers.
AMT had been ITEC's master stocking distributor of printers and supplies in
the EC and on the European Continent. AMT's European operations are being
integrated into ITEC's recently established European Headquarters operation,
ITEC Europe, located near London.
SPECIAL CHARGES
In the fourth quarter of fiscal 1998, the Company wrote-off contract and
license receivables of approximately $5.2 million that are due from OEMs and
co-developers who have been adversely affected by the downturn in the
technology segment of the market and the economic crisis in Asia.
In addition, the Company began to implement a restructuring plan aimed at
streamlining operations and reducing costs. The restructuring plan seeks to
combine and coordinate the efforts of the Company's subsidiaries, eliminate
redundant functions, promote operating efficiencies, and focus resources on
the new product lines. These actions resulted in a net charge of
approximately $3.8 million including $1.7 million relating to redundant
compensation costs; $1.5 million relating to the write-down of inventory,
licenses, and other assets that are not central to the Company's core
business; and $0.3 million relating to the consolidation of facilities.
15
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Revenues were $34.4 million, $32.2 million and $12.5 million for the
fiscal years ended June 30, 1998, 1997 and 1996, respectively. Sales of
product were $30.7 million, $26.1 million and $9.5 million for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively. The increase in
product sales from 1997 to 1998 was due primarily to an increase in sales of
printer products, and the increase from 1996 to 1997 was due primarily to the
Company's merger with NewGen, which commenced operations in 1997.
Engineering fees were $2.3 million, $5.9 million and $2.4 million for the
fiscal years ended June 30, 1998, 1997 and 1996, respectively. The decrease
in 1998 compared to 1997 was primarily the result of the Company's change in
strategic direction, focusing more on internal product development and sales
and less on engineering for third parties. The increase in 1997 as compared
to 1996 was primarily the result of several large OEM contracts in 1997.
License fees and royalties were $1.4 million, $.3 million and $.6 million for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The
increase from 1997 to 1998 was due primarily to the sales of a license to AMT
of $1.3 million. The decrease in 1997 as compared to 1996 was primarily the
result of declining royalties on older technology products.
COST OF PRODUCTS SOLD
Cost of products sold were $22.5 million or 73% of product sales, $17.0
million or 65% of product sales and $7.9 million or 83% of product sales for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The
percentage increase in 1998 as compared to 1997 was primarily due to price
reductions on older printer products and increased sales of lower margin
memory products. The 1996 cost of product sold related primarily to the Prima
division which has remained relatively constant as a percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $10.3 million or 30% of
total revenues, $10.5 million or 32% of total revenues and $3.8 million or
31% of total revenues for the fiscal years ended June 30, 1998, 1997 and
1996, respectively. Selling, general and administrative expenses consisted
primarily of salaries and commissions of sales and marketing personnel,
salaries and related costs for general corporate functions, including
finance, accounting, facilities and legal, advertising and other marketing
related expenses, and fees for professional services. The decrease both in
absolute dollars and as a percentage of net revenues in selling, general and
administrative expenses in 1998 as compared to 1997 was due primarily to the
reclassification of redundant costs to restructuring charges. The increase
both in absolute dollars and as a percentage of net revenues in selling,
general and administrative expenses in 1997 as compared to 1996 was due
primarily to the additional personnel acquired in the merger with NewGen
in 1997.
COST OF ENGINEERING AND PURCHASED R&D
Cost of engineering and purchased R&D was $2.5 million or 106% of engineering
revenues, $4.2 million or 72% of engineering revenues and $2.1 million or 90%
of engineering revenues for the fiscal years ended June 30, 1998, 1997 and
1996, respectively. As a percentage of engineering revenues, the increase in
fiscal 1998 over 1997 results from cost overruns on contracts that were
terminated. The decrease from fiscal 1996 to 1997 results from several large
OEM contracts.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through cash
generated from operations, debt financing, and from the sale of equity
securities. In August 1997, the Company completed a private placement of 500
shares of Series C Convertible Preferred Stock providing aggregate proceeds of
$5.0 million. A portion of the shares were converted by the holders and on
September 18, 1998, the Company redeemed all 237 outstanding shares of the
Series C Convertible Preferred Stock. The Company paid $2.23 million in cash,
issued $1.0 million in subordinated promissory notes and warrants to purchase
300,000 shares of Common Stock to the holders of the Series C Convertible
Preferred Stock in connection with the redemption.
The Company has received and anticipates that it will continue to receive the
majority of its cash from collections of accounts receivable from its customers,
distributors and OEMs. These groups generally have a history of timely payments;
however, an increasing amount of international sales can increase accounts
receivable balances due to traditionally slower payments by international
customers. In addition, the economies of certain foreign countries, particularly
in Asia, have weakened recently creating greater risk of nonpayment for the
Company from these areas. Any failure of the Company's customers, distributors
or OEMs to pay, or any significant delay in the payment of, a material portion
of the amounts owing to the Company could have a material adverse effect on the
Company.
As of June 30, 1998, the Company had working capital of $0.3 million a
decrease of $4.5 milion as compared to June 30, 1997. The decrease is
primarily the result of the private placement of increased borrowings during
fiscal 1998. The Company's other principal source of liquidity at June 30,
1998, were lines of credit with Imperial Bank aggregating $7 million.
Borrowing under the lines of credit at June 30, 1998 totaled $2 million. The
Company also has a term loan with Imperial Bank, the principal balance of
which at June 30, 1998, was $2.5 million. The lines of credit and the term
loan bear interest at Imperial Bank's prime rate plus 0.75% per annum. The
applicable interest rate at June 30, 1998, was 9.25%. The Company's
obligations under the lines of credit and the term loan are secured by all of
the Company's accounts receivable, inventories, and other assets. In
September 1998, Imperial Bank ceased funding under the lines of credit and
notified the Company that it intended to terminate its banking relationship
with the Company. After further discussions, the Company and Imperial Bank
have agreed on the principal terms of a Forbearance Agreement pursuant to
which Imperial Bank would resume funding to the Company under the lines of
credit and the Company would repay all outstanding indebtedness owed to
Imperial Bank by January 15, 1999. The Forbearance Agreement is subject to
further negotiation and the approval of senior Management at Imperial Bank
and the Company's Board of Directors and there can be no assurance that such
approvals will be obtained. Although the Company is in discussions with
several lenders regarding new financing for the Company, there can be no
assurance that the Company will secure new financing by January 15, 1999, if
ever. The failure of Imperial Bank to continue to provide funding to the
Company under the lines of credit or the failure of the Company to secure
sufficient new financing to repay all indebtedness owed to Imperial Bank on
or before January 15, 1999, would have a material adverse effect on the
Company.
As of June 30, 1998, the Company also had a line of credit with the Bank of
Yorba Linda with a principal balance of $.4 million. The loan bears interest at
prime plus 3% per annum and matured on August 13, 1998. The Company currently
plans to refinance this obligation as part of the new financing it is
attempting to secure. There can be no assurance, however, that the Company
will be able to secure new financing to repay the Bank of Yorba Linda loan,
and the Company's failure to do so could have a material adverse effect on
the Company.
Net cash used in operating activities increased to $7.1 million during the year
ended June 30, 1998, from $4.0 million and $1.3 million during the years ended
June 30, 1997 and 1996, respectively. The increase
17
<PAGE>
from 1998 as compared to 1997 resulted primarily from the operating loss and
special charges. The increase from 1997 as compared to 1996 resulted
primarily from improved operating results.
Net cash used in investing activities increased to $3.8 million during the year
ended June 30, 1998, from $2.2 million and $0.5 million during the years ended
June 30, 1997 and 1996, respectively. The increase from 1998 as compared to 1997
resulted primarily from capitalized software. The increase from 1997 as compared
to 1996 resulted primarily from increased purchases of property and equipment
and capitalized software.
The Company has no material commitments for capital expenditures. The Company's
5% convertible preferred stock (which ranks prior to the Company's common
stock), carries cumulative dividends, when and as declared, at an annual rate of
$50.00 per share. The aggregate amount of such dividends in arrears at June 30,
1998, was approximately $497,000.
The Company's capital requirements depend on numerous factors, including market
acceptance of the Company's products, the scope and success of the Company's
product development efforts, the resources the Company devotes to marketing and
selling its products, and other factors. The Company anticipates that its
capital requirements will increase in future periods as it continues to develop
new products and increases its sales and marketing efforts. The report of the
Company's independent auditors accompanying the Company's June 30, 1998
financial statements includes an explanatory paragraph indicating there is a
substantial doubt about the Company's ability to continue as a going concern,
due primarily to the decreases in the Company's working capital and net worth.
To address the Company's working capital needs, on September 17, 1998, the
Company raised an aggregate of $4.38 million through the issuance of shares of
its Common Stock and subordinated notes to several private investors. While this
financing improved the Company working capital position, the Company needs to
raise additional funds to operate its business effectively. The Company has
recently engaged a financial advisor to assist with additional fund raising
efforts and the Company intends to attempt to raise additional funds in the near
future. There can be no assurance, however, that the Company will be able to
complete any additional debt or equity financings on favorable terms or at all,
or that any such financings, if completed, will be adequate to meet the
Company's capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to the Company's stockholders.
If adequate funds are not available, the Company may be required to delay,
reduce or eliminate some or all of its planned activities. The Company's
inability to fund its capital requirements would have a material adverse effect
on the Company. See "Item 1. Business--Risks and Uncertainties--Future Capital
Needs."
18
<PAGE>
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Report of independent accountants 20
Consolidated balance sheets as of June 30, 1998 and 1997 21
Consolidated statements of operations for the years ended
June 30, 1998, 1997, and 1996 22
Consolidated statements of shareholders' equity for the years ended
June 30, 1998, 1997, and 1996 23
Consolidated statements of cash flows for the years ended
June 30, 1998, 1997, and 1996 24
Notes to consolidated financial statements 25
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IMAGING TECHNOLOGIES CORPORATION
We have audited the consolidated balance sheets of Imaging Technologies
Corporation and its subsidiaries as of June 30, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Imaging
Technologies Corporation and its subsidiaries as of June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Note 1 to the financial statements
describes various factors that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BOROS & FARRINGTON APC
San Diego, California
October 5, 1998
20
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Current assets
Cash $ 3,023 $ 255
Accounts receivable, net 4,133 7,635
Inventories 6,287 2,348
Prepaid expenses and other 1,401 550
--------- ---------
Total current assets 14,844 10,788
Property and equipment, net 1,525 1,668
Prepaid licenses 635 697
Capitalized software, net 3,655 549
Other 302 373
--------- ---------
$ 20,961 $ 14,075
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank lines of credit $ 5,203 $ 955
Short-term debt 1,998 200
Current portion of long-term debt 903 144
Deferred revenue - 356
Accounts payable 5,027 2,876
Accrued expenses 1,398 1,439
--------- ---------
Total current liabilities 14,529 5,970
Long-term debt, less current portion 1,828 228
--------- ---------
Total liabilities 16,357 6,198
--------- ---------
Commitments and contingencies (note 11)
Shareholders' equity
Series A preferred stock, $1,000 par value, 7,500 shares
authorized, 420.5 shares issued and outstanding 420 420
Series C preferred stock, $1,000 par value, 1,200 shares
authorized, 236 shares issued and outstanding 2,360 -
Preferred stock, $1,000 par value, 2,383 shares authorized,
no shares issued and outstanding - -
Common stock, $0.005 par value, 100,000,000 shares authorized;
12,402,256 shares issued and outstanding 62 53
Paid-in capital 35,859 31,368
Shareholder loans (110) (140)
Accumulated deficit (33,987) (23,824)
--------- ---------
Total shareholders' equity 4,604 7,877
--------- ---------
$ 20,961 $ 14,075
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues
Sales of products $ 30,740 $26,081 $ 9,522
Engineering fees 2,327 5,860 2,379
Licenses and royalties 1,350 296 603
-------- ------- -------
34,417 32,237 12,504
-------- ------- -------
Costs and expenses
Costs of products sold 22,536 17,022 7,942
Selling, general, and administrative 10,269 10,460 3,849
Cost of engineering fees 2,475 4,243 2,135
Amortization of capitalized software costs - - 233
Special charges
Write-off of contract and license receivables 5,157 - -
Restructuring costs 3,784 - 2,058
-------- ------- -------
44,221 31,725 16,217
-------- ------- -------
Income (loss) from operations (9,804) 512 (3,713)
-------- ------- -------
Other income (expense)
Interest, net (341) (87) (60)
Other - 64 (4)
-------- ------- -------
(341) (23) (64)
-------- ------- -------
Income (loss) before income taxes and extraordinary items (10,145) 489 (3,777)
Income tax benefit (expense) (18) 234 (4)
-------- ------- -------
Income (loss) before extraordinary item (10,163) 723 (3,781)
Extraordinary gain on conversion of notes payable
(0.02 per share) - - 116
-------- ------- -------
Net income (loss) $(10,163) $ 723 $(3,665)
-------- ------- -------
-------- ------- -------
Earnings (loss) per common share
Basic $ (0.90) $ 0.07 $ (0.77)
-------- ------- -------
-------- ------- -------
Diluted $ (0.90) $ 0.06 $ (0.77)
-------- ------- -------
-------- ------- -------
Weighted average common shares 11,295 8,698 4,997
-------- ------- -------
-------- ------- -------
Weighted average common shares - assuming dilution 11,295 10,623 4,997
-------- ------- -------
-------- ------- -------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 $ 2,318 $ 1,162 $ - $22 $18,206
Issuance of common stock
Conversion of notes payable
(58,862 shares) - - - - 102
Conversion of accounts payable
(176,001 shares) - - - 1 310
Exercise of options and warrants
(1,243,007 shares) - - - 6 3,362
Private sale
(1,801,334 shares) - - - 9 2,516
Sale of warrants - - - - 513
Net loss - - - - -
------- ------- ------- --- -------
BALANCE, JUNE 30, 1996 2,318 1,162 - 38 25,009
Issuance of common stock
Conversion of preferred stock
(556,601 shares) (1,898) (1,162) - 3 3,056
Business mergers and acquisitions
(2,150,000 shares) - - - 11 2,547
Exercise of options and warrants
(162,993 shares) - - - 1 256
Private sale
(100,000 shares) - - - - 500
Net income - - - - -
------- ------- ------- --- -------
BALANCE, JUNE 30, 1997 420 - - 53 31,368
Issuance of preferred stock
(500 shares) - - 5,000 - (211)
Issuance of common stock
Conversion of preferred stock
(958,598 shares) - - (2,640) 5 2,617
Conversion of note payable
(64,516 shares) - - - - 100
Business acquisitions
(240,000 shares) - - - 1 349
Exercise of options and warrants
(554,530 shares) - - - 3 1,636
Collection of shareholder loans - - - - -
Net loss - - - - -
------- ------- ------- --- -------
BALANCE, JUNE 30, 1998 $ 420 $ - $ 2,360 $62 $35,859
------- ------- ------- --- -------
------- ------- ------- --- -------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER ACCUMULATED
LOANS DEFICIT TOTAL
<S> <C> <C> <C>
BALANCE, JULY 1, 1995 $ - $(20,882) $ 826
Issuance of common stock
Conversion of notes payable
(58,862 shares) - - 102
Conversion of accounts payable
(176,001 shares) - - 311
Exercise of options and warrants
(1,243,007 shares) (8) - 3,360
Private sale
(1,801,334 shares) - - 2,525
Sale of warrants - - 513
Net loss - (3,665) (3,665)
-------- -------- --------
BALANCE, JUNE 30, 1996 (8) (24,547) 3,972
Issuance of common stock
Conversion of preferred stock
(556,601 shares) - - (1)
Business mergers and acquisitions
(2,150,000 shares) (82) - 2,476
Exercise of options and warrants
(162,993 shares) (50) - 207
Private sale
(100,000 shares) - - 500
Net income - 723 723
-------- -------- --------
BALANCE, JUNE 30, 1997 (140) (23,824) 7,877
Issuance of preferred stock
(500 shares) - - 4,789
Issuance of common stock
Conversion of preferred stock
(958,598 shares) - - (18)
Conversion of note payable
(64,516 shares) - - 100
Business acquisitions
(240,000 shares) - - 350
Exercise of options and warrants
(554,530 shares) (53) - 1,586
Collection of shareholder loans 83 - 83
Net loss - (10,163) (10,163)
-------- -------- --------
BALANCE, JUNE 30, 1998 $ (110) $(33,987) $ 4,604
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(10,163) $ 723 $(3,665)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Non-cash special charges 7,073 - 2,058
Extraordinary gain on conversion of notes payable - - (116)
Depreciation and amortization 657 909 428
Changes in operating assets and liabilities
Accounts receivable (973) (3,893) (476)
Inventories (3,263) (202) 112
Prepaid expenses and other (413) 61 (156)
Accounts payable and accrued expenses 338 (1,602) 191
Deferred revenue (356) (32) 361
-------- -------- -------
Net cash from operating activities (7,100) (4,036) (1,263)
-------- -------- -------
Cash flows from investing activities
Prepaid licenses (274) (641) (169)
Capitalized software (3,106) (526) -
Capital expenditures (413) (1,009) (311)
Other - (36) (50)
-------- -------- -------
Net cash from investing activities (3,793) (2,212) (530)
-------- -------- -------
Cash flows from financing activities
Capital contributions (NewGen) - 1,002 -
Cash acquired from business acquisitions 40 - -
Net borrowings under bank lines of credit 3,915 340 (151)
Net borrowings under short-term notes payable 1,000 - (400)
Net proceeds from issuance of common stock 1,586 707 5,927
Net proceeds from issuance of preferred stock 5,000 - -
Stock issuance costs (229) - -
Sale of warrants - - 513
Collection of shareholder loans 83 - -
Issuance of long term debt 2,500 143 -
Repayment of long-term debt (234) (83) (27)
-------- -------- -------
Net cash from financing activities 13,661 2,109 5,862
-------- -------- -------
Net increase (decrease) in cash 2,768 (4,139) 4,069
Cash, beginning of year 255 4,394 325
-------- -------- -------
Cash, end of year $ 3,023 $ 255 $ 4,394
-------- -------- -------
-------- -------- -------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Imaging Technologies Corporation, formerly Personal Computer Products, Inc., a
Delaware corporation, and its subsidiaries ("ITEC" or the "Company") (1) develop
and license laser printer technology; (2) manufacture, market, and distribute
laser printer controllers and accessories; (3) market and distribute
internationally a variety of personal computer accessory products; and (4)
market and distribute high resolution imaging and color digital proofing
products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ITEC and its
active subsidiaries, PCPI Technologies, Inc. ("PCPI"), Prima Inc. doing
business as Prima International ("Prima"), NewGen Imaging Systems, Inc.
("NewGen"), AMT Accel UK Ltd. ("AMT"), McMican Corporation doing business as
ITEC Memory ("McMican"), and Color Solutions, Inc. ("CSI"). All significant
inter-company accounts and transactions have been eliminated.
GOING CONCERN CONSIDERATIONS.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At June 30, 1998, and for the year
then ended, the Company experienced a net loss and a significant decline in
working capital and net worth which raised substantial doubt about its ability
to continue as a going concern. The losses have resulted primarily from losses
on contract cancellations and the resulting lack of expected royalty income
because the OEMs such as Panasonic, Apple Computer, Mita, Minolta, and Canon
have failed to bring the end products to market. In addition, the Company has
experienced relatively high operating costs due in part to redundancies and
inefficiencies resulting from recent mergers and acquisitions. The Company is
taking a new strategic direction whereby it will manufacture imaging products
under its own name. To this end the Company has acquired increased
manufacturing, selling, and distribution capabilities through key mergers and
acquisitions. The Company is in the process of consolidating and restructuring
these operations to conform to the new strategic plan. While management
believes that these new products will be well received by the market, the
Company must obtain additional funds to provide adequate working capital and
finance operations. Management expects to raise these funds through a
combination of debt and equity financing and is actively pursuing such matters.
However, no assurance can be given that the financing will be obtained and that
the Company will achieve profitable operations. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market; cost being determined by
the first-in, first-out method.
PREPAID LICENSES
Up-front payments for licenses of software are recorded as prepaid licenses.
Amortization of prepaid licenses is recorded on a straight-line basis over
estimated useful lives generally ranging from three to five years, commencing
from the date the underlying technology is available for use by the Company.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally computed
on a straight-line basis over the estimated useful lives of assets ranging from
three to seven years. Amortization of leasehold improvements is provided over
the initial term of the lease, on a straight-line basis. Maintenance, repairs,
and minor renewals and betterments are charged to expense.
REVENUE RECOGNITION
Revenue from the sale of products is recognized as of the date shipments are
made to customers. Revenue from long-term software and technology license fees
is recognized once the collection is made, or is "probable" as
25
<PAGE>
prescribed in AICPA Statement of Position 91-1 "Software Revenue
Recognition," and there are no further contractual obligations under the
license agreement. Royalties are recognized upon the sale of such products
by the licensee.
The Company currently has development contracts with original equipment
manufacturers ("OEMs") to adapt the Company's software products to the OEMs'
hardware products. Revenues under these contracts, including the guaranteed
portion of license fees, are recognized based on the percentage-of-completion
method, measured by the percentage of costs incurred to date to estimated total
costs for each contract. Upon cancellation or termination of a contract, the
OEM is billed for the entire guaranteed amount of contract revenue, and a
provision for loss is established based on management's estimate of
collectability. The Company provides for any anticipated losses on such
contracts in the period in which such losses are first determinable. Unbilled
receivables arise when the revenue recognized on a contract exceeds billing due
to timing differences related to billing milestones as specified in the
contracts. Deferred revenue represents billings in excess of costs and earned
revenues on such contracts.
ADVERTISING COSTS
The Company expenses advertising and promotion costs as incurred. During fiscal
1998, 1997 and 1996, the Company incurred advertising and promotion costs of
approximately $660, $1,056 and $215 thousand, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Such costs
have been immaterial for fiscal 1998, 1997 and 1996 as the Company has focused
engineering resources on the development of technologies, which have
technological feasibility, for use in OEM and Company products.
CAPITALIZED SOFTWARE AND DEVELOPMENT COSTS
The Company has developed software technology and capitalized certain qualifying
costs pursuant to the provisions of Statement of Financial Accounting Standards
No. 86 "Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed". The capitalized software development costs are related to
software contained in laser printer controllers. Capitalized software includes
emulations of existing software printer control languages currently in the
marketplace, as well as software included in laser printer controllers for
existing laser printers. The Company's software emulation products are
generally offered in different combinations that are designed to provide more
value than its competitors' products. Its printer controller products are
generally designed to allow existing laser printers to operate at higher
performance levels than originally configured. While the Company believes its
new products will be accepted in the marketplace and that it will recover its
investment in capitalized software, the ultimate realization of this investment
is dependent on such acceptance and the abilities of the Company and/or OEM's to
successfully market these new products.
Costs incurred prior to the establishment of technological feasibility, or
subsequent to the release to customers, are expensed as incurred. Capitalized
software costs are amortized on a product-by-product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product, or (b) the straight-line
method over the estimated economic life of the product, generally three years.
Amortization begins when the product is available for general release to
customers.
REVERSE STOCK SPLIT
Effective February 24, 1997, the Company effected a 1 for 5 reverse stock split.
Accordingly, all historical share and per share data have been restated to give
effect for the reverse stock split.
25
<PAGE>
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) available to common shareholders (the
"numerator") by the weighted average number of common shares outstanding (the
"denominator") during the period. Diluted earnings (loss) per common share
("Diluted EPS") is similar to the computation of Basic EPS except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back the after-tax amount of
interest recognized in the period associated with any convertible debt. The
computation of diluted EPS does not assume exercise or conversion of
securities that would have an anti-dilutive effect on net earnings (loss) per
share. The following is a reconciliation of Basic EPS to Diluted EPS:
<TABLE>
<CAPTION>
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
JUNE 30, 1996
Net loss $ (3,665)
Preferred dividends (174)
---------
Basic and diluted EPS $ (3,839) 4,997 $(0.77)
--------- ------
--------- ------
JUNE 30, 1997
Net income $ 723
Preferred dividends (126)
---------
Basic EPS 597 8,698 $ 0.07
Effect of options and warrants - 1,837
Effective of convertible notes payable 7 64
Effect of convertible preferred stock 68 24
--------- ------
Diluted EPS $ 672 10,623 $ 0.06
--------- ------
--------- ------
JUNE 30, 1998
Net loss $ (10,163)
Preferred dividends (21)
---------
Basic and diluted EPS $ (10,184) 11,295 $(0.90)
--------- ------
--------- ------
</TABLE>
STOCK ISSUANCE COSTS
Stock issuance costs including distribution fees, due diligence fees,
wholesaling costs, legal and accounting fees, and printing are capitalized
before the sale of the related stock and then charged against gross proceeds
when the stock is sold.
DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortization is provided over the life
of the related debt using the straight-line method.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation (FAS 123"), which the Company
adopted in fiscal 1997, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock option plans.
Under APB 25, if the exercise price of the Company's employee stock options
equals or exceeds the fair value of the underlying stock on the date of grant,
no compensation is recognized. Information regarding the Company's pro forma
disclosure of stock-based compensation pursuant to FAS 123 may be found in Note
8.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign sales
subsidiaries at the year-end exchange rates. Any gains and losses from the
translations are credited or charged to "accumulated translation adjustment"
in shareholders' equity. Such amounts were immaterial in fiscal 1998, 1997,
and 1996.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax consequences
of temporary differences between the tax bases of assets or liabilities and
their reported amounts in the financial statements. These temporary
differences will result in taxable or deductible amounts in future years when
the reported amounts of the assets or liabilities are recovered or settled.
The deferred tax assets are reviewed for recoverability and valuation
allowances are provided, as necessary.
26
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" requires the disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The carrying
value of the financial instruments on the consolidated balance sheets are
considered reasonable estimates of the fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
supersedes Statement of Position 91-1, "Software Revenue Recognition". SOP
97-2, and amendments thereto, provide guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and is
effective for transactions entered into in fiscal years beginning after December
15, 1997. Retroactive application of the provisions of SOP 97-2 is prohibited.
Management is currently evaluating the requirements of SOP 97-2 and the impact
that adoption of SOP 97-2 will have on the financial statements of the Company.
Such adoption, however, may delay the timing of revenue recognition on certain
of the Company's contracts.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. An enterprise that has no items of other comprehensive
income in any period presented is not required to report comprehensive income.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. AFAS 131 is effective for fiscal years beginning after December 15,
1997. Management plans to adopt this accounting standard in fiscal 1999.
Management has not yet assessed the impact that the adoption of SFAS 131 will
have on the Company's financial statements.
RECLASSIFICATIONS
Certain prior year financial statement classifications have been reclassified
to conform with the current year's presentation.
NOTE 2. SPECIAL CHARGES
WRITE-OFF OF CONTRACT AND LICENSE RECEIVABLES
In the fourth quarter of fiscal 1998, the Company wrote-off contract and
license receivables of $5,157 thousand that are due from OEMs and
co-developers who have been adversely affected by the downturn in the
technology segment of the market and the economic crisis in Asia. The
following summarizes the nature and effect of these write-offs.
AMT ACCEL UK, LTD. AMT is a European sales subsidiary formerly owned by
Singapore-based Lam Soon, manufacturer of dot matrix, laser and inkjet
printer and plotters for specialized application, printer manufacturer
headquartered in Singapore. The Company sold to AMT an exclusive license to
distribute in the United Kingdom and Europe certain Company products in
return for guaranteed payments of $1.25 million. AMT and its parent company
began experiencing financial difficulties and were unable to meet their
obligations to the Company under the licensing agreement. Effective May 31,
1998, the Company reached a settlement with the parent whereby the Company
acquired the net assets of AMT totaling $359 thousand and released AMT's
parent from its contract obligations, resulting in a write-off of $891
thousand.
SOFTWARE TECHNOLOGY, INC. STI is a Korean corporation who manufactures and
distributes computer related products in the Asia. STI has been a
longstanding customer of the Company and has acted as co-developer and
representative on various projects. STI owes the Company $954 thousand, but
it is unable to pay at this time due to the sharp decline in the Korean
economy, which has had a significant adverse impact on its operations and
financial condition. As a result, the Company wrote-off in the fourth
quarter the amounts due from STI.
MITA DIGITAL DESIGN, INC. AND NIPPO LTD. The Company developed for Mita a
controller board that was to be used by Mita in a new multifunctional
product. Mita has refused to pay amounts totaling $954 thousand under the
agreement. According to a recent press release, Mita's parent company in
Japan has filed for protection under bankruptcy laws. Based on this
announcement, the Company believes that Mita does not currently have
27
<PAGE>
sufficient resources to complete and market the new product and is therefor
seeking to avoid its contract obligations. The company has entered into a
settlement agreement with Mita which the Company currently values at $328
thousand. As a result, the remaining balance of $626 was written-off in the
fourth quarter. Nippo is a Japanese corporation who acted as a co-developer
on the Mita project in exchange for a share of product royalties and
distribution rights. Nippo owes the Company $964 thousand under the
co-development agreement, but it has refused to pay and has abandoned the
laser printer business altogether. As a result, the Company wrote-off the
receivable in the fourth quarter.
MINOLTA COMPANY LTD. The Company had a contract with Minolta, a Japanese
corporation, to develop a controller for a color laser printer product to be
manufactured and sold by Minolta. Minolta terminated the contract and is
disputing contract receivables of $260 thousand. In the fourth quarter, the
Company wrote-off the amount due from Minolta.
TOHOKU RICOH CO., LTD. Tohoku Ricoh is a Japanese corporation that entered
into a technology development agreement with the Company providing for
guaranteed payments of $674 thousand. Tohoku Ricoh has cancelled the contract
and is disputing the amount of the guarantee. The Company believes that it
is owed the full guaranteed contract amount and is pursuing collection.
However, as a result of this dispute, the Company wrote-off in the fourth
quarter the amount due from Tohoku Ricoh.
OTHER CONTRACT RECEIVABLES. In the fourth quarter, the Company wrote-off
additional contract receivables totaling $788 thousand that are past due.
RESTRUCTURING OF OPERATIONS
In the fourth quarter of fiscal 1998, the Company began to implement a
restructuring plan aimed at streamlining operations and reducing costs. The
restructuring plan seeks to combine and coordinate the efforts of the
Company's subsidiaries, eliminate redundant functions, promote operating
efficiencies, and focus resources on the new product lines. These actions
resulted in a net charge of $3,784 thousand including $1,692 thousand
relating to redundant compensation costs; $1,480 thousand relating to the
write-down of inventory, licenses, and other assets that are not central to
the Company's core business; and $296 thousand relating to the consolidation
of facilities.
In fiscal 1996, the Company reassessed the future benefit of certain
"older-technology" product lines. As a result, the Company took a non-cash
write-down of an aggregate of $2,058 thousand which including capitalized
software of $937 thousand, prepaid licenses and royalties of $583 thousand,
inventories of $204 thousand, and certain pre-paid assets of $334 thousand to
reduce these assets to their net realizable value.
NOTE 3. BUSINESS COMBINATIONS
AMT AND MCMICAN CORPORATION
Effective May 31, 1998, the Company acquired the net assets of AMT as
consideration for the settlement of a license fee receivable (see Note 2).
AMT, as a foreign sales subsidiary located in the United Kingdom, markets the
Company's products in the European market.
Effective November 24, 1997, the Company purchased the total outstanding
shares of the privately-held McMican Corporation, doing business as ITEC
Memory ("McMican") for 200 thousand shares of unregistered ITEC common stock.
McMican produces specialized memory modules for handheld personal computers,
digital cameras, and printers.
The above transactions were accounted for as purchases; accordingly, the
results of AMT's and McMican's operations have been included in consolidated
operations from the date of acquisition. The following are the un-audited
pro forma results of operations of the Company as though AMT and McMican were
acquired on July 1, 1995. The proforma summary does not necessarily reflect
the results of operations as they would have been had AMT and McMican been
combined with the Company as of the beginning of the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues $ 40,228 $ 38,811 $ 17,517
-------- -------- --------
-------- -------- --------
Net income (loss) $ (9,906) $ 1,127 $ (3,455)
-------- -------- --------
-------- -------- --------
</TABLE>
NEWGEN SYSTEMS ACQUISITION CORPORATION AND COLOR SOLUTIONS, INC.
Effective November 30, 1997, Color Solutions, Inc. ("CSI") was merged into a
newly created, wholly-owned subsidiary of the Company. Under the terms of the
Merger Agreement, 850 thousand shares of unregistered ITEC common stock were
exchanged for all of the outstanding shares of CSI. On November 30, 1997, CSI
began operating as a wholly-owned subsidiary of the Company.
28
<PAGE>
Effective February 14, 1997, the Company issued 2,150 thousand shares of
unregistered ITEC common stock in exchange for all of the outstanding shares of
NewGen Systems Acquisition Corporation ("NSAC"). NSAC was then merged into a
newly created, wholly-owned subsidiary of the Company, NewGen Imaging Systems,
Inc. ("NewGen") and was accounted for as a pooling of interests. NewGen
commenced operations in July 1996 and, accordingly, no restatement of prior
financial statements is required.
The above mergers were accounted for as a pooling of interests. Details of the
results of operations of the previously separate companies for the periods prior
to combination are as follows for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues
ITEC $ 33,028 $ 23,443 $ 11,621
CSI 1,389 1,604 883
NewGen - 7,190 -
-------- -------- --------
Combined $ 34,417 $ 32,237 $ 12,504
-------- -------- --------
-------- -------- --------
Extraordinary item
ITEC $ - $ 116
CSI -
NewGen - - -
-------- -------- --------
Combined $ - $ 116
-------- -------- --------
-------- -------- --------
Net Income (loss)
ITEC $(10,163) $ 2,388 $ (3,613)
CSI - (115) (52)
NewGen - (1,550) -
-------- -------- --------
Combined $(10,163) $ 723 $ (3,665)
-------- -------- --------
-------- -------- --------
</TABLE>
NewGen's net loss of $1,550 thousand during fiscal 1997 included non-recurring
charges of $1,157 thousand including purchased research and development of $780
thousand and the write-down of prepaid licenses and royalties totaling $349
thousand.
NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following summarizes certain financial statement captions at
June 30:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Accounts receivable
Trade $ 5,068 $ 3,663
Contract 458 4,979
------- -------
5,526 8,642
Less allowance for doubtful accounts (1,393) (1,007)
------- -------
$ 4,133 $ 7,635
------- -------
------- -------
Inventories
Materials and supplies $ 2,081 $ 1,475
Finished goods 4,206 873
------- -------
$ 6,287 $ 2,348
------- -------
------- -------
Property and equipment
Computers and other equipment $ 2,529 $ 2,069
Office furniture and fixtures 516 487
Leasehold improvements 103 78
------- -------
3,148 2,634
Less accumulated depreciation and amortization (1,623) (966)
------- -------
$ 1,525 $ 1,668
------- -------
------- -------
Accrued liabilities
Compensation and vacation $ 694 $ 681
Other 704 758
------- -------
$ 1,398 $ 1,439
------- -------
------- -------
</TABLE>
30
<PAGE>
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Non-cash financing activities
Conversion of preferred stock into common stock $ 2,640 $3,060 $ -
Conversion of notes payable into common stock 100 1,582 198
Conversion of accounts payable and accrued liabilities
into notes payable 987 227 54
Conversion of accounts payable and accrued liabilities
into common stock - - 319
Stock issued for loans 53 50 8
Fixed assets acquired under capital leases 4 7 28
Conversion of accrued interest into common stock - - 12
Net assets acquired in business combinations
Accounts receivable 1,489 - -
Inventories 1,923 - -
Prepaid and other 51 - -
Property and equipment 97 - -
Borrowings under bank line of credit (333) - -
Accounts payable and accrued liabilities (2,639) - -
Supplemental disclosure of cash flow information
Cash paid during the year for interest 370 111 62
Cash paid during the year for income taxes 5 9 4
</TABLE>
NOTE 6. SHORT-TERM DEBT
LINES OF CREDIT
At June 30, 1998, the Company has lines of credit agreements with a bank which
provide for borrowings of up to $7.5 million and expire on September 30, 1999.
Borrowings under the lines bear interest at the bank's prime interest rate plus
0.75%, are restricted to finance certain eligible inventory and accounts
receivable, and are collateralized by substantially all assets of the Company.
The agreements provide, among other requirements and covenants, that the Company
shall maintain a ratio of trading assets (accounts receivable and inventory) to
trading liabilities (accounts payable and bank lines outstanding) of at least
1.3 to 1, a ratio of debt to equity of not greater than 1.75 to 1, and minimum
debt coverage of 2.5 to 1. In addition, the Company shall maintain minimum
trading capital of $6 million and minimum tangible net worth of $12.5 million.
At June 30, 1998, the Company was not in compliance with certain of these
covenants.
The Company previously had a line of credit with Coast Savings which was
terminated in July 1998.
The Company has an additional line of credit available to a subsidiary which
provides for borrowing of up to $388 thousand and expired on August 15, 1998.
Borrowings under the line bear interest at prime plus 3% and are guaranteed
by the Parent Company.
NOTES PAYABLE
The following summarizes short-term notes payable at June 30:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Payable to suppliers, 7-8% $ 998 $100
Payable to a former director; 7%, convertible into common
stock at $1.55 per share - 100
Payable to a director, 10%, convertible on or after December 31,
1998 into common stock at the lesser of $2.36 per share or 85%
of the volume weighted trade price on the date of conversion 1,000 -
------ ----
$1,998 $200
------ ----
------ ----
</TABLE>
31
<PAGE>
NOTE 7. LONG-TERM DEBT
The following summarizes long-term debt at June 30:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to bank in monthly installments of $80 through
June 2001 including interest at prime plus 0.75%;
secured by substantially all assets of the Company $2,500 $ -
Notes payable to suppliers in monthly installments through
September 2001 including interest at 7-12%; secured by
accounts receivable and equipment 214 338
Capital lease obligations, 9-20% 17 34
------ -------
2,731 372
Less current portion 903 144
------ -------
$1,828 $ 228
------ -------
------ -------
MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:
YEAR ENDING JUNE 30:
1999 $ 903
2000 870
2001 949
2002 9
------
$2,731
------
------
</TABLE>
NOTE 8. SHAREHOLDERS' EQUITY
5% SERIES A CONVERTIBLE PREFERRED STOCK
Holders of the 5% convertible preferred stock ("Series A") are entitled to
receive, when and as declared by the Board of Directors, but only out of amounts
legally available for the payment thereof, cumulative cash dividends at the
annual rate of $50.00 per share, payable semi-annually.
The 5% convertible preferred stock is convertible, at any time, into shares of
the Company's common stock, at a price of $17.50 per common share. This
conversion price is subject to certain anti-dilution adjustments, in the event
of certain future stock splits or dividends, mergers, consolidations or other
similar events. In addition, the Company shall reserve, and keep reserved, out
of its authorized but un-issued shares of common stock, sufficient shares to
effect the conversion of all shares of the 5% convertible preferred stock.
In the event of any involuntary or voluntary liquidation, dissolution, or
winding up of the affairs of the Company, the 5% convertible preferred
stockholders shall be entitled to receive $1,000 per share, together with
accrued dividends, to the date of distribution or payment, whether or not earned
or declared.
The 5% convertible preferred stock is callable, at the Company's option, at call
prices ranging from $1,050 to $1,100 per share. No call on the 5% convertible
preferred stock was made during fiscal 1998, 1997, or 1996.
5% SERIES B CONVERTIBLE PREFERRED STOCK
In January, 1995, the Company designated 117 shares of previously undesignated
Preferred Stock as 5% Series B Convertible Preferred Stock, par value $1,000 per
share with a face value of $10,000 per share ("Series B"). Each share may be
converted into 1,905 shares of the Company's common stock at the conversion rate
of $5.25. The holders of the Series B have a liquidation preference of $10,000
per Series B share over the common shareholders but are junior to the
liquidation preference of the existing 5% Convertible Preferred Stock
shareholders. Holders of the Series B are entitled to receive, when and as
declared by the Board of Directors, but only out of amounts legally available
for the payment thereof, cumulative cash dividends at the annual rate of $500
per share, payable annually.
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK
On August 21, 1997, the Company closed a private placement of its newly
designated Series C Redeemable Convertible Preferred Stock ("Series C Shares")
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act"). In the initial closing of $5 million, ITEC issued 500 Series
C Shares and warrants to purchase up to 200,000 shares of the Company's common
stock. After satisfying certain holding periods, each of the newly issued
Series C Shares is convertible, at the option of its holder, into shares of
Common Stock of the Company based upon a conversion price equal to $9.00 or if
lower, the lowest closing market price of the Company's Common Stock during the
7 trading days prior to the conversion date. The warrants have an exercise
price of $7.50 per share. Subject to
32
<PAGE>
certain additional conditions, the Company had the right to call for a second
round of financing up to an aggregate amount of $5 million, beginning on and
including January 1, 1998 and ending June 30, 1998. This additional round of
financing would have involved the issuance of up to an additional 500 Series
C Shares and warrants for the purchase of up to 200,000 shares of Common
Stock. Additionally, purchasers of the Series C Shares were entitled to
purchase additional Series C Shares up to 40% of the number of Series C
Shares held by each investor on December 31, 1997.
During fiscal 1998, 264 shares of Series C Shares were converted into 958,598
shares of common stock. On September 25, 1998, the Company redeemed all
outstanding shares of the Series C Convertible Preferred Stock. See Note 12.
CONVERSION OF PREFERRED STOCK
During fiscal 1997, the Company extended an offer to holders of the Company's
Series A and Series B to convert the accumulated dividends of approximately
$1,789 thousand and $116 thousand, respectively, into unregistered shares of the
Company's common stock at a conversion rate of $7.50. Under the terms of the
offer, Series A shareholders converted 1,897.5 shares and approximately $1,381
thousand of the accumulated dividend and Series B shareholders converted 116.2
shares and approximately $116 thousand of the accumulated dividend into
unregistered shares of the Company's common stock. As of June 30, 1998, the
accumulated dividend in arrears was approximately $497 thousand on the Series A.
COMMON STOCK WARRANTS
The Company, from time-to-time, grants warrants to employees, directors, outside
consultants and other key persons, to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of such
stock on the date of grant. The terms and vesting of these warrants are
determined by the Board of Directors on a case-by-case basis. The following is
a summary of the warrant activity:
<TABLE>
<CAPTION>
PRICE UNDERLYING
PER COMMON
SHARE SHARES
<S> <C> <C>
June 30, 1995 $3.00-$7.50 604
Granted $1.00-$5.00 3,443
Exercised $1.50-$3.10 (1,227)
Canceled $3.00-$3.75 (351)
------
June 30, 1996 $1.00-$7.50 2,469
Granted $5.00-$6.25 845
Exercised $1.00-$3.75 (91)
------
June 30, 1997 $1.00-$7.50 3,223
Granted $2.25-$7.50 1,930
Exercised $1.00-$5.50 (524)
Canceled $4.00-$6.25 (145)
------
June 30, 1998 4,484
------
------
Exercisable at June 30, 1998 $1.00-$7.50 3,039
------
------
</TABLE>
In July 1995, the Company issued to one of its then officers five-year warrants
to purchase an aggregate of 30,000 shares of common stock at $1.00 per share,
the fair market value of the Company's stock on the date the warrants were
granted. During fiscal 1998 and 1997, the former officer exercised warrants to
purchase 10,000 and 20,000 shares, respectively.
In September 1995, two-year warrants to purchase 40,000 shares of the Company's
unregistered common stock at $2.50 per share were issued to an investor group
that provided the Company loan financing in consideration for $6 thousand and a
six month extension to their existing loan. These warrants were exercised in
fiscal 1998.
In September 1995, the Company issued to each of two investors groups that
provided a loan financing, two-year warrants to purchase 6,185 shares (an
aggregate of 12,370 shares) of the Company's unregistered common stock at $2.50
per share. Warrants to purchase 3,093 were exercisable immediately and the
remaining 3,092 warrants were exercisable after six months for each investor
group. All of these warrants were issued in exchange for cash consideration of
approximately $2 thousand which management believes approximates their fair
market value. These warrants were exercised in fiscal 1998.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the then current market value.
Accordingly, an aggregate of 350,607 warrants were canceled and reissued at an
exercise price $1.00 per share. In addition, the Company issued to three of its
officers and its two
33
<PAGE>
outside directors warrants to purchase an aggregate of 415,460 shares of the
Company's common stock. Warrants for 20,000 shares were exercised in fiscal
1997 and 226,666 shares in fiscal 1998.
In October 1995, the Company issued as part of a financing, five-year warrants
to purchase 50,000 unregistered shares of the Company's common stock at $1.25
per share. These warrants remain outstanding at June 30, 1998.
Between January and April 1996, the Company issued to various consultants
warrants to purchase an aggregate of 544,000 shares of the Company's common
stock at prices ranging from $1.50 to $5.00 per share. As of June 30, 1998 and
1997, warrants to purchase 20,000 shares, which expire in January 2001, remained
outstanding and are exercisable at the price of $5.00 per share.
In January 1996, the Company sold to its Chairman for $500 thousand a
five-year warrant to purchase 2,000,000 unregistered shares of its common
stock at the rate of $5.00 per share. The warrant contains certain
anti-dilution provisions should the Company issue equity instruments at less
than 50% of the exercise price. Subsequently, in connection with a private
placement with various private investors of approximately $2.5 million, the
exercise price of this warrant was reduced to $3.00 per share in accordance
with the warrants anti-dilution provision. During fiscal 1997 and 1996,
warrants to purchase 684,667 shares were exercised and as of June 30, 1998,
warrants to purchase 1,315,333 shares were outstanding.
In June 1997, the Company issued to six of its officers and its two outside
directors warrants to purchase an aggregate of 725,000 shares of the Company's
common stock at an exercise price of $6.25 per share vesting monthly over 44
months. During fiscal 1998, warrants for 65,000 shares were cancelled.
In July 1997, the Company issued to a co-developer and sales representative
three-year warrants to purchase 270,000 shares of its common stock at an
exercise price of $5.00 per share and 100,000 shares at $5.50 per share. During
fiscal 1998, warrants for 100,000 shares were exercised at $5.00 per share.
In August 1997, the Company issued three-year warrants to purchase 200,000
shares of its common stock at an exercise price of $7.50 per share in connection
with the issuance of the Series C Preferred Stock.
In fiscal 1998, the Company issued to officers of the Company ten-year warrants
to purchase 930,000 shares of its common stock at exercise prices ranging from
$3.00 to $4.00 per share. During fiscal 1998, warrants for 80,000 shares were
cancelled. In addition, the Company issued to key employees four-year warrants
to purchase 270,000 shares of its common stock at an exercise price of $2.25 per
share
In June 1998, the Company issued to directors and advisors of the Company
ten-year warrants to purchase 160,000 shares of its common stock at an
exercise price of $2.25 per share.
In June 1998, the Company issued five-year warrants to purchase 60,000 shares of
its common stock at an exercise price of $2.50 per share.
During fiscal 1998, the Company issued to suppliers of the Company warrants to
purchase 40,000 shares of its common stock at exercise prices ranging from $3.00
to $4.25 per share.
COMMON STOCK OPTION PLANS
In July 1984 ("1984 Plan"), November 1987 ("1988 Plan") and September, 1996
("1997 Plan"), the Company adopted stock option plans, under which incentive
stock options and non-qualified stock options may be granted to employees,
directors, and other key persons, to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of such
stock on the date of grant, with such options exercisable in installments at
dates typically ranging from one to not more than ten years after the date of
grant.
Under the terms of the 1988 and 1997 Plans, loans may be made to option holders
which permit the option holders to pay the option price, upon exercise, in
installments. A total of 212,000 and 1,000,000 shares of common stock are
authorized for issuance under the 1988 and 1997 Plans, respectively.
No shares are available for future issuance under the 1984 Plan due to the
expiration of the plan during 1994. As of June 30, 1998, options to acquire
2,000 shares were outstanding under the 1984 Plan and options to acquire
670,000 shares remained available for grant under the 1988 and 1997 Plans.
In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans
("Outside Plan"), granted to employees, directors and other key persons of ITEC
or its subsidiaries options to purchase shares of the Company's common stock, at
an exercise price equal to no less than the fair market value of such stock on
the date of grant. Options are exercisable in installments at dates typically
ranging from one to not more than ten years after the date of grant.
34
<PAGE>
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the current market value.
Accordingly, the exercise price on an aggregate of 18,220 and 275,000 options
under the 1988 and Outside Plans, respectively, were canceled and reissued at
an exercise price of $1.00 per share.
COMMON STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan ("Purchase Plan") was approved by the
Company's shareholders in September 1996. The Purchase Plan permits employees
to purchase the Company's common stock at a 15% discounted price. The Purchase
Plan is designed to encourage and assist a broad spectrum of employees of the
Company to acquire an equity interest in the Company through the purchase of its
common stock. It is also intended to provide participating employees the tax
benefits under Section 421 of the Code. The Purchase Plan covers an aggregate
of 500,000 shares of the Company's common stock.
All employees, including executive officers and directors who are employees,
customarily employed more than 20 hours per week and more than five months per
year by the Company are eligible to participate in the Purchase Plan on the
first enrollment date following employment. However, employees who hold,
directly or through options, five percent or more of the stock of the Company
are not eligible to participate.
Participants may elect to participate in the Purchase Plan by contributing up to
a maximum of 15 percent of their compensation, or such lesser percentage as the
Board may establish from time to time. Enrollment dates are the first trading
day of January, April, July and October or such other dates as may be
established by the Board from time to time. On the last trading day of each
December, March, June and September, or such other dates as may be established
by the Board from time to time, the Company will apply the funds then in each
participant's account to the purchase of shares. The cost of each share
purchased is 85 percent of the lower of the fair market value of common stock on
(i) the enrollment date or (ii) the purchase date. The length of the enrollment
period may not exceed a maximum of 24 months. No participant's right to acquire
shares may accrue at a rate exceeding $25,000 of fair market value of common
stock (determined as of the first trading day in an enrollment period) in any
calendar year. No shares have been issued under the Purchase Plan.
STOCK OPTION ACTIVITY
The following is a summary of the stock option activity:
<TABLE>
<CAPTION>
1984, 1988, AND 1997 PLANS OTHER OPTIONS
PRICE UNDERLYING PRICE UNDERLYING
PER COMMON PER COMMON
SHARE SHARES SHARE SHARES
<S> <C> <C> <C> <C>
JUNE 30, 1995 $2.50-$5.10 72 $1.65-$3.60 265
Granted $1.00-$5.00 33 $1.00 334
Exercised $1.00 (8) $1.00 (8)
Cancelled $1.60-$5.10 (61) $1.00-$3.60 (278)
--- ----
JUNE 30, 1996 $1.00-$5.10 36 $1.00 313
Granted $3.60-$8.45 104 -
Exercised $1.00-$2.10 (5) $1.00 (78)
Cancelled $1.00-$7.95 (13) -
--- ----
JUNE 30, 1997 $1.00-$8.45 122 $1.00 235
Granted $1.95-$4.88 373 -
Exercised $1.00-$3.45 (5) $1.00 (37)
Cancelled $1.00-$8.45 (94) $1.00 (3)
--- ----
JUNE 30, 1998 $1.00-$8.45 396 $1.00 195
--- ----
--- ----
EXERCISABLE AT JUNE 30, 1998 48 178
--- ----
--- ----
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. The Company has opted
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") to disclose its stock-based compensation
with no financial effect. The pro forma effects of applying SFAS 123 in this
initial phase-in period are not necessarily representative of the effects on
reported net income or loss for future years. Had compensation expense for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS 123, the Company's pro forma net income (loss) and net
income (loss) per share would have been as follows for the years ended June 30:
35
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income (loss)
As reported $(10,163) $ 723 $(3,665)
Pro forma $(11,154) $ 518 $(3,730)
Basic earnings (loss) per share
As reported $ (0.90) $0.07 $ (0.77)
Pro forma $ (0.99) $0.05 $ (0.78)
</TABLE>
The weighted average fair value of the options granted during fiscal years 1998,
1997, and 1996 is estimated on the date of grant using the Black-Scholes option
pricing model. The weighted average fair values and weighted average
assumptions used in calculating the fair values were as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fair value of options granted $2.37 $5.45 $0.78
Risk free interest rate 6% 7% 7%
Expected life (years) 3 5 5
Expected volatility 95% 95% 95%
Expected dividends - - -
</TABLE>
EXTRAORDINARY GAINS
During fiscal 1996, the Company recognized extraordinary gains on certain
issuances of common stock of app1roximately $116,000, representing the
difference in the aggregate conversion price and the market value of the shares
on the conversion date.
NOTE 9. SIGNIFICANT CUSTOMERS, REVENUE DATA, AND CONCENTRATION OF CREDIT RISK
As of and during the years ended June 30, 1998 and 1997, no customer accounted
for more than 10% of consolidated accounts receivable or total consolidated
revenues.
As of and during the year ended June 30, 1996, Narbon Technologies accounted for
27% of consolidated accounts receivable and 4% of total consolidated revenues;
Canon USA accounted for 11% of consolidated accounts receivable and 3% of total
consolidated revenues; and Computer 2000 accounted for 8% of consolidated
accounts receivable and 17% of total consolidated revenues.
The majority of the Company's product sales in fiscal 1998, 1997, and 1996 were
to European distributors (denominated in U.S. dollars) in the computer
peripherals and accessories market, including imaging and data storage devices
and printers, through its wholly-owned subsidiaries.
A significant portion of contract revenue is derived from OEMs and co-developers
who are headquartered in the Asia.
Revenues from foreign customers as a percentage of total consolidated revenues
were 56% in fiscal 1998, 57% in fiscal 1997, and 81% in fiscal 1996, as
reflected in the following table for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Europe $13,912 $12,221 $ 6,750
Asia 4,189 4,438 2,887
Others 1,223 1,764 452
------- ------- -------
$19,324 $18,423 $10,089
------- ------- -------
------- ------- -------
</TABLE>
The Company typically has not required collateral for its sales. However, it
has required letters of credit or prepayment from time-to-time as deemed
necessary.
NOTE 10. INCOME TAXES
The Company's provision for income taxes is accounted for in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under the SFAS 109 asset
and liability method, deferred tax assets and liabilities are determined based
upon the difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is then provided for
deferred tax assets which are more likely than not to not be realized.
The benefit (provision) for income taxes is as follows for the years ended June
30:
36
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current - State $ (18) $ (5) $ (4)
Deferred benefit - 241 -
------- ------ ------
$ (18) $ 236 $ (4)
------- ------ ------
------- ------ ------
</TABLE>
The components of deferred income taxes are as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets
Federal net operating loss carryforwards $ 8,793 $ 4,728
State net operating loss carryforwards 834 225
Book reserves and accrued liabilities 490 349
Federal general business credits and other
tax credits 517 517
State R&D and other credits 102 102
-------- -------
10,736 5,921
Valuation allowance (10,495) (5,680)
-------- -------
$ 241 $ 241
-------- -------
-------- -------
</TABLE>
The Company's federal and state net operating loss carryforwards expire in
various years through 2013. Additionally, the Company's federal and state
research and development credits expire in various years through 2009. During
1991 the Company sustained a change in ownership as defined in Section 382 of
the Internal Revenue Code; as a result, an annual limitation of approximately
$350 thousand was imposed on the utilization of the net operating loss
carryforwards generated prior to the date of change. In addition, Section 383
places a limitation on the usage of tax credits generated prior to such a
change. Subsequent to the date of the ownership change in 1991, there have been
numerous additional equity issuances; as a result, the Company may have
experienced, or could experience in the future, similar ownership changes, which
could result in additional limitations on the annual utilization of the
Company's net operating loss carryforwards and tax credits generated prior to
the new change in ownership.
The provision for income taxes results in an effective rate which differs from
the federal statutory rate. A reconciliation between the actual tax provision
and taxes computed at the statutory rate is as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Benefit (provision) at federal statutory income tax rate $ 3,449 $ (246) $ 1,286
Utilization of Federal net operating loss carryforward - 485 -
Losses for which no current benefit is available (3,449) - (1,286)
State income taxes (18) (5) (4)
------- ------ -------
$ (18) $ 234 $ (4)
------- ------ -------
------- ------ -------
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain equipment under non-cancelable capital leases, which
are included in property and equipment. At June 30, 1998 and 1997, the cost of
such equipment was $56 and $117 thousand and the related accumulated
amortization was $37 and $54 thousand, respectively. Future commitments under
capital lease obligations are included with long-term debt in Note 7.
The Company and its subsidiaries lease operating facilities under lease
agreements that expire at various dates through March 2003. Total rental
expense was approximately $574 thousand in fiscal 1998, $509 in fiscal 1997,
and $252 in fiscal 1996.
Future minimum lease payments under these long-term non-cancelable operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1999 $393
2000 142
2001 146
2002 149
2003 50
----
$880
----
----
</TABLE>
37
<PAGE>
LEGAL MATTERS
The Company, because of the nature of its business, is from time to time
threatened or involved in legal actions. The Company does not consider that
any of these legal actions now pending will result in a material adverse
effect on the consolidated financial position or results of operations of the
Company and, further, does not consider that any such proceedings fall
outside ordinary, routine litigation incidental to the business of the
Company.
NOTE 12. RELATED PARTY TRANSACTIONS
A former director receives compensation as a consultant to the Company on
corporate matters and investment banking issues under an agreement expiring
in June 2002. These consulting fees amounted to $120 thousand in fiscal
1998, $120 thousand in fiscal 1997, and $108 thousand in 1996. Effective
July 1, 1998, the annual consulting fee under the agreement has been reduced
to $56 thousand. During fiscal 1996, approximately $81 thousand of accrued
consulting fees and $27 thousand of accrued directors fees owed to this
former director were converted into unregistered shares of the Company's
common stock. During fiscal 1998, as consideration for services provided
relating to the private placement of the Series C Preferred Stock, this
former director received commissions and expense reimbursement totaling $200
thousand of which $100 thousand was paid in cash and $100 thousand was used
to exercise warrants for 100,000 shares at a price of $1.00 per share.
As shown in Note 6, one of the Company's former directors loaned to the
Company an aggregate of $100 thousands with interest at the rate of 7% per
year. In June 1998, the note was converted into 64,516 shares of the
Company's common stock.
In June 1998, a director of the Company loaned $1 million to the Company under a
10% note payable due on or after December 31, 1998 and convertible into the
Company's common stock at the lesser of $2.36 per share or 85% of the volume
weighted trade price on the date of conversion.
As further described in Note 13, subsequent to June 30, 1998, a group of several
private investors, one of whom is a director of the Company, provided the
Company with funding totaling $4,380 thousand.
NOTE 13. EVENTS SUBSEQUENT TO JUNE 30, 1998
On September 25, 1998, the Company redeemed all outstanding shares of the
Series C Convertible Preferred Stock (Series C Shares). Owners of the Series
C Shares received $2.23 million in cash, $1 million in subordinated notes and
Warrants to purchase 300,000 shares of Common Stock (100,000 shares at the
exercise price of $4.00, and 200,000 shares at an exercise price of $2.025).
The Company financed the redemption through a $4.38 million private
placement of newly issued shares of common stock and subordinated notes.
The $4.38 million in funding came from several private investors, one of whom is
a director of the Company. In exchange, the Company issued a total of 500,000
shares of the Company's common stock at a price of $2.50 per share and
subordinated promissory notes in the amount of $3.13 million. All of the
promissory notes bear interest at 16% per year. A portion of the notes, $675
thousand, mature in two years and are convertible, at the option of each
investor, at any time into shares of Company common stock at $2.025 per share
(subject to adjustment under certain circumstances). The remaining notes, $2.45
million, mature in one year and are not convertible. The Company also issued
warrants to the investors as part of the financing. The warrants authorize the
purchase of 490,000 shares of common stock at an exercise price of $2.025 per
share. This price is based on the average of the closing bid prices for ITEC's
common stock for the five trading days ended September 14, 1998.
38
<PAGE>
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
39
<PAGE>
PART III
Pursuant to General Instruction G(3) to Form 10-K, the information required
by Items 10, 11, 12, and 13 of Part III is incorporated by reference from the
Company's definitive Proxy Statement with respect to its 1998 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A within 120 days after
June 30, 1998.
PART IV
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K:
(1) FINANCIAL STATEMENTS
The financial statements of the Company are included herein as
required under Item 8 of this Annual Report on Form 10-K. See Index to
Financial Statements on page 19.
(2) FINANCIAL STATEMENT SCHEDULES:
Financial Statement Schedules have been omitted because they are
not applicable or not required or the information required to be set
forth therein is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
fiscal year ended June 30, 1998.
(c) Exhibits.
The following exhibits are filed as part of, or incorporated by
reference into, this Form 10-K.
<TABLE>
<CAPTION>
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
<S> <C> <C>
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also Item 4(a). (Incorporated by
reference to Exhibit 3(a) to 1988 Form 10-K.). . . . . . . . . . *
3(b) Certificate of Amendment of Certificate of Incorporation of
the Company, filed February 8, 1995, as amended, and currently
in effect. (Incorporated by reference to Exhibit 3(b) to 1995
Form 10-K.). . . . . . . . . . . . . . . . . . . . . . . . . . . *
3(c) Certificate of Amendment of Certificate of Incorporation of
the Company, filed May 23, 1997, as amended, and currently in
effect. (Incorporated by reference to 1997 Form 10-K.). . . . . *
3(d) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K). . *
4(a) Amended Certificate of Designation of Imaging Technologies
Corporation with respect to the 5% Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4(d) to 1987 Form 10-K.) . *
4(b) Amended Certificate of Designation of Imaging Technologies
Corporation with respect to the 5% Series B Convertible
Preferred Stock. (Incorporated by reference to Exhibit 4(b)
to 1988 Form 10-K.). . . . . . . . . . . . . . . . . . . . . . . *
4(c) Certificate of Designations, Preferences and Rights of Series
C Convertibles Preferred Stock of Imaging Technologies
Corporation filed on August 21, 1997 . . . . . . . . . . . . . **
10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by
reference to Form S-8 Filed October 26, 1984, File
No. 2-93993.) . . . . . . . . . . . . . . . . . . . . . . . . . *
10(a.2) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1984 Stock Option Plan. (Incorporated by
reference to Form S-8 filed October 26, 1984, File
No. 2-93993.) . . . . . . . . . . . . . . . . . . . . . . . . . *
10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by
reference to Exhibit 10(g) in 1989 Form 10-K.) . . . . . . . . . *
10(b.2) Amendment and Restatement of 1988 Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to 1991
Form 10-K.) . . . . . . . . . . . . . . . . . . . . . . . . . . *
10(b.3) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1988 Stock Option Plan. (Incorporated by
reference to Exhibit 10(e) to 1991 Form 10-K) . . . . . . . . . *
10(c) Standard Industrial Lease Multi-Tenant - Modified Net dated
January 24, 1996 between the Company and Bernardo View, Ltd.;
addendum I to lease; addendum II to lease; Addendum III to
Lease. (Incorporated by reference to Exhibit 10(c) to 1996
Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . *
40
<PAGE>
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
<S> <C> <C>
10(d) Reference is made to the various stock options and warrants
granted in 1996 to directors and executive officers as
described in Notes 6 and 7 to the 1996 financial statements.
(Incorporated by reference to Forms S-8 dated February 12,
1996, File Nos. 333-00871, 333-00873 and 333-00879). . . . . . . *
10(e.1) Executive Employment Agreement, as amended, between the
Company and Edward W. Savarese, dated July 1, 1990 and
amended as of February 25, 1994. (Incorporated by reference
to Exhibit 10(k) to 1994 Form 10-KSB). . . . . . . . . . . . . . *
10(e.2) Compensation Agreement between the Company and Edward W.
Savarese, dated November 16, 1992. (Incorporated by reference
to Exhibit 10(af) to 1993 Form 10-KSB.) . . . . . . . . . . . . *
10(e.3) Amendment to Employment Agreement between the Company and
Edward W. Savarese dated April 1, 1998. . . . . . . . . . . . . **
10(e.4) Amendment to Employment Agreement between the Company and
Edward W. Savarese dated June 12, 1998. . . . . . . . . . . . . **
10(f) Compensation Agreement between the Company and Harry J. Saal
dated November 16, 1992. (Incorporated by reference to Exhibit
10(ad) to 1993 Form 10-KSB.) . . . . . . . . . . . . . . . . . . *
10(g.1) Compensation Agreement between the Company and Irwin Roth
dated November 16, 1992. (Incorporated by reference to Exhibit
10(ag) to 1993 Form 10-KSB.) . . . . . . . . . . . . . . . . . . *
10(g.2) Consulting Agreement, dated April 1, 1994, between the Company
and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to
1994 Form 10-KSB.) . . . . . . . . . . . . . . . . . . . . . . . *
10(g.3) Amendment to Consulting Agreement dated June 12, 1998 between
the Company and Irwin Roth. . . . . . . . . . . . . . . . . . . **
10(h) Acquisition Agreement for acquisition of Prima International
subsidiary on October 1, 1993. (Incorporated by reference to
Exhibit 2.1 to Amendment No. 1 to Form 8K/A dated October 14,
1993.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
10(i.1) Third Party Development Partner License Agreement, effective
October 22, 1993, between the Company and Adobe Systems
Incorporated. (Incorporated by reference to Exhibit 10(ai)
to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . *
10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the
Postscript Support Source and Object Code Distribution License
Agreement between Adobe Systems Incorporated and the Company.
(Incorporated by reference to Exhibit 10(aj) to 1994
Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . *
10(j) ITEC/APS License Agreement, dated March 28, 1994, between the
Company and Integrated Device Technology, Inc. (Incorporated
by reference to Exhibit 10(ak) to 1994 Form 10-KSB) . . . . . . *
10(k) International Sales Representative Agreement, dated October 15,
1993, between the Company and Nippo Ltd. (Incorporated by
reference to Exhibit 10(ao) to 1994 Form 10-KSB). . . . . . . . *
10(l) Consulting Agreement dated September 17, 1993 between the
Company and Marius A. Robinson. (Incorporated by reference to
Exhibit 10(aq) to 1994 Form 10-KSB). . . . . . . . . . . . . . . *
10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between
the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(ar) to 1994 Form 10-KSB). . . . . . . . *
41
<PAGE>
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
<S> <C> <C>
10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.50 per share, dated
September 17, 1993, between the Company and Robinson
International, Ltd. (Incorporated by reference to Exhibit 10
(as) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . *
10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.00 per share, dated
September 17, 1993, between the Company and Robinson
International, Ltd. (Incorporated by reference to Exhibit 10(
at) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . *
10(n) ITEC/MEI License Agreement, dated September 30, 1994 between
the Company and Matsushita Electric Industrial Co., Ltd.
(Incorporated by reference to Exhibit 10(aac) to 1994
Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . *
10(o) Form of standard Warrant Agreement dated January 3, 1996 issued
to Harry J. Saal as described in Note 6 to the 1996 financial
statements. (Incorporated by reference to Exhibit 10(o) to
1996 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . *
10(p) Form of standard Warrant and Consulting Agreement issued to
consultants as described in Note 6 to the 1996 financial
statements. (Incorporated by reference to Form S-8 dated
May 9, 1996, File Number 333-03375). . . . . . . . . . . . . . . *
10(q) Compensation Agreement between the Company and Brian Bonar dated
September 1, 1994. (Incorporated by reference to Exhibit 10(q)
to 1996 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . *
10(q.1) Amendment to Employment Agreement between the Company and Brian
Bonar dated April 1, 1998. . . . . . . . . . . . . . . . . . . . **
10(r) Promissory Note between Imperial Bank and the Company dated
June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . **
10(s) Security and Loan Agreement and Addendum thereto (Eximbank
Facility) between Imperial Bank and the Company, dated June 23,
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
10(t) Security and Loan Agreement and Addendum thereto (Foreign
Insured A/R Line) between Imperial Bank and the Company, dated
June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . **
10 u) Security and Loan Agreement and Addendum thereto (Domestic Line)
between Imperial Bank and the Company, dated June 23, 1998. . . **
10(v) Amended and Restated Agreement and Plan of Merger and Plan of
Reorganization dated February 12, 1997, between and among NewGen
Systems Acquisition Corporation, NewGen Imaging Technologies
Corporation and Personal Computer Products, Incorporated.
(Incorporated by reference to form 8-K dated April 28, 1998). . *
10(w) Warrant to purchase stock between Imperial Bank and the
Company dated June 23, 1998. . . . . . . . . . . . . . . . . . . **
10(x) Securities Purchase Agreement between Buyers and the Company
dated August 21, 1997. . . . . . . . . . . . . . . . . . . . . . **
10(y) Registration Rights Agreement between Buyers and the Company
dated August 21, 1997. . . . . . . . . . . . . . . . . . . . . . **
10(z) Form of Warrant to purchase Common Stock between buyers and the
Company dated August 21, 1997. . . . . . . . . . . . . . . . . . **
10(aa) Promissory Note between DataProducts Corporation and the Company
dated June 30, l998. . . . . . . . . . . . . . . . . . . . . . . **
10(ab) Stock Purchase Agreement between the Company and Stockholders
of New Media, Incorporated dated November 28, 1997. . . . . . . **
42
<PAGE>
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
<S> <C> <C>
10(ac) Agreement and Plan of Merger and Plan of Reorganization between
the Company and Color Solutions, Incorporated dated
November 30, l997. . . . . . . . . . . . . . . . . . . . . . . . *
21 List of Subsidiaries of the Company. . . . . . . . . . . . . . . **
23 Consent of Independent Accountants . . . . . . . . . . . . . . . **
</TABLE>
Exhibits 10(a.1), (a.2), (b.1), (b.2), (b.3), (d), (e.1), (e.2), (e.3), (e.4),
(f), (g.1), (g.2), (g.3), (q), and (q.1) are management contracts or
compensatory plans or arrangements.
The Company will furnish a copy of any exhibit to a requesting stockholder upon
payment of the Company's reasonable expenses in furnishing such exhibit.
* Exhibit is incorporated by reference only and a copy in not
included in this filing.
** Filed Herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized
Date: October 13, 1998 IMAGING TECHNOLOGIES CORPORATION
By: /s/ BRIAN BONAR
--------------------------------
Brian Bonar
President, and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Brian Bonar and Michael K. Clemens, and each
of them acting individually as his attorney-in-fact, each with full power of
substitution and resubstitution, for him in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Harry J. Saal Chairman of the Board of Directors October 13, 1998
- ------------------------
Harry J. Saal
/s/ Brian Bonar President and Chief Executive October 13, 1998
- ------------------------ Officer
Brian Bonar (Principal Executive Officer)
/s/ Michael K. Clemens Senior Vice President, and October 13, 1998
- ------------------------ Chief Financial Officer
Michael K. Clemens (Principal Financial and
Accounting Officer)
/s/ David M. Carver Director October 13, 1998
- ------------------------
David M. Carver
/s/ A.L. Dubrow Director October 13, 1998
- ------------------------
A.L. Dubrow
/s/ Warren T. Lazarow Director October 13, 1998
- ------------------------
Warren T. Lazarow
/s/ Stephen A. MacDonald Director October 13, 1998
- ------------------------
Stephen A. MacDonald
</TABLE>
43
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "IMAGING TECHNOLOGIES CORPORATION", FILED IN THIS OFFICE ON THE
TWENTY-FIRST DAY OF AUGUST, A.D. 1997, AT 10:30 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY
RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-----------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2008678 8100 [Seal] AUTHENTICATION: 8616920
971280088 DATE: 08-21-97
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
IMAGING TECHNOLOGIES CORPORATION
Imaging Technologies Corporation (the "COMPANY"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
of the Company by the Certificate of Incorporation, as amended, of the Company,
and pursuant to Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Company at a meeting duly held, adopted
resolutions (i) authorizing a series of the Company's previously authorized
preferred stock, par value $1,000 per share, and (ii) providing for the
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, of One Thousand Two
Hundred (1,200) shares of Series C Redeemable Convertible Preferred Stock of the
Company, as follows:
RESOLVED, that the Company is authorized to issue 1,200 shares of
Series C Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"),
par value $1,000 per share, which shall have the following powers,
designations, preferences and other special rights:
(1) DIVIDENDS. The Preferred Shares shall not bear any dividends.
(2) HOLDER'S CONVERSION OF PREFERRED SHARES. A holder of Preferred
Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, $.005 par value
per share (the "COMMON STOCK"), on the following terms and conditions:
(a) CONVERSION RIGHT. Subject to the provisions of Section 2(k)
below, at any time or times on or after the date which is 46 days after the
Issuance Date (as defined below), any holder of Preferred Shares shall be
entitled to convert any whole number of Preferred Shares into fully paid
and nonassessable shares (rounded to the nearest whole share in accordance
with Section 2(i) below) of Common Stock, at the
<PAGE>
Conversion Rate (as defined below); provided, however, that in no event
shall any holder be entitled to convert Preferred Shares in excess of that
number of Preferred Shares which, upon giving effect to such conversion,
would cause the aggregate number of shares of Common Stock beneficially
owned by the holder and its affiliates to exceed 4.9% of the outstanding
shares of the Common Stock following such conversion. For purposes of the
foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the
number of shares of Common Stock issuable upon conversion of the Preferred
Shares with respect to which the determination of such proviso is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (i) conversion of the remaining, nonconverted Preferred
Shares beneficially owned by the holder and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company (including, without limitation, any
warrants) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the holder and its
affiliates. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. The
holder may waive the foregoing limitations by written notice to the Company
upon not less than 61 days prior notice (with such waiver taking effect
only upon the expiration of such 61 day notice period).
(b) CONVERSION RATE. The number of shares of Common Stock
issuable upon conversion of cach of the Preferred Shares pursuant to
Sections (2)(a), 2(g) and 2(h) shall be determined according to the
following formula (the "CONVERSION RATE"):
(.06)(N/365)(10,000) + 10,000
-------------------------------
Conversion Price
For purposes of this Certificate of Designations, the following terms shall
have the following meanings:
(i) "CONVERSION PRICE" means, as of any Conversion
Date (as defined below) or other date of determination, the lower of the Fixed
Conversion Price and the Floating Conversion Price, each in effect as of such
date and subject to adjustment as provided herein;
(ii) "FIXED CONVERSION PRICE" means 150% of the Market
Price ON the date of issuance of the applicable Preferred Shares, subject to
adjustment as provided herein;
(iii) "FLOATING CONVERSION PRICE* means, as of any date
of determination, the amount obtained by multiplying the Conversion Percentage
in effect as of such date by the Market Price as of such date;
(iv) "CONVERSION PERCENTAGE" means (A) 100 % for the
period beginning on the Issuance Date and ending on and including the date which
is 90 days after the
-2-
<PAGE>
Issuance Date, (B) 95% for the period beginning on and including the date which
is 91 days after the Issuance Date and ending on and including the date which is
180 days after the Issuance Date and (C) 90% for the period beginning on and
including the date which is 181 days after the Issuance Date and ending on and
including the date which is five years after the Issuance Date, subject in cach
case to adjustment as provided herein;
(v) "MARKET PRICE" means, with respect to any security
for any date, the lowest Closing Bid Price (as defined below) for such security
during the seven consecutive trading days immediately preceding such date;
(vi) "CLOSING BID PRICE" means, for any security as of
any date, the last closing bid price for such security on The Nasdaq SmallCap
Market as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if The
Nasdaq SmallCap Market is not the principal trading market for such security,
the last closing bid price of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid 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 closing bid price is reported
for such security by Bloomberg, the last closing trade price of such security as
reported by Bloomberg, or, if no last closing trade 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 Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holders of Preferred Shares. If the Company and the holders of
Preferred Shares are unable to agree upon the fair market value of the Common
Stock, then such dispute shall be resolved pursuant to Section 2(f)(iii) below
with the term "Closing Bid Price" being substituted for the term "Market Price."
(All such determinations to be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period).
(vii) "N" means the number of days from, but excluding,
the Issuance Date through and including the Conversion Date for the Preferred
Shares for which conversion is being elected; and
(viii) "ISSUANCE DATE" means, with respect to each
Preferred Share, the date of issuance of the applicable Preferred Share.
(c) EFFECT OF FAILURE TO OBTAIN AND MAINTAIN EFFECTIVENESS OF
REGISTRATION STATEMENT. If the registration statement (the "REGISTRATION
STATEMENT") covering the resale of the shares of Common Stock issuable upon
conversion or exercise of the Preferred Shares and the Warrants (as defined in
the Securities Purchase Agreement), respectively, and required to be filed by
the Company pursuant to the Registration Rights Agreement between the Company
and the Buyers referred to therein (THE "REGISTRATION RIGHTS AGREEMENT") is not
(i) filed within 45 days or the first Issuance Date of any Preferred Shares (the
"SCHEDULED FILING DATE"), (ii) declared effective by the United States
Securities and Exchange Commission (the "SEC") on or before 150 days after the
first Issuance Date for any Preferred Shares (the
-3-
<PAGE>
"SCHEDULED EFFECTIVE DATE"), or (iii) if after the Registration Statement has
been declared effective by the SEC, sales cannot be made pursuant to the
Registration Statement (whether because of a failure to keep the Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to the Registration Statement, to register sufficient shares of
Common Stock or otherwise), then, as partial relief for the damages to any
holder by reason of any such delay in or reduction of its ability to sell the
underlying shares of Common Stock (which remedy shall not be exclusive of any
other remedies available at law or in equity), the Conversion Percentage and the
Fixed Conversion Price shall be adjusted as follows:
(A) CONVERSION PERCENTAGE. The Conversion Percentage
in effect at such time shall be reduced by a number of percentage points
equal to the product of (I) .06 and (II) the sum of (x) the number of days
after the Scheduled Filing Date that the relevant Registration Statement
is filed with the SEC, (y) the number of days after the Scheduled
Effective Date and prior to the date that the relevant Registration
Statement is declared effective by the SEC (without double-counting any
number of days after the Scheduled Filing Date that the relevant
Registration Statement is filed, if applicable) and (z) the number of days
that sales cannot be made pursuant to the Registration Statement in
accordance with the Registration Rights Agreement after the Registration
Statement has been declared effective. (For example, if the Registration
Statement becomes effective 30 days after the Scheduled Effective Date,
the Conversion Percentage would be 88.2% percent until any subsequent
adjustment; if thereafter sales could not be made pursuant to the
Registration Statement for a period of 40 additional days, the Conversion
Percentage would then be 85.8%); and
(B) FIXED CONVERSION PRICE. The Fixed Conversion
Price in effect at such time shall be reduced by an amount equal to the
product of (I) the Fixed Conversion Price in effect as of the Issuance
Date and (II) .0006 multiplied by (III) the sum of (x) the number of days
after the Scheduled Filing Date that the relevant Registration Statement
is filed with the SEC, (y) the number of days after the Scheduled
Effective Date and prior to the date that the relevant Registration
Statement is declared effective by the SEC (without double-counting any
number of days after the Scheduled Filing Date that the relevant
Registration Statement is filed, if applicable) and (z) the number of days
that sales cannot be made pursuant to the Registration Statement in
accordance with the Registration Rights Agreement after the Registration
Statement has been declared effective. (For example, assuming for purposes
of this Section 3(c)(B) only that the Fixed Conversion Price equals $9.00,
if the Registration Statement becomes effective 30 days after the
Scheduled Effective Date, the Fixed Conversion Price would be $8.982 until
any subsequent adjustment; if thereafter sales could not be made pursuant
to the Registration Statement for a period of 40 additional days, the
Fixed Conversion Price would then be $8.958.)
(d) ADJUSTMENT TO CONVERSION PRICE -- DILUTION AND OTHER EVENTS.
In order to prevent dilution of the rights granted under this Certificate of
Designations, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 2(d).
-4-
<PAGE>
(i) ADJUSTMENT OF FIXED CONVERSION PRICE UPON ISSUANCE
OF COMMON STOCK. If and whenever on or after the date of issuance of the
Preferred Shares, the Company issues or sells, or is deemed to have issued or
sold, any shares of Common Stock (other than shares of Common Stock deemed to
have been issued by the Company in connection with an Approved Stock Plan (as
defined below)) for a consideration per share less than the Fixed Conversion
Price in effect immediately prior to such time (the "APPLICABLE PRICE"), then
immediately after such issue or sale, the Fixed Conversion Price shall be
reduced to an amount equal to the product of (x) the Fixed Conversion Price in
effect immediately prior to such issue or sale and (y) the quotient determined
by dividing (1) the sum of (I) the product of the Applicable Price and the
number of shares of Common Stock Deemed Outstanding (as defined below)
immediately prior to such issue or sale, and (II) the consideration, if any,
received by the Company upon such issue or sale, by (2) the product of (I) the
Applicable Price and (II) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale. For purposes of determining
the adjusted Fixed Conversion Price under this Section 2(d)(i), the following
shall be applicable:
(A) ISSUANCE OF OPTIONS. If the Company in any
manner grants any rights or options to subscribe for or to purchase
Common Stock (other than pursuant to an Approved Stock Plan or upon
conversion of the Preferred Shares) or any stock or other securities
convertible into or exchangeable for Common Stock (such rights or
options being herein called "OPTIONS" and such convertible or
exchangeable stock or securities being herein called "CONVERTIBLE
SECURITIES") and the price per share for which Common Stock is issuable
upon the exercise of such Options or upon conversion or exchange of such
Convertible Securities is less than the Applicable Price, then the total
maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon conversion or exchange of the total maximum amount
of such Convertible Securities issuable upon the exercise of such
Options shall be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of this
Section 2(d)(i)(A), the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of
such Convertible Securities" is determined by dividing (I) the total
amount, if any, received or receivable by the Company as consideration
for the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all
such options, plus in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the issuance or sale
of such Convertible Securities and the conversion or exchange thereof,
by (II) the total maximum number of shares of Common Stock issuable upon
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No
adjustment of the Fixed Conversion Price shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.
(B) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuabIe upon such conversion or
exchange is less than the Applicable
-5-
<PAGE>
Price, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities shall be deemed to
be outstanding and to have been issued and sold by the Company for such
price per share. For the purposes of this Section 2(d)(i)(B), the "price
per share for which Common Stock is issuable upon such conversion or
exchange" is determined by dividing (I) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (II) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities. No adjustment of the Fixed Conversion Price shall be made upon
the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of
the Fixed Conversion Price had been or are to be made pursuant to other
provisions of this Section 2(d)(i), no further adjustment of the Fixed
Conversion Price shall be made by reason of such issue or sale.
(C) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If
the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of
any Convertible Securities, or the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock change at
any time, the Fixed Conversion Price in effect at the time of such change
shall be readjusted to the Fixed Conversion Price which would have been in
effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold; provided that no adjustment shall be
made if such adjustment would result in an increase of the Fixed
Conversion Price then in effect.
(D) CERTAIN DEFINITIONS. For purposes of determining
the adjusted Fixed Conversion Price under this Section 2(d)(i), the
following terms have meanings set forth below:
(I) "APPROVED STOCK PLAN" shall mean any
contract, plan or agreement which has been approved by the Board of
Directors of the Company, pursuant to which the Company's securities may
be issued to any employee, officer, director, consultant or other service
provider.
(II) "COMMON STOCK DEEMED OUTSTANDING"
means, at any given time, the number of shares of Common Stock actually
outstanding at such time, plus the number of shares of Common Stock deemed
to be outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock
issuable upon conversion of the Preferred Shares.
-6-
<PAGE>
(E) EFFECT ON FIXED CONVERSION PRICE OF CERTAIN
EVENTS. For purposes of determining the adjusted Fixed Conversion Price
under this Section 2(d)(i), the following shall be applicable:
(I) CALCULATION OF CONSIDERATION RECEIVED.
If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Market Price of such securities for the twenty (20)
consecutive trading days immediately preceding the date of receipt. In
case any Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity the amount of consideration therefor
will be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair
value of any consideration other than cash or securities will be
determined jointly by the Company and the holders of a majority of the
Preferred Shares then outstanding. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event requiring
valuation (The "VALUATION EVENT"), the fair value of such consideration
will be determined within forty-eight (48) hours of the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser
selected by the Company. The determination of such appraiser shall be
deemed binding upon all parties absent manifest error.
(II) INTEGRATED TRANSACTIONS. In case any
Option is issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a
consideration of $.01.
(III) TREASURY SHARES. The number of shares
of Common Stock outstanding at any given time does not include shares
owned or held by or for the account of the Company, and the disposition of
any shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) RECORD DATE. If the Company takes a
record of the holders of Common Stock for the purpose of entitling them
(1) to receive a dividend or other distribution payable in Common Stock,
Options or in Convertible Securities or (2) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date
will be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
-7-
<PAGE>
(ii) ADJUSTMENT OF FIXED CONVERSION PRICE UPON
SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time
subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock
into a greater number of shares, the Fixed Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If
the Company at any time combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock
into smaller number of shares, the Fixed Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(iii) ADJUSTMENT OF FLOATING CONVERSION PRICE UPON
ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or
sells Convertible Securities that are convertible into Common Stock at a
price which varies with the market price of the Common Stock (the
formulation for such variable price being herein referred to as the
"VARIABLE PRICE") and such Variable Price is not calculated using the same
formula used to calculate the Floating Conversion Price in effect
immediately prior to the time of such issue or sale, the Company shall
provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("VARIABLE NOTICE") on the date of issuance
of such Convertible Securities. If the holders of Preferred Shares
representing at least two-thirds (2/3) of the Preferred Shares then
outstanding provide written notice via facsimile and overnight courier
(the "VARIABLE PRICE ELECTION NOTICE") to the Company within five (5)
business days of receiving a Variable Notice that such holders desire to
replace the Floating Conversion Price then in effect with the Variable
Price described in such Variable Notice, the Company shall prepare and
deliver to each holder of the Preferred Shares via facsimile and overnight
courier a copy of an amendment to this Certificate of Designations (the
"VARIABLE PRICE AMENDMENT") that substitutes the Variable Price for the
Floating Conversion Price (together with such modifications to this
Certificate of Designations as may be required to give full effect to the
substitution of the Variable Price for the Floating Conversion Price)
within five (5) business days after receipt of the requisite number of
Variable Price Election Notices set forth above. The Company shall file
such Variable Price Amendment with the Secretary of State of the State of
Delaware within five (5) business days after delivery of the Variable
Price Amendment to the holders of the Preferred Shares; provided that in
the event that the Company receives a notice prior to the filing of the
Variable Price Amendment from any holder who has delivered a Variable
Price Election Notice in connection with such Variable Price Amendment
that such holder objects to the form of the Variable Price Amendment, the
Company shall not file such Variable Price Amendment until such time as
the Variable Price Amendment has been revised to the reasonable
satisfaction of such holder and approved in writing by the holders of the
Preferred Shares representing at least two-thirds (2/3) of the Preferred
Shares then outstanding. Except as provided in the preceding proviso, a
holder's delivery of a Variable Price Election Notice shall serve as the
consent required to amend this Certificate of Designations pursuant to
Section 14 below.
(iv) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION,
MERGER OR SALE. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale
-8-
<PAGE>
of all or substantially all of the Company's assets to another Person (as
defined below) or other transaction which is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior
to the consummation of any Organic Change, the Company will make
appropriate provision (in form and substance satisfactory to the holders
of a majority of the Preferred Shares then outstanding) to insure that
each of the holders of the Preferred Shares will thereafter have the right
to acquire and receive in lieu of or addition to (as the case may be) the
shares of Common Stock immediately theretofore acquirable and receivable
upon the conversion of such holder's Preferred Shares, such shares of
stock, securities or assets as may be issued or payable with respect to or
in exchange for the number of shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Preferred Shares had such Organic Change not taken place (without taking
into account any limitations or restrictions on the timing or amount of
conversions). In any such case, the Company will make appropriate provision
(in form and substance satisfactory to the holders of a majority of the
Preferred Shares then outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 2(d) and
Section 2(e) below will thereafter be applicable to the Preferred Shares
(including, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Fixed Conversion Price to the value for the
Common Stock reflected by the terms of such consolidation, merger or sale,
if the value so reflected is less than the Fixed Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Company will
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor entity (if other than the Company)
resulting from consolidation or merger or the entity purchasing such assets
assumes, by written instrument (in form and substance satisfactory to the
holders of a majority of the Preferred Shares then outstanding), the
obligation to deliver to each holder of Preferred Shares such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire. "PERSON" shall mean an
individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or
any department or agency thereof.
(v) CERTAIN EVENTS. If any event occurs of the
type contemplated by the provisions of this Section 2(d) but not expressly
provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other
rights with equity features), then the Company's Board of Directors will
make an appropriate adjustment in the Conversion Price so as to protect
the rights of the holders of the Preferred Shares; provided that no such
adjustment will increase the Conversion Price as otherwise determined
pursuant to this Section 2(d).
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(vi) NOTICES.
(A) Immediately upon any adjustment of the
Conversion Price, the Company will give written notice thereof to each
holder of Preferred Shares, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(B) The Company will give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation; provided that in no event shall such notice be provided to
such holder prior to such information being made known to the public.
(C) The Company will also give written notice to
each holder of Preferred Shares at least twenty (20) days prior to the
date on which any Organic Change, dissolution or liquidation will take
place; provided that in no event shall such notice be provided to such
holder prior to such information being made known to the public.
(e) PURCHASE RIGHTS. In addition to any adjustments of the
Conversion Price pursuant to Section 2(d) above, if at any time the Company
grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the "PURCHASE RIGHTS"), then the holders
of Preferred Shares 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 Preferred Shares (without taking into account
any limitations or restrictions on the timing or amount of conversions)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(f) MECHANICS OF CONVERSION. Subject to the Company's inability
to fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 6 below:
(i) HOLDER'S DELIVERY REQUIREMENTS. To convert
Preferred Shares into full shares of Common Stock on any date (the
"CONVERSION DATE"), the holder thereof shall (A) transmit by facsimile (or
otherwise deliver), for receipt on or prior to 11:59 p.m., Central Time on
such date, a copy of a fully executed notice of conversion in the form
attached hereto as Exhibit I (the "CONVERSION NOTICE"), to the Company or
its designated transfer agent (the "TRANSFER AGENT"), and (B) surrender to
a common carrier for delivery to the Company or the Transfer Agent as soon
as practicable following such date, the original certificates representing
the Preferred Shares being converted (or an indemnification undertaking
with respect to such shares in the
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case of their loss, theft or destruction) (the "PREFERRED STOCK
CERTIFICATES") and the originally executed Conversion Notice.
(ii) COMPANY'S RESPONSE. Upon receipt by the Company of
a facsimile copy of a Conversion Notice, the company shall immediately
send, via facsimile, a confirmation of receipt of such Conversion Notice to
such holder. Upon receipt by the Company or the Transfer Agent of the
Preferred Stock Certificates to be converted pursuant to a Conversion
Notice, together with the originally executed Conversion Notice, the
Company or the Transfer Agent (as applicable) shall, on the next business
day following the date of receipt (or the second business day following the
date of receipt if received after 11:00 a.m. local time of the Company or
Transfer Agent, as applicable), (I) issue and surrender to a common carrier
for overnight delivery to the address as specified in the Conversion
Notice, a certificate, registered in the name of the holder or its
designee, for the number of shares of Common Stock to which the holder
shall be entitled, or (II) credit such aggregate number of shares of Common
Stock to which the holder shall be entitled to the holder's or its
designee's balance account with The Depository Trust Company. If the number
of Preferred Shares represented by the Preferred Stock Certificate(s)
submitted for conversion is greater than the number of Preferred Shares
being converted, then the Company or Transfer Agent, as the case may be,
shall, as soon as practicable and in no event later than two business days
after receipt of the Preferred Stock Certificate(s) and at its own expense,
issue and deliver to the holder a new Preferred Stock Certificate
representing the number of Preferred Shares not converted.
(iii) DISPUTE RESOLUTION. In the case of a dispute as to
the determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder the number
of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Market Price
or arithmetic calculation of the Conversion Rate within one (1) business
day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within one (1) business day
submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside accountant.
The Company shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the
Company and the holder of the results no later than forty-eight (48) hours
from the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case
may be, shall be binding upon all parties absent manifest error.
(iv) RECORD HOLDER. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on the Conversion Date.
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(v) COMPANY'S FAILURE TO TIMELY CONVERT. If within ten
(10) business days of the Company's or the Transfer Agent's receipt of the
Preferred Stock Certificates to be converted and the originally executed
Conversion Notice the Company shall fail to issue a certificate to a holder
or credit the holder's balance account with The Depository Trust Company
for the number of shares of Common Stock to which such holder is entitled
upon such holder's conversion of Preferred Shares or to issue a new
Preferred Stock Certificate representing the number of Preferred Shares to
which such holder is entitled pursuant to Section 2(f)(ii), in addition to
all other available remedies which such holder may pursue hereunder and
under the Securities Purchase Agreement between the Company and the initial
holders of the Preferred Shares (the "SECURITIES PURCHASE AGREEMENT")
(including indemnification pursuant to Section 8 thereof), the Company
shall pay additional damages to such holder on each date after such tenth
(10th) business day that such conversion is not timely effected in an
amount equal to 1.0% of the product of (A) the number of shares of
Common Stock not issued to the holder on a timely basis pursuant to Section
2(f)(ii) and to which such holder is entitled and, in the event the Company
has failed to deliver a Preferred Stock Certificate to the holder on a
timely basis pursuant to Section 2(f)(ii), the number of shares of Common
Stock issuable upon conversion of the Preferred Shares represented by such
Preferred Stock Certificate, as of the last possible date which the Company
could have issued such Preferred Stock Certificate to such holder without
violating Section 2(f)(ii) and (B) the Closing Bid Price of the Common
Stock on the last possible date which the Company could have issued such
Common Stock and such Preferred Stock Certificate, as the case may be, to
such holder without violating Section 2(f)(ii).
(g) MANDATORY CONVERSION. If any Preferred Shares remain
outstanding on the Mandatory Conversion Date (as defined below), then all
such Preferred Shares shall be converted as of such date in accordance with
this Section 2 as if the holders of such Preferred Shares had given the
Conversion Notice on the Mandatory Conversion Date. All holders of
Preferred Shares shall thereupon surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the Company or the
Transfer Agent and on the Mandatory Conversion Date all Preferred Shares,
whether or not the Preferred Stock Certificates therefor are surrendered,
shall be cancelled and deemed null and void provided that the Company has
complied with its obligations under this Section 2(g). "MANDATORY
CONVERSION DATE" means the date which is five years after the applicable
Issuance Date.
(h) CONVERSION AT THE OPTION OF THE COMPANY. At any time or
times on or after the Issuance Date, the Company shall have the right, in
its sole discretion, to require that any or all of the outstanding
Preferred Shares be converted ("CONVERSION AT COMPANY'S ELECTION") at the
Conversion Rate; provided that the Conditions to Conversion at the Option
of the Company (as set forth below) are satisfied. The Company shall
exercise its right to Conversion at Company's Election by providing each
holder of Preferred Shares written notice ("NOTICE OF CONVERSION AT
COMPANY'S ELECTION") at least 30 days prior to the date selected by the
Company for conversion ("COMPANY'S ELECTION CONVERSION DATE"). If the
Company elects to require conversion of some, but not all, of the Preferred
Shares, the Company shall convert an amount from
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each holder of Preferred Shares equal to such holder's pro rata amount
(based on the number of Preferred Shares held by such holder relative to
the number of Preferred Shares outstanding on Company's Election Conversion
Date) of all Preferred Shares the Company is requiring to be converted. The
Notice of Conversion at Company's Election shall indicate (x) the number
of Preferred Shares the Company has selected for conversion, (y) the
Company's Election Conversion Date, which date shall be not less than 30 or
more than 40 days after each holder's receipt of such notice, and (z) each
holder's pro rata share of outstanding Preferred Shares. All Preferred
Shares selected for conversion in accordance with the provision of this
Section 2(h) shall be converted as of the Company's Election Conversion
Date in accordance with this Section 2 as if the holders of such Preferred
Shares selected by the Company to be converted had given the Conversion
Notice on the Company's Election Conversion Date. All holders of Preferred
Shares shall thereupon and within two business days the Company's Election
Conversion Date surrender all Preferred Stock Certificates selected for
conversion, duly endorsed for cancellation, to the Company or the Transfer
Agent. "CONDITIONS TO CONVERSION AT THE COMPANY'S ELECTION" means the
following conditions: (i) on each day during the 20 consecutive trading
days immediately preceding the date of the Company's Notice of Conversion
at the Company's Election, the last reported sale price (as reported by
Bloomberg) of the Common Stock is at least 200% of the last reported sale
price (as reported by Bloomberg) as of the applicable Issuance Date of the
Preferred Shares being converted; (ii) on each day during the period
beginning on the date of the Notice of Conversion at the Company's Election
and ending on and including the Company's Election Conversion Date, the
last reported sale price (as reported by Bloomberg) of the Common Stock is
at least 170% of the last reported sale price (as reported by Bloomberg)
as of the applicable Issuance Date of the Preferred Shares being converted;
(iii) the Company shall not have previously given Notice of Conversion at
Company's Election; (iv) the Company's stockholders shall have approved the
issuance of the Securities (as defined below) on or prior to the date of
the Company's Notice of Conversion at Company's Election; (v) on each day
during the period beginning 20 days prior to the Notice of Conversion at
the Company's Election and ending on and including the Company's Election
Conversion Date, the Registration Statement shall be effective and
available for the sale of no less than 125% of the sum of (A) the number of
Conversion Shares then issuable upon the conversion of all outstanding
Preferred Shares, including the Conversion Shares to be issued pursuant to
this Conversion at the Company's Election, (B) the number of Warrant Shares
(as defined in the Securities Purchase Agreement) then issuable upon
exercise of all outstanding Warrants and (C) the number of Conversion
Shares and Warrant Shares that are then held by the holders of the
Preferred Shares, (vi) on each day during the period beginning 20 days
prior to the date of the Company's Notice of Conversion at Company's
Election and ending on and including the Company's Election Conversion
Date, the Common Stock is designated for quotation on The Nasdaq SmallCap
Market or the Nasdaq National Market or a national securities exchange and
is not suspended from trading; (vii) during the period beginning 20 days
prior to the date of the Company's Notice of Conversion at Company's
Election and ending on and including the Company's Election Conversion
Date, the Average Daily Trading Dollar Volume (as defined below) is not
less than $250,000; (viii) during the period beginning on the Initial
Issuance Date and ending on and including the
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Company's Election Conversion Date, the Company shall have delivered
Conversion Shares upon conversion of the Preferred Shares and Warrant
Shares upon exercise of the Warrants to the Buyers on a timely basis as set
forth in Section 2(f)(ii) of this Certificate of Designations and
Sections 2(a) and 2(b) of the Warrants, respectively; and (ix) the
Company otherwise has satisfied its obligations and is not in default under
this Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement. For purposes of this Section 2(h), "AVERAGE
DAILY TRADING DOLLAR VOLUME" means the average during any period of the
number of shares of Common Stock sold on each trading day multiplied by
such day's weighted-average trading price as reported by Bloomberg;
provided, however, that for purposes of determining the Average Daily
Trading Dollar Volume, block trades in excess of 30,000 shares of Common
Stock shall be counted as the sale of only 30,000 shares of Common Stock.
Notwithstanding the above, any holder of Preferred Shares may convert such
shares (including Preferred Shares selected for conversion) into Common
Stock pursuant to Section 2(a) on or prior to the date immediately
preceding the Company's Election Conversion Date (and, after such holder's
receipt of the Notice of Conversion at Company's Election, without regard
to the conversion limitations set forth in Section 2(k) below).
(i) FRACTIONAL SHARES. The Company shall not issue any fraction
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
(j) TAXES. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Preferred Shares.
(k) CONVERSION RESTRICTIONS. Other than a conversion pursuant to
Section 2(g) or 2(h), the right of a holder of Preferred Shares to convert
Preferred Shares pursuant to this Section 2 shall be limited as set forth
below. Without the prior consent of the Company, a holder of Preferred
Shares shall not be entitled convert an aggregate number of Preferred
Shares from the Issuance Date of such Preferred Shares through the date of
this determination in excess of the number of Preferred Shares which when
divided by the number of Preferred Shares purchased by such holder on such
Issuance Date would exceed (i) 0.20 for the period beginning on the date
which is 46 days after the Issuance Date and ending on and including the
date which is 90 days after the Issuance Date, (ii) 0.40 for the period
beginning on and including the date which is 91 days after the Issuance
Date and ending on and including the date which is 135 days after the
Issuance Date, (iii) 0.60 for the period beginning on the date which is 136
days after the Issuance Date and ending on and including the date which is
180 days after the Issuance Date, (iv) 0.80 for the period beginning on and
including the date which is 181
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days after the Issuance Date and ending on and including the date which is
225 days after the Issuance Date and (v) 1.00 for the period beginning on
and including the date which is 226 days after the Issuance Date and ending
on and including the date which is five years after the Issuance Date.
Notwithstanding the foregoing, the conversion restriction set forth in this
Section 2(k) shall not apply (x) if there shall have occurred a Material
Adverse Change (as defined below), (y) with respect to any conversion of
Preferred Shares at a Conversion Price which is equal to the Fixed
Conversion Price then in effect or (z) the Company has delivered a Put
Share Notice (as defined under the Securities Purchase Agreement). For
purposes of this Section 2(k), "MATERIAL ADVERSE CHANGE" means any change,
event, result or happening involving, directly or indirectly, the Company
or any of its subsidiaries resulting in a material adverse effect on the
business, prospects, financial condition or results or operations of the
Company and its subsidiaries, taken as a whole, including, without
limitation, an event constituting a Major Business Event (as defined in the
Securities Purchase Agreement) or a Triggering Event shall have occurred.
(l) ADJUSTMENT OF CONVERSION RESTRICTIONS UPON ISSUANCE OF
CONVERTIBLE SECURITIES. If the Company in any manner issues or sells
Convertible Securities that are convertible into Common Stock and are
subject to restrictions on the amount of shares that can be converted (the
restriction on conversions being herein referred to as, the "CONVERSION
RESTRICTIONS") and such Conversion Restriction is not formulated with using
the same time periods and percentages used in Section 2(k), the Company
shall provide written notice thereof via facsimile and overnight courier to
each holder of the Preferred Shares ("CONVERSION RESTRICTION NOTICE") on
the date of issuance of such Convertible Securities. If the holders of
Preferred Shares representing at least two-thirds (2/3) of the Preferred
Shares then outstanding which remain subject to the restrictions in Section
2(k) provide written notice via facsimile and overnight courier (the
"CONVERSION RESTRICTION ELECTION NOTICE") to the Company within five (5)
business days of receiving a Conversion Restriction Notice that such
holders desire to replace the conversion restrictions set forth in Section
2(k) then in effect with the Conversion Restriction described in such
Conversion Restriction Notice, the Company shall prepare and deliver to
each holder of the Preferred Shares via facsimile and overnight courier a
copy of an amendment to this Certificate of Designations (the "CONVERSION
RESTRICTION AMENDMENT") that substitutes the Conversion Restriction for
conversion restrictions set forth in Section 2(k) (together with such
modifications to this Certificate of Designations as may be required to
give full effect to the substitution of the Conversion Restriction for the
conversion restrictions set forth in Section 2(k)) within five (5) business
days after receipt of the requisite number of Conversion Restriction
Election Notices set forth above. The Company shall file such Conversion
Restriction Amendment with the Secretary of State of the State of Delaware
within five (5) business days after delivery of the Conversion Restriction
Amendment to the holders of the Preferred Shares; provided that in the
event that the Company receives a notice prior to the filing of the
Conversion Restriction Amendment from any holder who has delivered a
Conversion Restriction Election Notice in connection with such Conversion
Restriction Amendment that such holder objects to the form of the
Conversion Restriction Amendment, the Company shall not file such
Conversion Restriction Amendment until such time as the
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Conversion Restriction Amendment has been revised to the reasonable
satisfaction of such holder and approved in writing by the holders of the
Preferred Shares representing at least two-thirds (2/3) of the Preferred
Shares then outstanding. Except as provided in the preceding proviso, a
holder's delivery of a Conversion Restriction Election Notice shall serve
as the consent required to amend this Certificate of Designations pursuant
to Section 14 below.
(3) REDEMPTION AT OPTION OF HOLDERS.
(a) REDEMPTION OPTION UPON MAJOR TRANSACTION. In addition to all
other rights of the holders of Preferred Shares contained herein,
simultaneous with the occurrence of a Major Transaction (as defined below),
each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to greater of (i)
Liquidation Value (as defined in Section 10 below) and (ii) the product of
(A) the Conversion Rate at such time and (B) the Closing Bid Price on the
date of the public announcement of such Major Transaction or the next date
on which the exchange or market on which the Common Stock is traded is open
if such public announcement is made (X) after 12:00 p.m., Central Time,
time on such date or (Y) on a date on which the exchange or market on which
the Common Stock is traded is closed ("MAJOR TRANSACTION REDEMPTION
PRICE").
(b) REDEMPTION OPTION UPON TRIGGERING EVENT. In addition to all
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to the greater of (i) $12,500 and (ii) the product of (A) the
Conversion Rate at such time and (B) the Closing Did Price calculated as of
the date immediately preceding such Triggering Event on which the exchange
or market on which the Common Stock is traded is open ("TRIGGERING EVENT
REDEMPTION PRICE" and, collectively with "MAJOR TRANSACTION REDEMPTION
PRICE," the "REDEMPTION PRICE"); provided, however, that in the case of
Triggering Event described in Section 3(d)(iii) below, the Triggering
Event Redemption Price shall equal the greater of (i) the Liquidation Value
and (ii) the product of (A) the Conversion Rate at such time and (B) the
Closing Bid Price calculated as of the date immediately preceding such
Triggering Event on which the exchange or market on which the Common Stock
is traded is open. The Company hereby warrants and agrees that the Fixed
Conversion Price for any Preferred Shares that are not redeemed after the
occurrence of a Triggering Event described in Section 3(d)(iii) below shall
be reset to equal the lesser of (x) 150% of the Market Price on the date of
issuance of the applicable Preferred Shares, subject to adjustment, and (y)
150% of the Market Price on the date immediately following such Triggering
Event on which the exchange or market on which the Common Stock is traded
is open.
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(c) "MAJOR TRANSACTION". A "MAJOR TRANSACTION" shall be deemed
to have occurred at such time as any of the following event:
(i) the consolidation, merger or other business
combination of the Company with or into another Person (other than pursuant
to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company) pursuant to which either (x)
the continuing or surviving entity is not a public company or (y) the
stockholders of the Company existing at the time of such consolidation,
merger or other business combination cannot elect a majority of the
directors of the continuing or surviving entity immediately following such
consolidation, merger or business combination.
(ii) the sale or transfer of all or substantially
all of the Company's assets pursuant to which either (x) the purchasing
entity is not a public company or (y) the stockholders of the Company
existing at the time of such sale cannot elect a majority of the directors
of the purchasing entity immediately following such sale; or
(iii) a purchase, tender or exchange offer made to
and accepted by the holders of more than 10% of the outstanding shares of
Common Stock which requires or receives the consent of the Company's Board
of Directors.
(d) "TRIGGERING EVENT". A "TRIGGERING EVENT" shall be deemed to
have occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date that is 240 days
after the Initial Issuance Date;
(ii) while the Registration Statement is required
to be maintained effective pursuant to the terms of the Registration
Rights Agreement, the effectiveness of the Registration Statement lapses
for any reason (including, without limitation, the issuance of a stop
order) or is unavailable to the holder of the Preferred Shares for sale
of the Registrable Securities (as defined in the Registration Rights
Agreement) in accordance with the terms of the Registration Rights
Agreement, and such lapse or unavailability continues for a period of
ten consecutive trading days, provided that the cause of such lapse or
unavailability is not due to factors solely within the control of such
holder of Preferred Shares;
(iii) the failure of the Common Stock to be listed on
the Nasdaq National Market, The Nasdaq SmallCap Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc. for a period of seven
consecutive days (provided that such failure shall not constitute a
Triggering Event if the Company delists the Common Stock at the election of
the holders of Preferred Shares pursuant to Section 3(g) below); or
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(iv) the Company's notice to any holder of Preferred
Shares, including by way of public announcement, at any time, of its
intention not to comply with proper requests for conversion of any
Preferred Shares into shares of Common Stock, including due to any of the
reasons set forth in Section 6(a) below.
(e) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON MAJOR
TRANSACTION. No sooner than 15 days nor later than 10 days prior to the
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver
written notice thereof via facsimile and overnight courier ("NOTICE OF
MAJOR TRANSACTION") to each holder of Preferred Shares. At any time after
receipt of a Notice of Major Transaction, the holders of at least
two-thirds (2/3) of the Preferred Shares then outstanding may require the
Company to redeem all of the holder's Preferred Shares then outstanding by
delivering written notice thereof via facsimile and overnight courier
("NOTICE OF REDEMPTION AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the
Company, which Notice of Redemption at Option of Buyer Upon Major
Transaction shall indicate (i) the number of Preferred Shares that such
holders are voting in favor of redemption and (ii) the applicable Major
Transaction Redemption Price, as calculated pursuant to Section 3(a) above.
(f) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING
EVENT. Within one (1) day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares.
At any time after receipt of a Notice of Triggering Event, the holders of
at least two-thirds (2/3) of the Preferred Shares then outstanding may
require the Company to redeem all of the Preferred Shares by delivering
written notice thereof via facsimile and overnight courier ("NOTICE OF
REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT") to the Company, which
Notice of Redemption at Option of Buyer Upon Triggering Event shall
indicate (i) the number of Preferred Shares that such holders are voting
in favor of redemption and (ii) the applicable Triggering Event Redemption
Price, as calculated pursuant to Section 3(b) above.
(g) PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction or a
Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the
case may be, from the holders of at least two-thirds (2/3) of the Preferred
Shares then outstanding, the Company shall immediately notify each holder
by facsimile of the Company's receipt of such requisite notices necessary
to affect a redemption and each holder of Preferred Shares shall thereafter
promptly send such holder's Preferred Stock Certificates to be redeemed to
the Company or its Transfer Agent. The Company shall deliver the applicable
Redemption Price to such holder within five days after the Company's
receipt of the requisite notices required to affect a redemption; provided,
however, that the Major Transaction Redemption Price must be delivered to
such holder prior to, or simultaneously with, the occurrence of a Major
Transaction; provided further that a holder's Preferred Stock Certificates
shall have been so delivered to the Company or its Transfer Agent; provided
further that if the Company is unable to redeem all of the
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Preferred Shares, the Company shall redeem an amount from each holder of
Preferred Shares equal to such holder's pro-rata amount (based on the
number of Preferred Shares held by such holder relative to the number of
Preferred Shares outstanding) of all Preferred Shares being redeemed. The
Company hereby covenants and agrees that a Major Transaction shall not be
consummated until the Company redeems all of the Preferred Shares submitted
for redemption pursuant to a Major Transaction. If the Company shall fail
to redeem all of the Preferred Shares submitted for redemption pursuant to
a Triggering Event (other than pursuant to a dispute as to the arithmetic
calculation of the Triggering Event Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Certificate of
Designations and the Securities Purchase Agreement, the Triggering Event
Redemption Price payable in respect of such unredeemed Preferred Shares
shall bear interest at the rate of 1.0% per month (prorated for partial
months) until paid in full. Until the Company pays any unpaid applicable
Redemption Price in full to each holder, holders of at least two-thirds
(2/3) of the Preferred Shares then outstanding, including shares of
Preferred Shares submitted for redemption pursuant to this Section 3 and
for which the applicable Redemption Price has not been paid, shall have the
option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption,
require the Company to promptly return to each holder all of the Preferred
Shares that were submitted for redemption by such holder under this Section
3 and for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the "VOID
OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of such Void
Optional Redemption Notice(s) and prior to payment of the full applicable
Redemption Price to each holder, (i) the Notice(s) of Redemption at Option
of Buyer Upon Triggering Event or the Notice(s) of Redemption at Option of
Buyer Upon Major Transaction, as the case may be, shall be null and void
with respect to those Preferred Shares submitted for redemption and for
which the applicable Redemption Price has not been paid, (ii) the Company
shall immediately return any Preferred Shares submitted to the Company by
each holder for redemption under this Section 3(i) and for which the
applicable Redemption Price has not been paid, (iii) the Fixed Conversion
Price of such returned Preferred Shares shall be adjusted to the lesser of
(A) the Fixed Conversion Price as in effect on the date on which the Void
Optional Redemption Notice(s) is delivered to the Company and (B) the
lowest Closing Bid Price during the period beginning on the date on which
the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or
the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as
the case may be, is delivered to the Company and ending on the date on
which the Void Optional Redemption Notice(s) is delivered to the Company;
provided that no adjustment shall be made if such adjustment would result
in an increase of the Fixed Conversion Price then in effect, and (iv) the
Conversion Percentage in effect at such time shall be reduced by a number
of percentage points equal to the product of (A) .25 and (B) the number of
days in the period beginning on the date on which the Notice(s) of
Redemption at Option of Buyer Upon Major Transaction or the Notice(s) of
Redemption at Option of Buyer Upon Triggering Event, as the case may be,
is delivered to the Company and ending on the date on which the Void
Optional Redemption Notice(s) is delivered to the Company. In addition, if
a redemption voided pursuant to this Section 3(i) was caused by a
Triggering Event involving the Company's inability to issue Conversion
Shares because
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of the Exchange Cap (as defined in Section 13), and if so directed by the
holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding, including shares of Preferred Shares submitted for redemption
pursuant to this Section 3 with respect to which the applicable Redemption
Price has not been paid, in a Void Mandatory Redemption Notice, the Company
shall immediately delist the Common Stock from such exchange and have the
Common Stock, at such holders' option, listed on The Nasdaq SmallCap Market
or traded on the electronic bulletin board or the "pink sheets".
Notwithstanding the foregoing, in the event of a dispute as to the
determination of the Closing Bid Price or the arithmetic calculation of the
Redemption Price, such dispute shall be resolved pursuant to Section
2(f)(iii) above with the term "Closing Bid Price" being substituted for the
term "Market Price" and the term "Redemption Price" being substituted for
the term "Conversion Rate". Payments provided for in this Section 3 shall
have priority to payments to other stockholders in connection with a Major
Transaction.
(4) COMPANY'S RIGHT TO REDEEM AT ITS ELECTION. Notwithstanding
Section 2(g) or anything herein to the contrary but subject to Sections
4(d) and 4(e) below, on the date which is two years after the Issuance
Date, but only on such date, the Company shall have the right, in its sole
discretion, to redeem ("REDEMPTION AT THE COMPANY'S ELECTION"), from time
to time, any or all of the Preferred Shares at the Redemption Price at the
Company's Election (as defined below). If the Company elects to redeem
some, but not all, of the Preferred Shares, the Company shall redeem an
amount from each holder of Preferred Shares equal to such holder's pro-rata
amount (based on the number of Preferred Shares held by such holder
relative to the number of Preferred Shares outstanding) of all Preferred
Shares being redeemed.
(a) REDEMPTION PRICE AT THE COMPANY'S ELECTION. The "REDEMPTION
PRICE AT THE COMPANY'S ELECTION" shall be an amount per Preferred Share
equal to the product of (i) 1.1 multiplied by (ii) the sum of (A)
(.06)(P/365)(10,000) plus (B) 10,000; where "P" means the number of days
from, but excluding, the Issuance Date through and including the Date of
Redemption at the Company's Election (as defined in Section 4(b)).
(b) MECHANICS OF REDEMPTION AT THE COMPANY'S ELECTION. The
Company shall effect each such redemption no sooner than 20 trading days
nor later than 40 trading days after delivering written notice of its
Redemption at the Company's Election via facsimile and overnight courier
("NOTICE OF REDEMPTION AT THE COMPANY'S ELECTION") to (i) each holder of
the Preferred Shares and (ii) the Transfer Agent. Such Notice of Redemption
at the Company's Election shall indicate (A) the number of shares of
Preferred Shares that have been selected for redemption, (B) the date that
such redemption is to become effective (the "DATE OF REDEMPTION AT THE
COMPANY'S ELECTION") AND (C) the applicable Redemption Price at the
Company's Election. Notwithstanding the above, any holder may convert into
Common Stock pursuant to Section (2)(a) above, on or prior to the date
immediately preceding the Date of Redemption at the Company's Election, any
Preferred Shares that such holder is otherwise entitled to convert (and,
after such holder's receipt of the Notice of Redemption at the Company's
Election, without regard to the conversion limitations set
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forth in Section 2(k)), including Preferred Shares that have been selected
for Redemption at the Company's Election pursuant to this Section 4.
(c) PAYMENT OF REDEMPTION PRICE. Each holder submitting
Preferred Shares being redeemed under this Section 4 shall send such
holder's Preferred Stock Certificates so redeemed to the Company or its
Transfer Agent within five (5) business days after the Date of Redemption
at the Company's Election, and the Company shall pay the applicable
Redemption Price at the Company's Election to that holder in cash within
three business days after such holder's Preferred Stock Certificates are so
delivered to the Company or its Transfer Agent. If the Company shall fail
to pay the applicable Redemption Price at the Company's Election to such
holder on a timely basis as described in this Section 4(c), in addition to
any remedy such holder of Preferred Shares may have under this Certificate
of Designations and the Securities Purchase Agreement, such unpaid amount
shall bear interest at the rate of 2.5% per month until paid in full.
Notwithstanding the foregoing, if the Company fails to pay the applicable
Redemption Price at the Company's Election to a holder within the time
period described in this Section 4 due to a dispute as to the arithmetic
calculation of the Redemption Price at the Company's Election, such dispute
shall be resolved pursuant to Section 2(f)(iii) above with the term
"Redemption Price at the Company's Election" being substituted for the term
"Conversion Rate."
(d) COMPANY MUST HAVE IMMEDIATELY AVAILABLE FUNDS OR CREDIT
FACILITIES. The Company shall not be entitled to send any Notice of
Redemption at the Company's Election pursuant to Section 4(b) above and
begin the redemption procedure under this Section 4, unless it has:
(i) the full amount of the Redemption Price at the
Company's Election in cash, available in a demand or other immediately
available account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar
financial institutions that are immediately available and unrestricted for
use in redeeming the Preferred Shares, in the full amount of the Redemption
Price at the Company's Election;
(iii) a written agreement with a standby underwriter or
qualified buyer ready, willing and able to purchase from the Company a
sufficient number of shares of stock to provide proceeds necessary to
redeem any stock that is not converted prior to a Redemption at the
Company's Election; or
(iv) a combination of the items set forth in the
preceding clauses (i), (ii) and (iii), aggregating the full amount of the
Redemption Price at the Company's Election.
(e) CERTAIN CONDITIONS DURING NOTICE PERIOD. The Company shall
not be entitled to redeem the Preferred Shares on a Date of Redemption at
the Election of the Company. unless each of the following conditions are
satisfied as of the date of the
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Notice of Redemption at the Company's Election and on each day from such
date until and including the later of the Date of Redemption at the
Company's Election and the date on which the Company pays the applicable
Redemption Price:
(i) The Company's stockholders shall have approved the
issuance of the Securities (as defined below) on or prior to the Date of
Redemption at the Company's Election;
(ii) The Registration Statement shall be effective and
available for the sale of no less than 125% of the sum of (A) the number of
Conversion Shares then issuable upon the conversion of all outstanding
Preferred Shares, including the Conversion Shares to be issued pursuant
to this Conversion at the Company's Election, (B) the number of Warrant
Shares then issuable upon exercise of all outstanding Warrants and (C) the
number of Conversion Shares and Warrant Shares that are then held by the
holders of the Preferred Shares;
(iii) The Common Stock is designated for quotation on
the Nasdaq National Market or a national securities exchange and is not
suspended from trading;
(iv) The Average Daily Trading Dollar Volume (as
defined in Section 2(h)) is not less than $250,000;
(v) The Company shall have delivered Conversion Shares
upon conversion of the Preferred Shares and Warrant Shares upon exercise of
the Warrants to the Buyers on a timely basis as set forth in Section
2(f)(ii) of this Certificate of Designations and Sections 2(a) and 2(b) of
the Warrants, respectively; and
(vi) the Company otherwise has satisfied its
obligations and is not in default under this Certificate of Designations,
the Securities Purchase Agreement and the Registration Rights Agreement.
(5) COMPANY'S RIGHT TO REDEEM IN LIEU OF CONVERSION. (a)
Notwithstanding Section 2 or anything herein to the contrary but subject to
Section 5(e) below, at any time after the Issuance Date, the Company may
elect to redeem Preferred Shares submitted for conversion in lieu of
converting such Preferred Shares, provided that the Conversion Rate for
such Preferred Shares on the date submitted for conversion is less than
$5.00 per share (a "COMPANY REDEMPTION IN LIEU OF CONVERSION"). If the
Company elects to redeem some, but not all, of the Preferred Shares
submitted for conversion, the Company shall redeem an amount from each
holder of Preferred Shares submitted for conversion on the applicable date
a number of Preferred Shares equal to such holder's pro-rata amount (based
on the number of Preferred Shares held by such holder relative to the
number of Preferred Shares outstanding) of all Preferred Shares submitted
for conversion which the Company elects to redeem,
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(b) REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION. The "REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION" shall be an amount per Preferred Share equal to the product of
(i) the Conversion Rate of the Preferred Shares on the date such Preferred
Shares are submitted for conversion and (ii) the last reported sale price
of the Common Stock (as reported by Bloomberg) on the date the applicable
Preferred Shares are submitted for conversion.
(e) MECHANICS OF COMPANY REDEMPTION IN LIEU OF CONVERSION. The
Company shall exercise its right to redeem by delivering written notice by
facsimile and overnight courier ("NOTICE OF COMPANY REDEMPTION IN LIEU OF
CONVERSION") to (i) each holder of the Preferred Shares and (ii) the
Transfer Agent. Such Notice of Company Redemption in Lieu of Conversion at
the Company's Election shall indicate (A) the maximum, if any, aggregate
Redemption Price of Company Redemption in Lieu of Conversion which the
Company is willing to expend for Company Redemption in Lieu of Conversion,
(B) confirm the time period during which the Company may effect Company
Redemption in Lieu of conversion, which period shall begin on and include
the date which is five business days after the date of receipt by all of
the holders' of the Notice of Redemption in Lieu of Conversion and shall
end on and include the date which is 30 calendar days after the fifth
business day following the date of receipt by all of the holders of the
Notice of Redemption in Lieu of Conversion (the "REDEMPTION IN LIEU OF
CONVERSION PERIOD"). The Company may terminate a Redemption in Lieu of
Conversion Period at any time with respect to Preferred Shares which have
not been submitted for conversion by delivering written notice of such
termination to each holder of Preferred Shares by facsimile and overnight
courier. Any Preferred Shares submitted for conversion after the
termination of the Redemption in Lieu of Conversion Period or the
redemption price of which is in excess of the maximum aggregate Redemption
Price of Company Redemption in Lieu of Conversion shall be converted in
accordance with Section 2.
(d) PAYMENT OF REDEMPTION PRICE. The Company shall pay the
applicable Redemption Price of Company Redemption in Lieu of Conversion to
the holder of the Preferred Shares being redeemed in cash within a number
of days after the termination or expiration of the Redemption in Lieu of
Conversion Period equal to (i) five days if the number of Preferred Shares
presented for conversion and subject to redemption is less than or equal to
200 Preferred Shares, (ii) 10 days if the number of Preferred Shares
presented for conversion and subject to redemption is greater than 200 but
less than or equal to 400 Preferred Shares, (iii) 15 days if the number of
Preferred Shares presented for conversion and subject to redemption is
greater than 400 but less than or equal to 600 Preferred Shares, (iv) 25
days if the number of Preferred Shares presented for conversion and subject
to redemption is greater than 600 but less than or equal to 800 Preferred
Shares and (v) 35 days if the number of Preferred Shares presented for
conversion and subject to redemption is greater than 800. If the Company
shall fail to pay the applicable Redemption Price of Company Redemption in
Lieu of Conversion to such holder on a timely basis as described in this
Section 5(d), in addition to any remedy such holder of Preferred Shares
may have under this Certificate of Designations and the Securities
Purchase Agreement, such unpaid amount shall bear
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interest at the rate of 2.5% per month until paid in full. Until the
Company pays such unpaid applicable Redemption Price of Company Redemption
in Lieu of Conversion full to each holder, each holder of Preferred Shares
submitted for redemption pursuant to this Section 5 and for which the
applicable Redemption Price of Company Redemption in Lieu of Conversion has
not been paid, shall have the option (the "VOID COMPANY REDEMPTION OPTION")
to, in lieu of redemption, require the Company to promptly return to each
holder all of the Preferred Shares that were submitted for redemption by
such holder under this Section 5 and for which the applicable Redemption
Price of Company Redemption in Lieu of Conversion has not been paid, by
sending written notice thereof to the Company via facsimile (the "VOID
COMPANY REDEMPTION NOTICE"). Upon the Company's receipt of such Void
Company Redemption Notice(s) and prior to payment of the full applicable
redemption price to each holder, (i) the Company's Redemption in Lieu of
Conversion shall be null and void with respect to those Preferred Shares
submitted for redemption and for which the applicable redemption price has
not been paid, (ii) the Company shall immediately return any Preferred
Shares submitted to the Company by each holder for redemption under this
Section 5 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid and (iii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Conversion Rate applicable to such conversion on the date
on which such Preferred Shares were originally presented for conversion and
(B) the Conversion Rate which would have been effect if such Preferred
Shares were presented for conversion on the business day immediately
following the last day on which the Company could have effected a timely
Company Redemption in Lieu of Conversion. Notwithstanding the foregoing, if
the Company fails to pay the applicable Redemption Price of Company
Redemption in Lieu of Conversion to a holder within the time period
described in this Section 5(d) due to a dispute as to the arithmetic
calculation of the Redemption Price of Company Redemption in Lieu of
Conversion, such dispute shall be resolved pursuant to Section 2(f)(iii)
above with the term "Redemption Price of Company Redemption in Lieu of
Conversion" being substituted for the term "Conversion Rate." If the
Company fails to timely effect a Company Redemption in Lieu of Conversion
in accordance with this Section 5, the Company shall not be allowed to
submit another Notice of Company Redemption in Lieu of Conversion without
the prior written consent of the holders of at least two-thirds (2/3) of
the Preferred Shares then outstanding.
(e) COMPANY MUST HAVE IMMEDIATELY AVAILABLE FUNDS OR CREDIT
FACILITIES. The Company shall not be entitled to send any Notice of Company
Redemption in Lieu of Conversion pursuant to Section 5(b) above and begin
the redemption procedure under this Section 5, unless it has:
(i) the full amount of the Redemption Price of Company
Redemption in Lieu of Conversion in cash, available in a demand or other
immediately available account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar
financial institutions that are immediately available and unrestricted for
use in redeeming the Preferred Shares, in the full amount of the Redemption
Price of Company Redemption in Lieu of Conversion;
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<PAGE>
(iii) a written agreement with a standby underwriter or
qualified buyer ready, willing and able to purchase from the Company a
sufficient number of shares of stock to provide proceeds necessary to
redeem any stock that is not converted prior to a Company Redemption in
Lieu of Conversion; or
(iv) a combination of the items set forth in the
preceding clauses (i), (ii) and (iii), aggregating the full amount of the
Redemption Price of Company Redemption in Lieu of Conversion.
(6) INABILITY TO FULLY CONVERT.
(a) HOLDER'S OPTION IF COMPANY CANNOT FULLY CONVERT. If, upon
the Company's receipt of a Conversion Notice, the Company can not issue
shares of Common Stock registered for resale under the Registration
Statement for any reason, including, without limitation, because the
Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or
by the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the
Company or its Securities, including without limitation the Exchange Cap,
from issuing all of the Common Stock which is to be issued to a holder of
Preferred Shares pursuant to a Conversion Notice or (z) fails to have a
sufficient number of shares of Common Stock registered for resale under the
Registration Statement, then the Company shall issue as many shares of
Common Stock as it is able to issue in accordance with such holder's
Conversion Notice and pursuant to Section 2(f) above and, with respect to
the unconverted Preferred Shares, the holder, solely at such holder's
option, can elect to:
(i) require the Company to redeem from such holder
those Preferred Shares for which the Company is unable to issue Common
Stock in accordance with such holder's Conversion Notice ("MANDATORY
REDEMPTION") at a price per Preferred Share (the "MANDATORY REDEMPTION
PRICE") equal to the Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert
Preferred Shares is pursuant to Section 6(a)(z) above, require the Company
to issue restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice; or
(iv) if the Company's inability to fully convert
Preferred Shares is pursuant to the Exchange Cap described in Section
6(a)(y) above, require the Company to issue shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant to Section
2(f) above at a Conversion Price equal to the Market Price of the
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Common Stock for the five consecutive trading days preceding such holder's
Notice in Response to Inability to Convert (as defined below).
(b) MECHANICS OF FULFILLING HOLDER'S ELECTION. The Company shall
immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section 6(a) above, a notice of
the Company's inability to fully satisfy such holder's Conversion Notice
(the "INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert
Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory
Redemption Price. Such holder must within five (5) business days of receipt
of such Inability to Fully Convert Notice deliver written notice via
facsimile to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT") of
its election pursuant to Section 6(a) above.
(c) PAYMENT OF REDEMPTION PRICE. If such holder shall elect to
have its shares redeemed pursuant to Section 6(a)(i) above, the Company
shall pay the Mandatory Redemption Price in cash to such holder within
thirty (30) days of the Company's receipt of the holder's Notice in
Response to Inability to Convert. If the Company shall fail to pay the
applicable Mandatory Redemption Price to such holder on a timely basis as
described in this Section 6(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Redemption Price), in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designations and the Securities Purchase Agreement, such
unpaid amount shall bear interest at the rate of 2.5% per month (prorated
for partial months) until paid in full. Until the full Mandatory Redemption
Price is paid in full to such holder, such holder may void the Mandatory
Redemption with respect to those Preferred Shares for which the full
Mandatory Redemption Price has not been paid and receive back such
Preferred Shares. Notwithstanding the foregoing, if the Company fails to
pay the applicable Mandatory Redemption Price within such thirty (30) days
time period due to a dispute as to the determination of the arithmetic
calculation of the Redemption Rate, such dispute shall be resolved pursuant
to Section 2(f)(iii) above with the term "Redemption Price" being
substituted for the term "Conversion Rate".
(d) PRO-RATA CONVERSION AND REDEMPTION. In the event the Company
receives a Conversion Notice from more than one holder of Preferred Shares
on the same day and the Company can convert and redeem some, but not all,
of the Preferred Shares pursuant to this Section 6, the Company shall
convert and redeem from each holder of Preferred Shares electing to have
Preferred Shares converted and redeemed at such time an amount equal to
such holder's pro-rata amount (based on the number of Preferred Shares held
by such holder relative to the number of Preferred Shares outstanding) of
all Preferred Shares being converted and redeemed at such time.
(7) REISSUANCE OF CERTIFICATES. In the event of a conversion or
redemption pursuant to this Certificate of Designations of less than all of
the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly
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cause to be issued and delivered to the holder of such Preferred Shares a
preferred stock certificate representing the remaining Preferred Shares
which have not been so converted or redeemed.
(8) RESERVATION OF SHARES. The Company shall, so long as any of the
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Preferred Shares, such number of shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all of the Preferred Shares then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 150% of
the number of shares of Common Stock for which the Preferred Shares are at
any time convertible; provided further that such shares of Common Stock so
reserved shall be allocated for issuance upon conversion of Preferred
Shares pro rata among the holders of Preferred Shares based on the number
of Preferred Shares held by such holder relative to the total number of
authorized Preferred Shares.
(9) VOTING RIGHTS. Holders of Preferred Shares shall have no
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Delaware, and as expressly provided
in this Certificate of Designations.
(10) LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from
earnings available for distribution to its stockholders (the "PREFERRED
FUNDS"), before any amount shall be paid to the holders of any of the
capital stock of the Company of any class junior in rank to the Preferred
Shares in respect of the preferences as to the distributions and payments
on the liquidation, dissolution and winding up of the Company, an amount
per Preferred Share equal to the sum of (i) $10,000 and (ii) an amount
equal to the product of (.06) (N/365) ($10,000) (such sum being referred
to as the "LIQUIDATION VALUE"); provided that, if the Preferred Funds are
insufficient to pay the full amount due to the holders of Preferred Shares
and holders of shares of other classes or series of preferred stock of the
Company that are of equal rank with the Preferred Shares as to payments of
Preferred Funds (the "PARI PASSU SHARES"), then each holder of Preferred
Shares and Pari Passu Shares shall receive a percentage of the Preferred
Funds equal to the full amount of Preferred Funds payable to such holder
as a liquidation preference, in accordance with their respective
Certificate of Designations, Preferences and Rights, as a percentage of the
full amount of Preferred Funds payable to all holders of Preferred Shares
and Pari Passu Shares. The purchase or redemption by the Company 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
Company. Neither the consolidation or merger of the Company with or into
any other Person, nor the sale or transfer by the Company 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 Company. No holder
of Preferred Shares shall be entitled to receive any amounts with respect
thereto upon any liquidation, dissolution or winding up of the Company
other than the amounts provided for herein.
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(11) PREFERRED RANK. All shares of Common Stock shall be of junior
rank to all Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution and winding up
of the Company. The rights of the shares of Common Stock shall be subject
to the preferences and relative rights of the Preferred Shares. Without the
prior express written consent of the holders of not less than two-thirds
(2/3) of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or issue additional or other capital stock that is of
senior or equal rank to the Preferred Shares in respect of the preferences
as to distributions and payments upon the liquidation, dissolution and
winding up of the Company. Without the prior express written consent of the
holders of not less than two-thirds (2/3) of the then outstanding Preferred
Shares, the Company shall not hereafter authorize or make any amendment to
the Company's Certificate of Incorporation or bylaws, or file any
resolution of the board of directors of the Company with the Delaware
Secretary of State containing any provisions, which would adversely affect
or otherwise impair the rights or relative priority of the holders of the
Preferred Shares relative to the holders of the Common Stock or the holders
of any other class of capital stock. In the event of the merger or
consolidation of the Company with or into another corporation, the
Preferred Shares shall maintain their relative powers, designations and
preferences provided for herein and no merger shall result inconsistent
therewith.
(12) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO
OTHER CAPITAL STOCK. Until all of the Preferred Shares have been converted
or redeemed as provided herein, the Company shall not, directly or
indirectly, redeem, or declare or pay any cash dividend or distribution on,
its Common Stock without the prior express written consent of the holders
of not less than two-thirds (2/3) of the then outstanding Preferred Shares.
(13) LIMITATION ON NUMBER OF CONVERSION SHARES. The Company shall not
be obligated to issue, in the aggregate, more than 1,975,120 shares of
Common Stock (such amount to be proportionately and equitably adjusted from
time to time in the event of stock splits, stock dividends, combinations,
reverse stock splits, reclassification, capital reorganizations and similar
events relating to the Common Stock) (the "EXCHANGE CAP") upon conversion
of the Preferred Shares, if issuance of a larger number of shares of Common
Stock would constitute a breach of the Company's obligations under the
rules or regulations of The Nasdaq Stock Market, Inc. or any other
principal securities exchange or market upon which the Common Stock is or
becomes traded. The Exchange Cap shall be allocated among the Preferred
Shares pro rata based on the total number of authorized Preferred Shares.
(14) VOTE TO CHANGE THE TERMS OF PREFERRED SHARES. The affirmative
vote at a meeting duly called for such purpose or the written consent
without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for any change
to this Certificate of Designations or the Company's Certificate of
Incorporation which would amend, alter, change or repeal any of the
powers, designations, preferences and rights of the Preferred Shares.
-28-
<PAGE>
(15) LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the bolder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall
not be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
-29-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations
to be signed by Dr. Edward W. Savarese, its Chief Executive Officer as of the
21st day of August, 1997.
IMAGING TECHNOLOGIES CORPORATION
By: /s/ Edward W. Savarese
------------------------------
Name: Dr. Edward W. Savarese
Its: Chief Executive Officer
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
AS AMENDED APRIL 1, 1998
1) Change title of Chief Executive Officer to Executive Vice President for
Strategic Business Affairs.
2) 300,000 shares as previously granted for future performance vesting monthly
over four (4) years.
3) Target bonus for the 1st 3 Quarters @ $60,0000 (annualized) and the 4th
Quarter at $15,000 (annualized). Thereafter at $15,000 annually and/or may
be determined by the Board of Directors.
A bonus will not be paid if the company does less than 75% of plan
pre-tax/interest. Between 75% and 100% of plan, the bonus is paid pro-rata.
Above plan, the company will accrue 5% of the incremental pre-tax profits,
all or some of which the Board will distribute in its discretion.
Imaging Technologies Corporation
By: /s/ [ILLEGIBLE] /s/ Brian Bonar
----------------------------------
Title: Chairman CEO
-------------------------------
/s/ Edward W. Savarese
-------------------------------------
Edward W. Savarese
<PAGE>
AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
This Amendment to Executive Employment Agreement ("Amendment") is made and
entered into by and between Edward W. Savarese ("Employee") and Imaging
Technologies Corporation (the "Company") on June 12, 1998.
1. Executive and Company are parties to an Executive Employment Agreement
("Agreement") entered into as of July 1, 1990 and amended as of February 25,
1994, January 22, 1997, and April 1, 1998.
2. In consideration of the mutual covenants and agreements set forth
below, Executive and the Company agree as follows:
(a) Executive resigns from his position as a Director of the Board of
the Company effective as of the date of this Amendment.
(b) Employee shall no longer be Executive Vice-President for
Strategic Business Affairs. Employee shall be employed as the Manager of
Business Development.
(c) COMPENSATION. Paragraph 3.1 of the Executive Employment Agreement
as amended is further amended to provide that for all services Employee may
render to the Company during the Term of this Agreement as amended, Employee
will be compensated as follows:
07-01-98/06-30-02 Years 9-12 - $188,750
Such annual salary shall be payable in equal bi-monthly installments, subject to
income tax, withholding and other payroll tax deductions required by applicable
state and federal law.
(d) TERMINATION WITHOUT CAUSE. Paragraph 5.6 of the Executive
Employment Agreement as amended is amended to provide that if the Company
terminates Employee's employment at-will, the Company shall nonetheless pay to
Employee his salary as provided in paragraph 2(c) of this Amendment, together
with any other compensation or benefits due hereunder, for the remainder of
the 12-year term; all in a lump sum within 72 hours after such termination, and
continue all his fringe benefits for the remainder of the 12-year term. The
parties further agree that in the event the Company terminates the Employee's
employment at-will, any of the Employee's unvested Warrants shall become
immediately vested and the Company shall cause these Warrants to be
registered if they have not been previously registered. At his option, the
Employee shall be able to
-1-
<PAGE>
use either a portion or the entire lump sum provided for in this paragraph
towards the purchase of these Warrants.
(e) INDEMNITY AND INSURANCE COVERAGE. The Company agrees to defend and
also agrees to indemnify, other than for punitive damages, Employee against any
claim, damage, debt, liability, action, cause of action, cost or expense,
including attorneys' fees and costs, actually paid or incurred arising out of or
in any way connected with Employee's acts or omissions arising out of Employee's
service as a Director, officer, or employee of the Company. Company shall
continue to include Employee as a named insured on the Company's insurance
policy or policies for Director's and Officer's coverage.
(f) WARRANTS. Executive shall have the Option, exercisable at any
time upon written notice to the Company, to require the Company to advance
compensation otherwise payable to Employee in an amount sufficient to fund
Employee's purchase of 315,000 shares of the Common Stock of the Company at the
current warrant price of $1.00 per share. Except as otherwise set forth in this
paragraph (f), the parties agree that nothing in this Amendment affects
Employee's rights as a shareholder of the Company, or affects any Warrants
previously awarded to the Employee. Company agrees that in exchange for the
Employee signing this Amendment, the Company will register all of the Employee's
Warrants that have not yet been registered. Company further acknowledges that
by signing this Amendment, Employee has completely satisfied his obligation to
the Company for the $30,000.00 owed by the Employee for warrants which he
previously exercised.
(g) The Company and Employee agree that any bonus that has been paid
to Employee as of the date of this Amendment shall be considered already earned
and shall not be subject to any future adjustment. The Chief Executive Officer
of the Company and the Company's Board of Directors shall decide in their sole
discretion whether to pay Employee any bonus in the future.
Date: June 12, 1998 "COMPANY":
IMAGING TECHNOLOGIES CORPORATION
By /s/ Brian Bomar
------------------------------------
BRIAN BOMAR CEO
------------------------------------
(Printed Name and Title]
Dated: June 12 1998 "EMPLOYEE":
/s/ Edward W. Savarese
---------------------------------------
EDWARD W. SAVARESE
-2-
<PAGE>
AMENDMENT TO CONSULTING AGREEMENT
This Amendment to the Consulting Agreement ("Amendment") is made and entered
into by and between Irwin Roth ("Consultant") and Imaging Technologies
Corporation (the "Company") on June 12, 1998.
1. Consultant and Company are parties to a Consulting Agreement
("Agreement") entered into as of April 1, 1994 and amended as of
February 25, 1994, January 22, 1997, and April 1, 1998.
2. In consideration of the mutual covenants and agreements set forth
below, Consultant and the Company agree as follows:
(a) Consultant resigns from his position as a Director of the Board
of the Company effective as of the date of this Amendment.
(b) COMPENSATION. Paragraph 3 of the Consultant Agreement as amended
is further amended to provide that for all services Consultant
may render to the Company during the Term of this Agreement as
amended, Consultant will be compensated as follows:
07-01-98 / 06-30-02 Each year $55,583
Such cash compensation shall be payable in monthly installments, of $4,631.91,
in addition to any compensation as provided in paragraph d.
(c) INDEMNITY AND INSURANCE COVERAGE. The Company agrees to defend
and also agrees to indemnify, other than for punitive damages,
Consultant against any claim, damage, debt, liability, action,
cause of action, cost or expense, including attorneys' fees and
costs, actually paid or incurred, arising out of or in any way
connected with Consultant's acts or omissions arising out of
Consultant's service as a Director, officer, or Consultant of the
Company. Company shall continue to include Consultant as a named
insured on the Company's insurance policy or policies for
Director's and Officer's coverage.
(d) WARRANTS. Consultant shall have the Option, exercisable at any
time upon written notice to the Company, to require the Company
to advance compensation otherwise payable to Consultant in an
amount sufficient to fund Consultant's purchase of 209,667 shares
of the Common Stock of the Company at the current warrant price
of $1.00 per share. Except as otherwise set forth in this
paragraph (d), the parties agree that nothing in this Amendment
affects Consultant's rights as a shareholder of the Company, or
affects any Warrants previously awarded to the Consultant.
Company agrees that in exchange for the Consultant signing this
Amendment, the Company will register all of the Consultant's
Warrants that have not yet been registered in a timely manner.
Company further acknowledges that by signing this agreement all
outstanding warrants will be immediately vested.
Date: June 12, 1998 "COMPANY"
IMAGING TECHNOLOGIES CORPORATION
By /s/ Brian Bonar
---------------------------------
BRIAN BONAR CEO
------------------------------------
[Printed Name and Title]
Date: June 12, 1998 "CONSULTANT"
/s/ Irwin Roth
------------------------------------
IRWIN ROTH
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
AS AMENDED APRIL 1, 1998
1) Replace Chief Operating Officer by Chief Executive Officer.
2) Salary is raised to $250,000 per year
3) Target bonus for 1st 3 Quarters is $40,000 (annualized) and $50,000 in the
4th Quarter (annualized) and thereafter.
A bonus will not be paid if the company does less than 75% of plan pre-tax/
interest. Between 75% and 100% of plan, the bonus is paid pro-rata. Above
plan, the company will accrue 5% of the incremental pre-tax profits, all or
some of which the Board will distribute at its discretion.
3) 200,000 shares as previously granted for future performance vesting monthly
over four (4) years.
4) 250,000 shares for future performance vesting monthly over four (4) years.
Imaging Technologies Corporation
By: [ILLEGIBLE]
---------------------------------------
Title: Chairman
-----------------------------------
/s/ Brian Bonar
------------------------------------------
Brian Bonar
<PAGE>
[LOGO]
PROMISSORY NOTE
<TABLE>
<S><C>
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$2,500,000.00 06-23-1998 06-30-2001 624001 JM /s/ JM
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------
BORROWER: IMAGING TECHNOLOGIES CORPORATION; ET. AL. LENDER: IMPERIAL BANK
11031 VIA FRONTERA, SUITE 100 SAN DIEGO REGIONAL OFFICE
SAN DIEGO, CA 92127-1706 701 B STREET, SUITE 600
SAN DIEGO, CA 92112-4168
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT: $2,500,000.00 INITIAL RATE: 9.250% DATE OF NOTE: JUNE 23,1998
</TABLE>
PROMISE TO PAY. IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL,
NEWGEN SYSTEMS ACQUISITIONS CORPORATION, MCMICAN CORPORATION, COLOR
SOLUTIONS, INC., ITEC EUROPE LIMITED and AMT ACCEL UK LIMITED (REFERRED TO
IN THIS NOTE INDIVIDUALLY AND COLLECTIVELY AS "BORROWER") JOINTLY AND
SEVERALLY PROMISE TO PAY TO IMPERIAL BANK ("LENDER"), OR ORDER, IN LAWFUL
MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF TWO MILLION
FIVE HUNDRED THOUSAND & 00/100 DOLLARS ($2,500,000.00), TOGETHER WITH
INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM JUNE 23, 1998, UNTIL PAID IN
FULL.
PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE
INDEX, BORROWER WILL PAY THIS LOAN IN 35 PAYMENTS OF $80,094.69 EACH
PAYMENT AND AN IRREGULAR LAST PAYMENT ESTIMATED AT $80,094.64. BORROWER'S
FIRST PAYMENT IS DUE JULY 30, 1998, AND ALL SUBSEQUENT PAYMENTS ARE DUE ON
THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT WILL BE DUE
ON JUNE 30, 2001, AND WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST
NOT YET PAID. PAYMENTS INCLUDE PRINCIPAL AND INTEREST. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by
the outstanding principal balance, multiplied by the actual number of days
the principal balance is outstanding. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments
will be applied first to any unpaid collection costs and any late charges,
then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the Imperial Bank
Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as
its Prime Rate of interest from time to time. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that
Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. THE INDEX CURRENTLY IS
8.500%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE WILL BE AT A RATE OF 0.750 PERCENTAGE POINTS OVER THE INDEX,
RESULTING IN AN INITIAL RATE OF 9.250%. NOTICE: Under no circumstances will
the interest rate on this Note be more than the maximum rate allowed by
applicable law. Whenever increases occur in the interest rate, Lender, at
its option, may do one or more of the following: (a) increase Borrower's
payments to ensure Borrower's loan will pay off by its original final
maturity date, (b) increase Borrower's payments to cover accruing interest,
(c) increase the number of Borrower's payments, and (d) continue
Borrower's payments at the same amount and increase Borrower's final
payment.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full
prepayment of this Note, Borrower understands that Lender is entitled to a
MINIMUM INTEREST CHARGE OF $250.00. Other than Borrower's obligation to pay
any minimum interest charge, Borrower may pay without penalty all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's
obligation to continue to make payments under the payment schedule. Rather,
they will reduce the principal balance due and may result in Borrower
making fewer payments.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to comply with or to
perform when due any other term, obligation, covenant, or condition
contained in this Note or any agreement related to this Note, or in any
other agreement or loan Borrower has with Lender. (c) Any representation or
statement made or furnished to Lender by Borrower or on Borrower's behalf
is false or misleading in any material respect either now or at the time
made or furnished. (d) Borrower becomes insolvent, a receiver is appointed
for any part of Borrower's property, Borrower makes an assignment for the
benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (e) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien
or security interest. This includes a garnishment of any of Borrower's
accounts with Lender. (f) Any guarantor dies or any of the other events
described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if
Borrower has not been given a notice of a breach of the same provision
of this Note within the preceding twelve (12) months, it may be cured
(and no event of default will have occurred) if Borrower, after
receiving written notice from Lender demanding cure of such default: (a)
cures the default within ten (10) days; or (b) if the cure requires more
than ten (10) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon
Borrower's failure to pay all amounts declared due pursuant to this
section, including failure to pay upon final maturity, Lender, at its
option, may also, if permitted under applicable law, do one or both of the
following: (a) increase the variable interest rate on this Note to 5.750
percentage points over the Index, and (b) add any unpaid accrued interest
to principal and such sum will bear interest therefrom until paid at the
rate provided in this Note (including any increased rate). Lender may hire
or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court costs,
in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED
TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A
LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA.
LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST
THE OTHER. (INITIAL HERE [ILLEGIBLE]/GB) THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if
Borrower makes a payment on Borrower's loan and the check or preauthorized
charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all
accounts Borrower may open in the future, excluding however all IRA and
Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the
extent permitted by applicable law, to charge or setoff all sums owing on
this Note against any and all such accounts.
REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and all
matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise
of other provisional remedies (any and all of which may be initiated
pursuant to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this document ("Agreement"), which
controversy, dispute or claim is not settled in writing within thirty (30)
days after the "Claim Date" (defined as the date on which a party subject
to the Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference
proceeding in California in accordance with the provisions of Section 638
et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the
settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy, dispute or claim is subject to the
reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where the Real
Property, if any, is located or Los Angeles County if none (the "Court").
The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by
the Presiding Judge of the Court (or his representative). The
referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection
should take and subscribe to the oath of office as provided for in Rule 244
of the California Rules of Court (or any subsequently enacted Rule). Each
party shall have
<PAGE>
06-23-1998
PROMISSORY NOTE PAGE 2
(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Date and (b) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim
Date. Any decision rendered by the referee will be final, binding and
conclusive and judgment shall be entered pursuant to CCP 644 in any court
in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to
any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by
this Agreement shall be completed no later than fifteen (15) days before
the first hearing date established by the referee. The referee may extend
such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days
written notice, and request for production or inspection of documents shall
be responded to within ten (10) days after service. All disputes relating
to discovery which cannot be resolved by the parties shall be submitted to
the referee whose decision shall be final and binding upon the parties.
Pending appointment of the referee as provided herein, the Superior Court
is empowered to issue temporary and/or provisional remedies, as
appropriate.
2. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation
of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted
without a court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee.
The party making such a request shall have the obligation to arrange for
and pay for the court reporter. The costs of the court reporter at the
trial shall be borne equally by the parties.
3. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California.
The rules of evidence applicable to proceedings at law in the State of
California will be applicable to the reference proceeding. The referee
shall be empowered to enter equitable as well as legal relief, to provide
all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single
judgment at the close of the reference proceeding which shall dispose of
all of the claims of the parties that are the subject of the reference. The
parties hereto expressly reserve the right to contest or appeal from the
final judgment or any appealable order or appealable judgment entered by
the referee. The parties hereto expressly reserve the right to findings of
fact, conclusions of law, a written statement of decision, and the right to
move for a new trial or a different judgment, which new trial, if granted,
is also to be a reference proceeding under this provision.
4. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the
Court, in accordance with the California Arbitration Act, 1280 through
1294.2 of the CCP as amended from time to time. The limitations with
respect to discovery as set forth hereinabove shall apply to any such
arbitration proceeding.
SECURITY AND LOAN AGREEMENT. This Note is subject to the provisions of the
Security and Loan Agreement and Addendum dated June 23, 1998 and all
amendments thereto and replacements therefor.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Note without losing them. Each Borrower understands
and agrees that, with or without notice to Borrower, Lender may with
respect to any other Borrower (a) make one or more additional secured or
unsecured loans or otherwise extend additional credit; (b) alter,
compromise, renew, extend, accelerate, or otherwise change one or more
times the time for payment or other terms any indebtedness, including
increases and decreases of the rate of interest on the indebtedness; (c)
exchange, enforce, waive, subordinate, fail or decide not to perfect, and
release any security, with or without the substitution of new collateral;
(d) apply such security and direct the order or manner of sale thereof,
including without limitation, any nonjudicial sale permitted by the terms
of the controlling security agreements, as Lender in its discretion may
determine; (e) release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms
or in any manner Lender may choose; and (f) determine how, when and what
application of payments and credits shall be made on any other indebtedness
owing by such other borrower. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest
and notice of dishonor. Upon any change in the terms of this Note, and
unless otherwise expressly stated in writing, no party who signs this Note,
whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or notice to
anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom
the modification is made. The obligations under this Note are joint and
several.
PRIOR TO SIGNING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
EACH BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A
COMPLETED COPY OF THE NOTE.
BORROWER:
IMAGING TECHNOLOGIES CORPORATION
IMAGING TECHNOLOGIES CORPORATION
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
PRIME INTERNATIONAL, CO-BORROWER
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
NEWGEN SYSTEMS ACQUISITIONS CORPORATION, CO-BORROWER
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
MCMICAN CORPORATION, CO-BORROWER
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
COLOR SOLUTIONS INC., CO-BORROWER
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
<PAGE>
06-23-1998
PROMISSORY NOTE PAGE 3
(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEC EUROPE LIMITED, CO-BORROWER
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
AMT ACCEL UK LIMITED, CO-BORROWER
BY: /s/ Brian Bonar
-------------------------------
BRIAN BONAR, C.E.O.
BY: /s/ Gerry Berg
-------------------------------
GERRY BERG, VICE PRESIDENT
<PAGE>
[LOGO]
IMPERIAL BANK
Member FDIC
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between IMAGING TECHNOLOGIES CORPORATION, ET. AL.
(SEE EXHIBIT "A1" ATTACHED HERETO)
, A CORPORATIONS
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate
unpaid principal balance, the following Borrowing Base:
* % of Eligible Accounts
* % of the Value of Inventory
and in no event more than $ 2,500,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be
debited to the loan ledger account of Borrower maintained by Bank
(herein called "Loan Account") and Bank shall credit the Loan Account
with all loan repayments made by Borrower. Borrower promises to pay
Bank (a) the unpaid balance of Borrower's Loan Account on demand and
(b) on or before the tenth day of each month, interest on the average
daily unpaid balance of the Loan Account during the immediately
preceding month at the rate of THREE QUARTERS OF ONE percent (0.750%)
per annum in excess of the rate of interest which Bank has announced
as its prime lending rate ("Prime Rate") which shall vary concurrently
with any change in such Prime Rate. Interest shall be computed at the
above rate on the basis of the actual number of days during which the
principal balance of the loan account is outstanding divided by 360,
which shall for interest computation purposes be considered one year.
Bank at its option may demand payment of any or all of the amount due
under the Loan Account including accrued but unpaid interest at any
time. Such notice may be given verbally or in writing and should be
effective upon receipt by Borrower. The amount of interest payable each
month by Borrower shall not be less than a minimum monthly charge of
$250.00 Bank is hereby authorized to charge Borrower's deposit account(s)
with Bank for all sums due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by
Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 1,
which shall disclose that Borrower is entitled to the amount of loan
being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased,
or to be sold or to be leased, or for services rendered or to
be rendered no matter how evidenced, including accounts
receivable, contract rights, chattel paper, instruments,
purchase orders, notes, drafts, acceptances, general
intangibles and other forms of obligations and receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and
other personal property which are held for sale or lease,
including those held for display or demonstration or out on
lease or consignment or to be furnished under a contract of
service or are raw materials, work in process or materials
used or consumed, or to be used or consumed in Borrower's
business, and shall include all property rights, patents,
plans, drawings, diagrams, schematics, assembly and display
materials relating thereto.
C. "Collateral" means any and all personal property of Borrower
which is assigned or hereafter is assigned to Bank as security
or in which Bank now has or hereafter acquires a security
interest.
D. "Eligible Accounts" means all of Borrower's Accounts
excluding, however, (1) all Accounts under which payment is
not received within 90 days from any invoice date, (2) all
Accounts against which the account debtor or any other person
obligated to make payment thereon asserts any defense, offset,
counterclaim or other right to avoid or reduce the liability
represented by the Account and (3) any Accounts if the account
debtor or any other person liable in connection therewith is
insolvent, subject to bankruptcy or receivership proceedings
or has made an assignment for the benefit of creditors or
whose credit standing is unacceptable to Bank and Bank has so
notified Borrower. Eligible Accounts shall only include such
accounts as Bank in its sole discretion shall determine are
eligible from time to time.
E. "Value of Inventory" means the value of Borrower's Inventory
determined in accordance with generally accepted accounting
principles consistently applied excluding, however, the amount
of progress payments, pre-delivery payments, deposits and any
other sums received by Borrower in anticipation of the sale
and delivery of Inventory, all Inventory on consignment or
lease to others, and all property on consignment or lease from
others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future
Accounts, including all proceeds due thereunder, all guaranties and
security therefor and all merchandise giving rise thereto, and hereby
grants to Bank a continuing security interest in all Borrower's
Inventory and in all proceeds and products thereof, whether now owned
or hereafter existing or acquired, including all moneys in the
Collateral Account referred to in Section 6 hereof, as security for
any and all obligations of Borrower to Bank, whether now owing or
hereafter incurred and whether direct, indirect, absolute or
contingent. So long as Borrower is indebted to Bank or Bank is
committed to extend credit to Borrower, Borrower will execute and
deliver to Bank such assignments, including Bank's standard forms of
Specific or General Assignment covering individual Accounts, notices,
financing statements, and other documents and papers as Bank may
require in order to affirm, effectuate or further assure the
assignment to Bank of the Collateral or to give any third party,
including the account debtors obligated on the Accounts, notice of
Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts and Inventory
proceeds pursuant to paragraph 10, Borrower will collect with
diligence all Borrower's Accounts and Inventory proceeds, provided
that no legal action shall be maintained thereon or in connection
therewith without Bank's prior written consent. Any collection of
Accounts or Inventory proceeds by Borrower, whether in the form of
cash, checks, notes, or other instruments for the payment of money
(properly endorsed or assigned where required to enable Bank to
collect same), shall be in trust for Bank, and Borrower shall keep all
such collections separate and apart from all other funds and property
so as to be capable of identification as the property of Bank and
deliver said collections, together with the proceeds of all cash
sales, daily to Bank in the identical form received. The proceeds of
such collections when received by Bank may be applied by Bank directly
to the payment of Borrower's Loan Account or any other obligation
secured hereby. Any credit given by Bank upon receipt of said proceeds
shall be conditional credit subject to collection. Returned items at
Bank's option may be charged to Borrower's general account. All
collections of the Accounts and inventory proceeds shall be set forth
on an itemized schedule, showing the name of the account debtor, the
amount of each payment and such other information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts or Inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments.
However, Borrower shall immediately notify Bank of all cases involving
returns, repossessions, and loss or damage of or to merchandise
represented by the Accounts or constituting inventory and of any
credits, adjustments or disputes arising in connection with the goods
or services represented by the Accounts or constituting Inventory and,
in any of such events, Borrower will immediately pay to bank from its
own funds (and not from the proceeds of Accounts or Inventory) for
application to Borrower's Loan Account or any other obligation secured
hereby the amount of any credit for such returned or repossessed
merchandise and adjustments made to any of the Accounts. Until payment
is made as provided herein or until release by Bank from its security
interest, all merchandise returned to or repossessed by Borrower shall
be set aside and identified as the property of Bank and Bank shall be
entitled to enter upon any premises where such merchandise is located
and take immediate possession thereof and remove same.
<PAGE>
8. Borrower represents and warrants to Bank: (i) If Borrower is a
corporation, that Borrower is duly organized and existing in the State
of its incorporation and the execution, delivery and performance
hereof are within Borrower's corporate powers, have been duly
authorized and are not in conflict with law or the terms of any
charter, by-law or other incorporation papers, or of any indenture,
agreement or undertaking to which Borrower is a party or by which
Borrower is found or affected; (ii) Borrower is, or at the time the
Collateral becomes subject to Bank's security interest will be, the
true and lawful owner of and has, or at the time the Collateral
becomes subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein; (iii)
Each Account is, or at the time the Account comes into existence will
be, a true and correct statement of a bona fide indebtedness incurred
by the debtor named therein in the amount of the Account for either
merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and
accepted by, the account debtor; (iv) That there are or will be no
defenses, counterclaims, or setoffs which may be asserted against the
Accounts; and (v) any and all financial information, including
information relating to the Collateral, submitted by Borrower to Bank,
whether previously or in the future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon, and reports as to the Inventory and sales thereof;
(iii) Permit representatives of Bank to inspect the Inventory and
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location at which the Inventory is or
will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each office
of Borrower at which records of Borrower relating to the Accounts are kept;
(vii) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may require and with loss payable solely to Bank,
and, in the event Bank takes possession of the Collateral, the insurance
policy or policies and any unearned or returned premium thereon shall at
the option of Bank become the sole property of Bank, such policies and the
proceeds of any other insurance covering or in any way relating to the
Collateral, whether now in existence or hereafter obtained, being hereby
assigned to Bank; (viii) Do all acts necessary to maintain, preserve and
protect all Inventory, keep all Inventory in good condition and repair and
not to cause any waste or unusual or unreasonable depreciation thereof, and
(ix) In the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrower's Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and Inventory proceeds and may give notice of assignment to any
and all account debtors, and Borrower does hereby make, constitute and
appoint Bank its irrevocable, true and lawful attorney with power to
receive, open and dispose of all mail addressed to Borrower, to endorse the
name of Borrower upon any checks or other evidences of payment that may
come into the possession of Bank upon the Accounts or as proceeds of
inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to demand,
sue for, collect and give acquittances for any and all moneys due or to
become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commenced by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt or moratorium law or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) immediately take possession of the
collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank, and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by
law, or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at as option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall have the right
to enforce one or more remedies hereunder successively or concurrently, and
any such action shall not estop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of Collateral to pay all obligations
secured by this Security Agreement, Borrower hereby promises and agrees to
pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Should default be made in the payment of principal or interest when due, or
in the performance or observance, when due, of any item, covenant or
condition of this Agreement, any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or
pertaining to this Agreement, at the option of the holder hereof and
without notice or demand, the entire balance of principal and accrued
interest then remaining unpaid shall (a) become immediately due and
payable, and (b) thereafter bear interest, until paid in full, at the
increased rate of 5% per year in excess of the rate provided for above, as
it may vary from time to time.
17. If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent twenty (20) or more
days, Borrower agrees to pay Bank a late charge in the amount of 5% of the
payment so due and unpaid, in addition to the payment; but nothing in this
paragraph is to be construed as any obligation on the part of the Bank to
accept payment of any payment past due or less than the total unpaid
principal balance after maturity.
All payments shall be applied first to any late charges owing, then to
interest and the remainder, if any, to principal.
18. Reference Provision.
A. Other than (i) non-judicial foreclosure and all matters in
connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be
initiated pursuant to applicable law), each controversy, dispute or
claim between the parties arising out of or relating to this
document ("Agreement"), which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement
gives written notice to all other parties that a controversy,
dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et
seq. of the California Code of Civil Procedure, or their successor
section ("CCP") which shall constitute the exclusive remedy for the
settlement of any controversy, dispute or claim concerning this
Agreement, including whether such controversy, dispute or claim is
subject to the reference proceeding and except as set forth above,
the parties waive their rights to initiate any
<PAGE>
legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property,
if any, is located or Los Angeles County if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within
forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers of a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of
office as provided for in Rule 244 of the California Rules of Court
(or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP Section 170.6. The referee shall
(a) be requested to set the matter for hearing within sixty (60) days
after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety
(90) days of the Claim Date. Any decision rendered by the referee will
be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California
having jurisdiction. Any party may apply for a reference proceeding at
any time after thirty (30) days following notice to any other party of
the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to
"priority" in conducting discovery. Depositions may be taken by either
party upon seven (7) days written notice, and request for production
or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be
resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is
empowered to issue temporary and/or provisional remedies, as
appropriate.
B. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be
conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of
the court reporter at the trial shall be borne equally by the parties.
C. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well
as legal relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto
expressly reserve the right to contest or appeal from the final
judgment or any appealable order or appealable judgment entered by the
referee. The parties hereto expressly reserve the right to findings of
fact, conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which new
trial, if granted, is also to be a reference proceeding under this
provision.
D. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be
conducted by a retired judge of the Court, in accordance with the
California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
19. Additional Provisions: *SEE ATTACHED (EXIMBANK FACILITY).
/X/ if checked, the Addendum or Exhibit "A" attached (and all amendments
thereto and replacements therefor) is incorporated herein by this
reference.
Executed this 23RD day of JUNE ,1998
-----------------------------------
(Name of Borrower)
IMPERIAL BANK BY:
-----------------------------------
(Authorized Signature and Title)
SEE EXHIBIT "A1" ATTACHED HERETO
BY: Michael A. Berrier Vice President BY:
------------------------------------ -----------------------------------
IMPERIAL BANK Title (Authorized Signature and Title)
<PAGE>
EXHIBIT"A1"
Attachment to the Security and Loan Agreement between IMAGING TECHNOLOGIES
CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION,
MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED, AMT ACCEL UK
LIMITED and IMPERIAL BANK DATED June 23, 1998.
Imaging Technologies Corporation
By: /s/ Brian Bonar
--------------------------------
By: /s/ Gerry Berg Vice Pres
--------------------------------
Prima International
By: /s/ Brian Bonar
--------------------------------
By: /s/ Gerry Berg Vice Pres
--------------------------------
Newgen Systems Acquisitions Corporation
By: /s/ Brian Bonar
--------------------------------
By: /s/ Brian Bonar Vice Pres
--------------------------------
Mc McMican Corporation
By: /s/ Brian Bonar
--------------------------------
By: /s/ Gerry Berg Vice Pres
--------------------------------
Color Solutions, Inc.
By: /s/ Brian Bonar
--------------------------------
By: /s/ Gerry Berg Vice Pres
--------------------------------
ITEC Europe Limited
By: /s/ Brian Bonar
--------------------------------
By: /s/ Gerry Berg Vice Pres
--------------------------------
Amt Ascel UK Limited
By: /s/ Brian Bonar
--------------------------------
By: /s/ Gerry Berg Vice Pres
--------------------------------
<PAGE>
EXHIBIT "A"
(Eximbank Facility)
ADDENDUM TO SECURITY AND LOAN AGREEMENT ("Security and Loan Agreement") BETWEEN
IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS
ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMIT ACCEL UK LIMITED, MCMICAN
CORPORATION, COLOR SOLUTIONS, INC., AND IMPERIAL BANK.
DATED: JUNE 23, 1998
This Addendum is made and entered into June 23, 1998 between IMAGING
TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS
CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION AND
COLOR SOLUTIONS, INC. ("Borrowers") hereby jointly and severally, and Imperial
Bank ("Bank"). This Addendum amends and supplements the Security and Loan
Agreement. In the event of any inconsistency between the terms herein and the
terms of the Security and Loan Agreement, the terms herein shall in all cases
govern and control. All capitalized terms herein, unless otherwise defined
herein, shall have the meaning set forth in the Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on
September 30, 1999, subject to Bank's right to renew said commitment at its
sole discretion. Any renewal of the commitment shall not be binding upon
the Bank unless it is in writing and signed by an officer of the Bank.
2. Borrowers represent and warrant that:
a. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrowers, and Borrowers are not in
default with respect to any order, writ, injunction, decree or demand
of any court or other governmental or regulatory authority.
b. FINANCIAL CONDITION. The consolidated balance sheet of Borrowers as of
March 31, 1998, and the related consolidated profit and loss statement
on that date, a copy of which has heretofore been delivered to Bank by
Borrowers, and all other statements and data submitted in writing by
Borrowers to Bank in connection with this request for credit are true
and correct, and said balance sheet and profit and loss statement
truly present the financial condition of Borrowers as of the date
thereof and the results of the operations of Borrowers for the period
covered thereby, and have been prepared in accordance with generally
accepted accounting principles on a basis consistently maintained.
Since such date, there have been no material adverse changes in the
financial condition or business of Borrowers. Borrowers have no
knowledge of any liabilities, contingent or otherwise, at such date
not reflected in said balance sheet, and Borrowers have not entered
into any special commitments or substantial contracts which are not
reflected in said balance sheet, other than in the ordinary and normal
course of its business, which may have a material adverse effect upon
its financial condition, operations or business as now conducted.
c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights,
and licenses to conduct its business as now operated, without any
known conflict with valid trademarks, trade names, copyrights patents
and license rights of others.
<PAGE>
d. TAX STATUS., Borrowers have no liability for any delinquent state,
local or federal taxes, and, if Borrowers have contracted with any
government agency, Borrowers have no liability for re-negotiation of
profits.
3. Borrowers agree that so long as they are indebted to Bank or so long as
Bank has any obligation to extend credit to Borrowers, they WILL NOT,
without Bank's WRITTEN CONSENT:
a. TYPE OF BUSINESS, MANAGEMENT. Make any substantial change in the
character of their business; or make any change in its executive
management.
b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from Bank except
obligations now existing as shown in financial statement dated March
31, 1998, excluding those being refinanced by Bank; or sell or
transfer, either with or without recourse, any accounts or notes
receivable or any moneys due to become due.
c. Liens and Encumbrances. Create, incur, assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon
property at any time purchased or acquired under conditional sale or
other title retention agreement) upon any asset now owned or hereafter
acquired by them, other than liens for taxes not delinquent and liens
in Bank's favor.
d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity other than in the normal and ordinary
course of their business as now conducted or make any investment in
the securities of any person or other entity other than the United
States Government; or guarantee or otherwise become liable upon the
obligation of any person or other entity, except by endorsement of
negotiable instruments for deposit or collection in the ordinary and
normal course of their business.
e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other
entity; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefore; or sell any assets except in the ordinary and
normal course of their business as now conducted; or sell, lease,
assign, or transfer any substantial part of their business or fixed
assets, or any property or other assets necessary for the continuance
of their business as now conducted, including without limitation the
selling of any property or other asset accompanied by leasing back of
same.
4. Should there be a default under the Security and Loan Agreement, the
General Security Agreement or under the Note, all obligations, loans and
liabilities of Borrowers to Bank, due or to become due, whether now
existing or hereafter arising, shall at the option of the Bank, become
immediately due and payable without notice or demand, and Bank shall
thereupon have the right to exercise all of its default rights and
remedies.
5. Pursuant to the provisions in the Security and Loan Agreement and this
exhibit, Eligible Accounts shall only include such accounts as Bank in its
sole discretion shall determine are eligible from time to time (eligible
Foreign Accounts Receivable shall mean those trade accounts from the sale
of items due and payable to Borrower in the United States and any notes,
drafts, letters of credit, or insurance proceeds supporting payments
thereof, for goods or services which are intended for export). Advance
rates for eligible accounts will be as follows:
<TABLE>
<CAPTION>
Foreign
-------
<S> <C>
Imaging Technology Corp. 90%
PCPI Technologies Corp. 90%
Prima International Corp. 90%
Newgen Imaging Systems Corp. 80%
</TABLE>
"Eligible Accounts" shall also NOT include any of the following:
<PAGE>
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of any
Borrower
b. Accounts with respect to which 25% or more of the account debtor's
total accounts or obligations outstanding to any Borrower are more
than 90 days from invoice date.
c. For accounts representing more than 20% of total accounts
receivable, the balance in excess of the 20% is not eligible.
However, the Bank may deem, at its sole discretion, the entire
amount, or any portion thereof, eligible.
d. Credit balances greater than 90 days from invoice date.
e. Government receivables, unless assigned to the Bank.
f. All accounts sold to and purchased from a company of common
name/ownership, whereby a potential offset exists.
g. Accounts over 90 calendar days from invoice date.
h. Consignment or guaranteed sales.
i. Bill and hold accounts.
j. Equipment rental offsets.
k. Collection accounts.
1. C.O.D. accounts more than 30 days from invoice date.
m. Any account evidenced by a letter of credit, until the date of
shipment of the items covered by such letter of credit;
n. Any account which the Bank or EXIMBANK in its reasonable judgement,
deems uncollectible for any reason;
o. Accounts payable in a currency other than U.S. dollars, except as
may be approved in writing by EXIMBANK;
p. Accounts from a military buyer, except as may be approved in writing
by EXIMBANK;
q. Any account due and collectible outside the United States, except as
may be approved in writing by EXIMBANK;
r. Accounts in the name of a buyer located in a country in which
EXIMBANK is legally prohibited from doing business as designated in
the country limitation schedule;
s. Accounts from buyers in a country where EXIMBANK coverage is not
available for commercial reasons as designated in the country
limitation schedule (as defined in the EXIMBANK agreement mentioned
in 8.n below) unless and only to the extent that such items are to
be sold to such country on terms of a letter of credit confirmed by
a bank acceptable to EXIMBANK.
6. Borrower may borrow against eligible inventory deemed acceptable to
Bank, up to a $1,250,000 sublimit within the line of credit, not to
exceed 50% of the balance outstanding on the line of credit,
contingent upon Borrowing Base availability, and substantiated by
monthly inventory certification submitted by Borrower to Bank.
Eligible Inventory shall
<PAGE>
only include Inventory as Bank in its sole discretion shall determine are
eligible from time to time. The advance rates on eligible inventory will
be as follows:
<TABLE>
<CAPTION>
Foreign
-------
<S> <C>
Imaging Technology Corp. 50%
PCPI Technologies Corp. 50%
Prima International Corp. 50%
Newgen Imaging Systems Corp. 60%
</TABLE>
Inventory eligible for advance under the Security and Loan agreement
shall NOT include the following:
a. any Inventory which is not located in the United States;
b. any demonstration Inventory or Inventory sold on consignment;
c. any Inventory consisting of proprietary software;
d. any Inventory which is damaged, obsolete, returned, defective,
recalled or unfit for further processing;
e. any Inventory which has been previously exported from the United
States;
f. any Inventory which constitutes defense articles or defense
services;
g. any Inventory which is to be incorporated into items destined for
shipment to a Buyer located in a country in which Eximbank is
legally prohibited from doing business as designated in the Country
Limitation Schedule;
h. any Inventory which is to be incorporated into items destined for
shipment to a buyer located in a country in which Eximbank
coverage is not available for commercial reasons as designated in
the Country Limitation Schedule, unless and only to the extent
that such items are to be sold to such country on terms of a
Letter of Credit confirmed by a bank acceptable to Eximbank;
i. any Inventory which would result in an ineligible Account;
j. Inventory reserve amounts;
k. Inventory not insured, naming Bank loss payee;
1. Inventory with no liquidation value due to various causes, i.e.,
service requirements, warranty requirements, etc.;
m. Inventory located in areas making it difficult to verify its
existence, or which will cause undue expense in liquidation due
to transportation costs, or other logistical reasons;
n. Inventory other than finished goods (i.e. raw materials and work in
process).
7. All financial covenants and financial information referenced herein
shall be interpreted and prepared in accordance with generally
accepted accounting principles applied on a basis consistent with
previous years. Compliance with financial covenants shall be
calculated and monitored on a quarterly basis. All financial reports
and statements and calculation of financial covenants will be on a
consolidated basis.
8. Borrowers affirmatively covenant that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank, or so
long as Bank has any obligation to extend credit to borrowers, they
WILL:
<PAGE>
a. Have and maintain a minimum effective tangible net worth (meaning
net worth plus subordinated debt, less intangible assets
including but not limited to goodwill, patents, copyrights, and
organization expenses), of not less than $12,500,000 beginning
with the period ending 6/30/98.
b. Have and maintain a trading ratio trading assets (accounts
receivable and inventory) to trading liabilities (accounts
payable and bank lines outstanding) of at least 1.30 to 1.00
beginning with the period ending 6/30/98, and thereafter.
c. Have and maintain a maximum ratio of total debt (less
subordinated debt), to tangible net worth (plus subordinated
debt) not to exceed 1.75 to 1.00, beginning with the period
ending 6/30/97, and thereafter.
d. Have and maintain trading capital (trading assets minus trading
liabilities as defined in 8.b above) of not less than $6,000,000
for the period ending 6/30/98, and thereafter.
e. Have and maintain a minimum debt service coverage (EBIDA / P&I) of
2.50: 1.
f. Borrowers shall maintain all significant bank accounts and banking
relationship with Bank.
g. Within 10 days from each month-end, deliver to Bank an accounts
receivable aging reconciled to the general ledger of Borrower's,
a detailed accounts payable aging reconciled to the Borrower's
general ledger and setting forth the amount of any book overdraft
or the amount of checks issued but not sent, and an inventory
certification outlining both inventory composition and activity
for the month. All the foregoing will be in form satisfactory to
the Bank. Also provide the Bank on a quarterly basis or more
frequent if demanded by Bank, a complete address list of all
active customers.
h. Within 45 days after the end of each quarter end, deliver to Bank a
profit and loss statement and a balance sheet in form satisfactory
to Bank all certified by an officer of Borrowers.
i. Within 90 days after end of Borrower's fiscal year, deliver to
Bank the same financial statements as otherwise provided
quarterly together with Changes in Financial Position Statement,
reviewed by an independent certified public accountant selected
by Borrower but acceptable to Bank.
j. RIGHTS AND FACILITIES. Maintain and preserve all rights,
franchises and other authority adequate for the conduct of its
business; maintain its properties, equipment and facilities in
good order and repair; conduct its business in an orderly manner
without voluntary interruption and, if a corporation or
partnership, maintain and preserve its existence.
k. INSURANCE Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable
property against fire and other hazards with responsible
insurance carriers to the extent usually maintained by similar
businesses. Borrower shall provide evidence of property insurance
in amounts and types acceptable to the Bank. Bank to be named as
loss payee.
1. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental changes upon or against it or any of
its properties, and any of its liabilities at any time existing,
except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any material adverse
effect upon its financial
<PAGE>
condition or the loss of any right of redemption from any sale
thereunder; and
(b) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed
adequate with respect thereto.
m. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles
on a basis consistently maintained; permit Bank's representatives to
have access to, and to examine its properties, books and records at
all reasonable times.
n. EXIMBANK AGREEMENT. Comply with all terms of the Export-Import Bank of
the United States Working Capital Guarantee Program Borrower Agreement
dated as of 6/15/98 executed by Borrower and acknowledged by Bank
("Eximbank Agreement").
9. INTEREST RATE. The rate of interest applicable to the Loan Accounts shall
be .75% above the rate of interest which Bank has announced as its prime
lending rate ("Prime Rate") which shall vary concurrently with any change
in such Prime Rate. Interest shall be computed at the above rate on the
basis of the actual number of days during which the principal balance of
the Loan Account is outstanding divided by 360, which shall, for interest
computation purposes, be considered one year. Bank at its option may demand
payment of any or all of the amount due under the Loan Account including
accrued but unpaid interest, at any time. Notice of such demand may be
given verbally or in writing and should be effective upon receipt by
Borrower.
10. NOTICE OF DEFAULT. Borrowers shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice
and lapse of time would be an event of default.
11. JOINT AND SEVERAL LIABILITY OF BORROWERS. The liability of each Borrower
under the Security and Loan Agreement, this Addendum and all other
documents executed pursuant to the transaction contemplated herein is join
and several. Discharge of any Borrower except for full payment, or any
extension, forbearance, change of rate of interest, or acceptance, release
or substitution of any Collateral, or any impairment or suspension of
Bank's rights against any Borrower, or any transfer of a Borrower's
interest to another shall not affect the liability of any other Borrower.
All Borrowers waive: (a) any right to require the Bank to proceed against
any Borrower before any other, or to pursue any other remedy: (b)
presentment, protest and notice of protest, demand and notice of
nonpayment, demand or performance, notice of sale and advertisement of
sale; (c) any right to the benefit of or to direct the application of any
Collateral until all obligations of Borrowers to Bank are repaid in full;
(d) any and all right of subrogation to Bank until all obligations of
Borrowers to Bank are repaid in full.
12. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or
delay on the part of Bank or any holder of Notes issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof or of any
other right, power or privilege. All rights and remedies existing under
this agreement or any not issued in connection with a loan that Bank may
make hereunder are cumulative to, not exclusive of, any rights or remedies
otherwise available.
13. The terms and conditions of this Addendum and the Security and Loan
Agreement extend to all obligations of Borrower to Bank and the Borrower
agrees to comply with all such terms and conditions until all obligations
of Borrower to Bank are repaid in full. Should there be a default under the
Security and Loan Agreement, this Addendum, any General Security Agreement
executed by Borrower, under any note executed by Borrower, or under any
other obligations of Borrower to Bank, or the provisions of any documents
executed by Borrower in relation to any such obligation (and Borrower shall
have failed to cure such default within any applicable cure period), all
obligations, loans and
<PAGE>
liabilities of Borrower to Bank, due or to become due, whether now existing
or hereafter arising, shall at the option of the Bank, become immediately
due and payable without notice or demand, and Bank shall thereupon have the
right to exercise all of its default rights and remedies.
14. This Addendum is executed by and on behalf of the parties as of the date
first above written.
IMAGING TECHNOLOGIES CORPORATION, "BORROWER"
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
PRIMA INTERNATIONAL "Borrower"
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
NEWGEN SYSTEMS ACQUISITIONS CORPORATION, "BORROWER"
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
ITEC EUROPE LIMITED "BORROWER"
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
AMT ACCEL UK LIMITED, "Borrower"
<PAGE>
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
McMICAN CORP., "BORROWER"
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
COLOR SOLUTIONS, INC. "BORROWER"
By: /s/ Brian Bonar
-------------------------------------
Title: CEO
----------------------------------
By: /s/ Gerry Berg
-------------------------------------
Title: Vice President
----------------------------------
IMPERIAL BANK "BANK"
By: /s/ Brian Bonar
-------------------------------------
Title: Vice President
----------------------------------
<PAGE>
[LOGO]
IMPERIAL BANK
MEMBER FDIC
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between IMAGING TECHNOLOGIES CORPORATION, ET. AL.
(SEE EXHIBIT "A1" ATTACHED HERETO)
, A CORPORATIONS
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
* % of Eligible Accounts
* % of the Value of Inventory
and in no event more than $1,000,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be
debited to the loan ledger account of Borrower maintained by Bank
(herein called "Loan Account") and Bank shall credit the Loan Account
with all loan repayments made by Borrower. Borrower promises to pay Bank
(a) the unpaid balance of Borrower's Loan Account on demand and (b) on
or before the tenth day of each month, interest on the average daily
unpaid balance of the Loan Account during the immediately preceding
month at the rate of THREE QUARTERS OF ONE percent (0.750%) per annum in
excess of the rate of interest which Bank has announced as its prime
lending rate ("Prime Rate") which shall vary concurrently with any
change in such Prime Rate. Interest shall be computed at the above rate
on the basis of the actual number of days during which the principal
balance of the loan account is outstanding divided by 360, which shall
for interest computation purposes be considered one year. Bank at its
option may demand payment of any or all of the amount due under the Loan
Account including accrued but unpaid interest at any time. Such notice
may be given verbally or in writing and should be effective upon receipt
by Borrower. The amount of interest payable each month by Borrower shall
not be less than a minimum monthly charge of $250.00. Bank is hereby
authorized to charge Borrower's deposit account(s) with Bank for all
sums due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and
receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and other
personal property which are held for sale or lease, including those
held for display or demonstration or out on lease or consignment or to
be furnished under a contract of service or are raw materials, work in
process or materials used or consumed, or to be used or consumed in
Borrower's business, and shall include all property rights, patents,
plans, drawings, diagrams, schematics, assembly and display materials
relating thereto.
C. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
D. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
90 days from any invoice date, (2) all Accounts against which the
account debtor or any other person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any Accounts
if the account debtor or any other person liable in connection
therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or
whose credit standing is unacceptable to Bank and Bank has so notified
Borrower. Eligible Accounts shall only include such accounts as Bank
in its sole discretion shall determine are eligible from time to time.
E. "Value of inventory" means the value of Borrower's Inventory
determined in accordance with generally accepted accounting principles
consistently applied excluding, however, the amount of progress
payments, pre-delivery payments, deposits and any other sums received
by Borrower in anticipation of the sale and delivery of Inventory, all
Inventory on consignment or lease to others, and all property on
consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security therefor
and all merchandise giving rise thereto, and hereby grants to Bank a
continuing security interest in all Borrower's Inventory and in all
proceeds and products thereof, whether now owned or hereafter existing or
acquired, including all moneys in the Collateral Account referred to in
Section 6 hereof, as security for any and all obligations of Borrower to
Bank, whether now owing or hereafter incurred and whether direct, indirect,
absolute or contingent. So long as Borrower is indebted to Bank or Bank is
committed to extend credit to Borrower, Borrower will execute and deliver
to Bank such assignments, including Bank's standard forms of Specific or
General Assignment covering individual Accounts, notices, financing
statements, and other documents and papers as Bank may require in order to
affirm, effectuate or further assure the assignment to Bank of the
Collateral or to give any third party, including the account debtors
obligated on the Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts and Inventory
proceeds pursuant to paragraph 10, Borrower will collect with diligence all
Borrower's Accounts and Inventory proceeds, provided that no legal action
shall be maintained thereon or in connection therewith without Bank's prior
written consent. Any collection of Accounts or Inventory proceeds by
Borrower, whether in the form of cash, checks, notes, or other instruments
for the payment of money (properly endorsed or assigned where required to
enable Bank to collect same), shall be in trust for Bank, and Borrower
shall keep all such collections separate and apart from all other funds
and property so as to be capable of identification as the property of Bank
and deliver said collections, together with the proceeds of all cash sales,
daily to Bank in the identical form received. The proceeds of such
collections when received by Bank may be applied by Bank directly to the
payment of Borrower's Loan Account or any other obligation secured hereby.
Any credit given by Bank upon receipt of said proceeds shall be conditional
credit subject to collection. Returned items at Bank's option may be
charged to Borrower's general account. All collections of the Accounts and
Inventory proceeds shall be set forth on an itemized schedule, showing the
name of the account debtor, the amount of each payment and such other
information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts or Inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However,
Borrower shall immediately notify Bank of all cases involving returns,
repossessions, and loss or damage of or to merchandise represented by the
Accounts or constituting Inventory and of any credits, adjustments or
disputes arising in connection with the goods or services represented by
the Accounts or constituting Inventory and, in any of such events, Borrower
will immediately pay to Bank from its own funds (and not from the proceeds
of Accounts or Inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
Until payment is made as provided herein or until release by Bank from its
security interest, all merchandise returned to or repossessed by Borrower
shall be set aside and identified as the property of Bank and Bank shall be
entitled to enter upon any premises where such merchandise is located and
take immediate possession thereof and remove same.
<PAGE>
8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon, and reports as to the Inventory and sales thereof;
(iii) Permit representatives of Bank to inspect the Inventory and
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location at which the Inventory is or
will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each office
of Borrower at which records of Borrower relating to the Accounts are kept;
(vii) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may require and with loss payable solely to Bank,
and, in the event Bank takes possession of the Collateral, the insurance
policy or policies and any unearned or returned premium thereon shall at
the option of Bank become the sole property of Bank, such policies and the
proceeds of any other insurance covering or in any way relating to the
Collateral, whether now in existence or hereafter obtained, being hereby
assigned to Bank; (viii) Do all acts necessary to maintain, preserve and
protect all Inventory, keep all Inventory in good condition and repair and
not to cause any waste or unusual or unreasonable depreciation thereof, and
(ix) In the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrower's Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and Inventory proceeds and may give notice of assignment to any
and all account debtors, and Borrower does hereby make, constitute and
appoint Bank its irrevocable, true and lawful attorney with power to
receive, open and dispose of all mail addressed to Borrower, to endorse the
name of Borrower upon any checks or other evidences of payment that may
come into the possession of Bank upon the Accounts or as proceeds of
Inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to demand,
sue for, collect and give acquittances for any and all moneys due or to
become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commenced by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt or moratorium law, or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank, and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by
law, or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at as option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall have the right
to enforce one or more remedies hereunder successively or concurrently, and
any such action shall not estop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of Collateral to pay all obligations
secured by this Security Agreement, Borrower hereby promises and agrees to
pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Should default be made in the payment of principal or interest when due, or
in the performance or observance, when due, of any item, covenant or
condition of this Agreement, any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or
pertaining to this Agreement, at the option of the holder hereof and
without notice or demand, the entire balance of principal and accrued
interest then remaining unpaid shall (a) become immediately due and
payable, and (b) thereafter bear interest, until paid in full, at the
increased rate of 5% per year in excess of the rate provided for above, as
it may vary from time to time.
17. If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent twenty (20) or more
days, Borrower agrees to pay Bank a late charge in the amount of 5% of the
payment so due and unpaid, in addition to the payment; but nothing in this
paragraph is to be construed as any obligation on the part of the Bank to
accept payment of any payment past due or less than the total unpaid
principal balance after maturity.
All payments shall be applied first to any late charges owing, then to
interest and the remainder, if any, to principal.
18. Reference Provision.
A. Other than (i) non-judicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant
to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this document ("Agreement"),
which controversy, dispute or claim is not settled in writing within
thirty (30) days after the "Claim Date" (defined as the date on which
a party subject to the Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled
by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute
the exclusive remedy for the settlement of any controversy, dispute or
claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as
set forth above, the parties waive their rights to initiate any
<PAGE>
legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property,
if any, is located or Los Angeles County if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within
forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers of a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of
office as provided for in Rule 244 of the California Rules of Court
(or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP Section 170.6. The referee shall
(a) be requested to set the matter for hearing within sixty (60) days
after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety
(90) days of the Claim Date. Any decision rendered by the referee will
be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California
having jurisdiction. Any party may apply for a reference proceeding at
any time after thirty (30) days following notice to any other party of
the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to
"priority" in conducting discovery. Depositions may be taken by either
party upon seven (7) days written notice, and request for production
or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be
resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is
empowered to issue temporary and/or provisional remedies, as
appropriate.
B. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be
conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of
the court reporter at the trial shall be borne equally by the parties.
C. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well
as legal relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto
expressly reserve the right to contest or appeal from the final
judgment or any appealable order or appealable judgment entered by the
referee. The parties hereto expressly reserve the right to findings of
fact, conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which new
trial, if granted, is also to be a reference proceeding under this
provision.
D. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be
conducted by a retired judge of the Court, in accordance with the
California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
19. Additional Provisions: *SEE ATTACHED (FOREIGN INSURED A/R LINE).
/X/ If checked, the Addendum or Exhibit "A" attached (and all amendments
thereto and replacements therefor) is incorporated herein by this
reference.
Executed this 23RD day of JUNE, 1998
----------------------------------
(Name of Borrower)
IMPERIAL BANK BY:
----------------------------------
(Authorized Signature and Title)
SEE EXHIBIT "A1" ATTACHED HERETO
BY: /s/ Michael A. Berrier Vice President BY:
--------------------------------------- ----------------------------------
IMPERIAL BANK Title (Authorized Signature and Title)
<PAGE>
EXHIBIT "A1"
Attachment to the Security and Loan Agreement between IMAGING TECHNOLOGIES
CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION,
MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED, AMT ACCEL UK
LIMITED and IMPERIAL BANK dated June 23,1998.
Imaging Technologies Corporation
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
Prima International
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
Newgen Systems Acquisitions Corporation
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
McMican Corporation
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
Color Solutions, Inc.
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
ITEC Europe Limited
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
Amt Accel UK Limited
By: /s/ Brian Bonar
--------------------------------------
By: /s/ Gerry Berg VICE PRES
--------------------------------------
<PAGE>
EXHIBIT "A"
(Foreign Insured A/R Line)
ADDENDUM TO SECURITY AND LOAN AGREEMENT ("SECURITY AND LOAN AGREEMENT") BETWEEN
IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS
ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN
CORPORATION, COLOR SOLUTIONS, INC., AND IMPERIAL BANK.
DATED: JUNE 23, 1998
This Addendum is made and entered into June 23, 1998, between IMAGING
TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS
CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION AND
COLOR SOLUTIONS, INC. ("Borrowers") hereby jointly and severally, and Imperial
Bank ("Bank"). This Addendum amends and supplements the Security and Loan
Agreement. In the event of any inconsistency between the terms herein and the
terms of the Security and Loan Agreement, the terms herein shall in all cases
govern and control. All capitalized terms herein, unless otherwise defined
herein, shall have the meaning set forth in the Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on
September 30, 1999, subject to Bank's right to renew said commitment at
its sole discretion. Any renewal of the commitment shall not be binding
upon the Bank unless it is in writing and signed by an officer of the
Bank.
2. Borrowers represent and warrant that:
a. LITIGATION. There is no litigation or other proceeding pending
or threatened against or affecting Borrowers, and Borrowers
are not in default with respect to any order, writ,
injunction, decree or demand of any court or other
governmental or regulatory authority.
b. FINANCIAL CONDITION. The consolidated balance sheet of
Borrowers as of March 31, 1998, and the related consolidated
profit and loss statement on that date, a copy of which has
heretofore been delivered to Bank by Borrowers, and all other
statements and data submitted in writing by Borrowers to Bank
in connection with this request for credit are true and
correct, and said balance sheet and profit and loss statement
truly present the financial condition of Borrowers as of the
date thereof and the results of the operations of Borrowers
for the period covered thereby, and have been prepared in
accordance with generally accepted accounting principles on a
basis consistently maintained. Since such date, there have
been no material adverse changes in the financial condition or
business of Borrowers. Borrowers have no knowledge of any
liabilities, contingent or otherwise, at such date not
reflected in said balance sheet, and Borrowers have not
entered into any special commitments or substantial contracts
which are not reflected in said balance sheet, other than in
the ordinary and normal course of its business, which may have
a material adverse effect upon its financial condition,
operations or business as now conducted.
c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof,
possesses all necessary trademarks, trade names, copyrights,
patents, patent rights, and licenses to conduct its business
as now operated, without any known conflict with valid
trademarks, trade names, copyrights patents and license rights
of others.
<PAGE>
d. TAX STATUS. Borrowers have no liability for any delinquent
state, local or federal taxes, and, if Borrowers have
contracted with any government agency, Borrowers have no
liability for re-negotiation of profits.
3. Borrowers agree that so long as they are indebted to Bank, or so long as
Bank has any obligation to extend credit to Borrowers, they WILL NOT,
without Bank's WRITTEN CONSENT:
a. TYPE OF BUSINESS, MANAGEMENT. Make any substantial change in
the character of their business; or make any change in its
executive management.
b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness for borrowed moneys other than loans from
Bank except obligations now existing as shown in financial
statement dated March 31, 1998, excluding those being
refinanced by Bank; or sell or transfer, either with or
without recourse, any accounts or notes receivable or any
moneys due to become due.
c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage,
pledge, encumbrance, lien or charge of any kind (including the
charge upon property at any time purchased or acquired under
conditional sale or other title retention agreement) upon any
asset now owned or hereafter acquired by them, other than
liens for taxes not delinquent and liens in Bank's favor.
d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or
advances to any person or other entity other than in the
normal and ordinary course of their business as now conducted
or make any investment in the securities of any person or
other entity other than the United States Government; or
guarantee or otherwise become liable upon the obligation of
any person or other entity, except by endorsement of
negotiable instruments for deposit or collection in the
ordinary and normal course of their business.
e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION.
Purchase or otherwise acquire the assets or business of any
person or other entity, or liquidate, dissolve, merge or
consolidate, or commence any proceedings therefore; or sell
any assets except in the ordinary and normal course of their
business as now conducted; or sell, lease, assign, or transfer
any substantial part of their business or fixed assets, or any
property or other assets necessary for the continuance of
their business as now conducted, including without limitation
the selling of any property or other asset accompanied by
leasing back of same.
4. Should there be a default under the Security and Loan Agreement, the
General Security Agreement or under the Note, all obligations, loans and
liabilities of Borrowers to Bank, due or to become due, whether now
existing or hereafter arising, shall at the option of the Bank, become
immediately due and payable without notice or demand, and Bank shall
thereupon have the right to exercise all of its default rights and
remedies.
5. Pursuant to the provisions in the Security and Loan Agreement and this
exhibit, Eligible Accounts shall only include such accounts as Bank in
its sole discretion shall determine are eligible from time to time
(eligible Foreign Accounts Receivable shall mean those trade accounts
from the sale of items due and payable to Borrower and any notes,
drafts, letters of credit, or insurance proceeds supporting payments
thereof, for goods or services which are intended for export). Advance
rates for eligible foreign accounts will be as follows:
<TABLE>
<CAPTION>
<S> <C>
Imaging Technology Corp. 90%
PCPI Technologies Corp. 90%
Prima International Corp. 90%
Newgen Imaging Systems Corp. 90%
</TABLE>
"Eligible Accounts" shall also NOT include any of the following:
<PAGE>
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of any
Borrower
b. Accounts with respect to which 25% or more of the account debtor's
total accounts or obligations outstanding to any Borrower are more
than 90 days from invoice date.
c. For accounts representing more than 20% of total accounts receivable,
the balance in excess of the 20% is not eligible. However, the Bank
may deem, at its sole discretion, the entire amount, or any portion
thereof, eligible.
d. Credit balances greater than 90 days from invoice date.
e. Government receivables, unless assigned to the Bank.
f. All accounts sold to and purchased from a company of common
name/ownership, whereby a potential offset exists.
g. Accounts over 90 calendar days from invoice date.
h. Consignment or guaranteed sales.
i. Bill and hold accounts.
j. Equipment rental offsets.
k. Collection accounts.
l. C.O.D. accounts more than 30 days from invoice date.
m. Any account evidenced by a letter of credit, until the date of
shipment of the items covered by such letter of credit;
n. Accounts payable in a currency other than U.S. dollars, except as may
be approved in writing by Bank;
o. Accounts from a military buyer, except as may be approved in writing
by Bank;
5. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted
accounting principles applied on a basis consistent with previous years.
Compliance with financial covenants shall be calculated and monitored on a
quarterly basis. All financial reports and statements and calculation of
financial covenants will be on a consolidated basis.
6. Borrowers affirmatively covenant that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, or so long as Bank has
any obligation to extend credit to Borrowers, they WILL:
a. Have and maintain a minimum effective tangible net worth (meaning net
worth plus subordinated debt, less intangible assets including but not
limited to goodwill, patents, copyrights, and organization expenses),
of not less than $12,500,000 beginning with the period ending 6/30/98.
b. Have and maintain a trading ratio trading assets (accounts receivable
and inventory) to trading liabilities (accounts payable and bank lines
outstanding) of at least 1.30 to 1.00 beginning with the period ending
6/30/98, and thereafter.
c. Have and maintain a maximum ratio of total debt (less subordinated
debt), to tangible net worth (plus subordinated debt) not to exceed
1.75 to 1.00, beginning with the period ending 6/30/97, and
thereafter.
<PAGE>
d. Have and maintain trading capital (trading assets minus trading
liabilities as defined in pp.8b above) of not less than $6,000,000 for
the period ending 6/30/98, and thereafter.
e. Have and maintain a minimum debt service coverage (EBIDA/P&I) of
2.50:1.
f. Borrowers shall maintain all significant bank accounts and banking
relationship with Bank..
g. Within 10 days from each month-end, deliver to Bank an accounts
receivable aging reconciled to the general ledger of Borrower's, a
detailed accounts payable aging reconciled to the Borrower's general
ledger and setting forth the amount of any book overdraft or the
amount of checks issued but not sent, and an inventory certification
outlining both inventory composition and activity for the month. All
the foregoing will be in form satisfactory to the Bank. Also provide
the Bank on a quarterly basis or more frequent if demanded by Bank, a
complete address list of all active customers.
h. Within 45 days after the end of each quarter end, deliver to Bank a
profit and loss statement and a balance sheet in form satisfactory to
Bank all certified by an officer of Borrowers.
i. Within 90 days after end of Borrower's fiscal year, deliver to Bank
the same financial statements as otherwise provided quarterly together
with Changes in Financial Position Statement, reviewed by an
independent certified public accountant selected by Borrower but
acceptable to Bank.
j. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain
its properties, equipment and facilities in good order and repair;
conduct its business in an orderly manner without voluntary
interruption and, if a corporation or partnership, maintain and
preserve its existence.
k. INSURANCE Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property
against fire and other hazards with responsible insurance carriers to
the extent usually maintained by similar businesses. Borrower shall
provide evidence of property insurance in amounts and types acceptable
to the Bank. Bank to be named as loss payee.
l. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments
and governmental changes upon or against it or any of its properties,
and any of its liabilities at any time existing, except to the extent
and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any material adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed
adequate with respect thereto.
m. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles
on a basis consistently maintained; permit Bank's representatives to
have access to, and to examine its properties, books and records at
all reasonable times.
n. ACCOUNTS RECEIVABLE INSURANCE. Maintain foreign accounts receivable
insurance (by the Export Import Bank of the United States or another
acceptable foreign
<PAGE>
insurance policy). Insurance policy is subject to review and approval
by Imperial Bank.
7. INTEREST RATE. The rate of interest applicable to the Loan Accounts shall
be 1.00% above the rate of interest which Bank has announced as its prime
lending rate ("Prime Rate") which shall vary concurrently with any change
in such Prime Rate. Interest shall be computed at the above rate on the
basis of the actual number of days during which the principal balance of
the Loan Account is outstanding divided by 360, which shall, for interest
computation purposes, be considered one year. Bank at its option may demand
payment of any or all of the amount due under the Loan Account including
accrued but unpaid interest, at any time. Notice of such demand may be
given verbally or in writing and should be effective upon receipt by
Borrower.
8. NOTICE OF DEFAULT. Borrowers shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice
and lapse of time would be an event of default.
9. JOINT AND SEVERAL LIABILITY OF BORROWERS. The liability of each Borrower
under the Security and Loan Agreement, this Addendum and all other
documents executed pursuant to the transaction contemplated herein is join
and several. Discharge of any Borrower except for full payment, or any
extension, forbearance, change of rate of interest, or acceptance, release
or substitution of any Collateral, or any impairment or suspension of
Bank's rights against any Borrower, or any transfer of a Borrower's
interest to another shall not affect the liability of any other Borrower.
All Borrowers waive: (a) any right to require the Bank to proceed against
any Borrower before any other, or to pursue any other remedy: (b)
presentment, protest and notice of protest, demand and notice of
nonpayment, demand or performance, notice of sale and advertisement of
sale; (c) any right to the benefit of or to direct the application of any
Collateral until all obligations of Borrowers to Bank are repaid in full;
(d) any and all right of subrogation to Bank until all obligations of
Borrowers to Bank are repaid in full.
10. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or
delay on the part of Bank or any holder of Notes issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof or of any
other right, power or privilege. All rights and remedies existing under
this agreement or any not issued in connection with a loan that Bank may
make hereunder are cumulative to, not exclusive of, any rights or remedies
otherwise available.
11. The terms and conditions of this Addendum and the Security and Loan
Agreement extend to all obligations of Borrower to Bank and the Borrower
agrees to comply with all such terms and conditions until all obligations
of Borrower to Bank are repaid in full. Should there be a default under the
Security and Loan Agreement, this Addendum, any General Security Agreement
executed by Borrower, under any note executed by Borrower, or under any
other obligations of Borrower to Bank, or the provisions of any documents
executed by Borrower in relation to any such obligation (and Borrower shall
have failed to cure such default within any applicable cure period), all
obligations, loans and liabilities of Borrower to Bank, due or to become
due, whether now existing or hereafter arising, shall at the option of the
Bank, become immediately due and payable without notice or demand, and Bank
shall thereupon have the right to exercise all of its default rights and
remedies.
12. This Addendum is executed by and on behalf of the parties as of the date
first above written.
IMAGING TECHNOLOGIES CORPORATION, "BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
<PAGE>
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
PRIMA INTERNATION "BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
NEWGEN SYSTEMS ACQUISITIONS CORPORATION, "BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
ITEC EUROPE LIMITED, "BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
AMT, ACCEL LIMITED, "BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
MCMICAN CORP., BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
<PAGE>
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
COLOR SOLUTIONS, INC. "BORROWER"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
IMPERIAL BANK "BANK"
BY: /s/ Brian Bonar
--------------------------------
TITLE: CEO
-----------------------------
BY: /s/ Gerry Berg
--------------------------------
TITLE: Vice President
-----------------------------
<PAGE>
[LOGO]
IMPERIAL BANK
MEMBER FDIC
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between IMAGING TECHNOLOGIES CORPORATION, ET. AL.
(SEE EXHIBIT "A1" ATTACHED HERETO)
, a CORPORATIONS
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
- % of Eligible Accounts
- % of the Value of Inventory
and in no event more than $ 3,500,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of Borrower's Loan Account on demand and (b) on or before the tenth
day of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of THREE
QUARTERS OF ONE percent (0.750%) per annum in excess of the rate of
interest which Bank has announced as its prime lending rate ("Prime Rate")
which shall vary concurrently with any change in such Prime Rate. Interest
shall be computed at the above rate on the basis of the actual number of
days during which the principal balance of the loan account is outstanding
divided by 360, which shall for interest computation purposes be considered
one year. Bank at its option may demand payment of any or all of the amount
due under the Loan Account including accrued but unpaid interest at any
time. Such notice may be given verbally or in writing and should be
effective upon receipt by Borrower. The amount of interest payable each
month by Borrower shall not be less than a minimum monthly charge of
$250.00. Bank is hereby authorized to charge Borrower's deposit account(s)
with Bank for all sums due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and
receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and other
personal property which are held for sale or lease, including those
held for display or demonstration or out on lease or consignment or to
be furnished under a contract of service or are raw materials, work in
process or materials used or consumed, or to be used or consumed in
Borrower's business, and shall include all property rights, patents,
plans, drawings, diagrams, schematics, assembly and display materials
relating thereto.
C. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
D. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
90 days from any invoice date, (2) all Accounts against which the
account debtor or any other person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any Accounts
if the account debtor or any other person liable in connection
therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or
whose credit standing is unacceptable to Bank and Bank has so notified
Borrower. Eligible Accounts shall only include such accounts as Bank
in its sole discretion shall determine are eligible from time to time.
E. "Value of Inventory" means the value of Borrower's Inventory
determined in accordance with generally accepted accounting principles
consistently applied excluding, however, the amount of progress
payments, pre-delivery payments, deposits and any other sums received
by Borrower in anticipation of the sale and delivery of Inventory,
all Inventory on consignment or lease to others, and all property on
consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security therefor
and all merchandise giving rise thereto, and hereby grants to Bank a
continuing security interest in all Borrower's inventory and in all
proceeds and products thereof, whether now owned or hereafter existing or
acquired, including all moneys in the Collateral Account referred to in
Section 6 hereof, as security for any and all obligations of Borrower to
Bank, whether now owing or hereafter incurred and whether direct, indirect,
absolute or contingent. So long as Borrower is indebted to Bank or Bank is
committed to extend credit to Borrower, Borrower will execute and deliver
to Bank such assignments, including Bank's standard forms of Specific or
General Assignment covering individual Accounts, notices, financing
statements, and other documents and papers as Bank may require in order to
affirm, effectuate or further assure the assignment to Bank of the
Collateral or to give any third party, including the account debtors
obligated on the Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts and Inventory
proceeds pursuant to paragraph 10, Borrower will collect with diligence all
Borrower's Accounts and Inventory proceeds, provided that no legal action
shall be maintained thereon or in connection therewith without Bank's prior
written consent. Any collection of Accounts or Inventory proceeds by
Borrower, whether in the form of cash, checks, notes, or other instruments
for the payment of money (properly endorsed or assigned where required to
enable Bank to collect same), shall be in trust for Bank, and Borrower
shall keep all such collections separate and apart from all other funds and
property so as to be capable of identification as the property of Bank and
deliver said collections, together with the proceeds of all cash sales,
daily to Bank in the identical form received. The proceeds of such
collections when received by Bank may be applied by Bank directly to the
payment of Borrower's Loan Account or any other obligation secured hereby.
Any credit given by Bank upon receipt of said proceeds shall be conditional
credit subject to collection. Returned items at Bank's option may be
charged to Borrower's general account. All collections of the Accounts and
Inventory proceeds shall be set forth on an itemized schedule, showing the
name of the account debtor, the amount of each payment and such other
information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts or Inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However,
Borrower shall immediately notify Bank of all cases involving returns,
repossessions, and loss or damage of or to merchandise represented by the
Accounts or constituting Inventory and of any credits, adjustments or
disputes arising in connection with the goods or services represented by
the Accounts or constituting Inventory and, in any of such events, Borrower
will immediately pay to Bank from its own funds (and not from the proceeds
of Accounts or Inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
Until payment is made as provided herein or until release by Bank from its
security interest, all merchandise returned to or repossessed by Borrower
shall be set aside and identified as the property of Bank and Bank shall be
entitled to enter upon any premises where such merchandise is located and
take immediate possession thereof and remove same.
<PAGE>
8. Borrower represents and warrants to Bank: (i) if Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon, and reports as to the Inventory and sales thereof;
(iii) Permit representatives of Bank to inspect the Inventory and
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location at which the Inventory is or
will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each office
of Borrower at which records of Borrower relating to the Accounts are kept;
(vii) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may require and with loss payable solely to Bank,
and, in the event Bank takes possession of the Collateral, the insurance
policy or policies and any unearned or returned premium thereon shall at
the option of Bank become the sole property of Bank, such policies and the
proceeds of any other insurance covering or in any way relating to the
Collateral, whether now in existence or hereafter obtained, being hereby
assigned to Bank; (viii) Do all acts necessary to maintain, preserve and
protect all Inventory, keep all Inventory in good condition and repair and
not to cause any waste or unusual or unreasonable depreciation thereof, and
(ix) In the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrower's Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and Inventory proceeds and may give notice of assignment to any
and all account debtors, and Borrower does hereby make, constitute and
appoint Bank its irrevocable, true and lawful attorney with power to
receive, open and dispose of all mail addressed to Borrower, to endorse the
name of Borrower upon any checks or other evidences of payment that may
come into the possession of Bank upon the Accounts or as proceeds of
Inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to demand,
sue for, collect and give acquittances for any and all moneys due or to
become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commenced by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt of moratorium law or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank, and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by
law, or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at as option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall have the right
to enforce one or more remedies hereunder successively or concurrently, and
any such action shall not estop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of Collateral to pay all obligations
secured by this Security Agreement, Borrower hereby promises and agrees to
pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Should default be made in the payment of principal or interest when due, or
in the performance or observance, when due, of any item, covenant or
condition of this Agreement, any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or
pertaining to this Agreement, at the option of the holder hereof and
without notice or demand, the entire balance of principal and accrued
interest then remaining unpaid shall (a) become immediately due and
payable, and (b) thereafter bear interest, until paid in full, at the
increased rate of 5% per year in excess of the rate provided for above, as
it may vary from time to time.
17. If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent twenty (20) or more
days, Borrower agrees to pay Bank a late charge in the amount of 5% of the
payment so due and unpaid, in addition to the payment; but nothing in this
paragraph is to be construed as any obligation on the part of the Bank to
accept payment of any payment past due or less than the total unpaid
principal balance after maturity.
All payments shall be applied first to any late charges owing, then to
interest and the remainder, if any, to principal.
18. Reference Provision.
A. Other than (i) non-judicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant
to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this document ("Agreement"),
which controversy, dispute or claim is not settled in writing within
thirty (30) days after the "Claim Date" (defined as the date on which
a party subject to the Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled
by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute
the exclusive remedy for the settlement of any controversy, dispute or
claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as
set forth above, the parties waive their rights to initiate any
<PAGE>
legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property,
if any, is located or Los Angeles County if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within
forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers of a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of
office as provided for in Rule 244 of the California Rules of Court
(or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP Section 170.6. The referee shall
(a) be requested to set the matter for hearing within sixty (60) days
after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety
(90) days of the Claim Date. Any decision rendered by the referee will
be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California
having jurisdiction. Any party may apply for a reference proceeding at
any time after thirty (30) days following notice to any other party of
the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to
"priority" in conducting discovery. Depositions may be taken by either
party upon seven (7) days written notice, and request for production
or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be
resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is
empowered to issue temporary and/or provisional remedies, as
appropriate.
B. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be
conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of
the court reporter at the trial shall be borne equally by the parties.
C. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well
as legal relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto
expressly reserve the right to contest or appeal from the final
judgment or any appealable order or appealable judgment entered by the
referee. The parties hereto expressly reserve the right to findings of
fact, conclusions of law, a written statement of decision, and the
right to move for a new trial or a different judgment, which new
trial, if granted, is also to be a reference proceeding under this
provision.
D. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be
conducted by a retired judge of the Court, in accordance with the
California Arbitration Act, Section 1280 through Section 1294.2 of
the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
19. Additional Provisions: *SEE ATTACHED (DOMESTIC LINE).
/x/ If checked, the Addendum or Exhibit "A" attached (and all amendments
thereto and replacements therefor) is incorporated herein by this
reference.
Executed this 23RD day of JUNE, 1998
--------------------------------
(Name of Borrower)
IMPERIAL BANK BY:
--------------------------------
(Authorized Signature and Title)
SEE EXHIBIT "A1" ATTACHED HERETO
By: /s/ Michael E. Berrier Vice President BY:
-------------------------------------- --------------------------------
IMPERIAL BANK Title (Authorized Signature and Title)
<PAGE>
EXHIBIT "A1"
Attachment to the Security and Loan Agreement between IMAGING TECHNOLOGIES
CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION,
MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED, AMT ACCEL UK
LIMITED and IMPERIAL BANK dated June 23, 1998.
Imaging Technologies Corporation
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
Prima International
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
Newgen Systems Acquisitions Corporation
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
McMican Corporation
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
Color Solutions, Inc.
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
ITEC Europe Limited
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
Amt Accel UK Limited
By: /s/ Brian Bonar
-----------------------------------
By: /s/ Gerry Berg VICE PRES
-----------------------------------
<PAGE>
EXHIBIT "A"
(Domestic Line)
ADDENDUM TO SECURITY AND LOAN AGREEMENT ("SECURITY AND LOAN AGREEMENT") BETWEEN
IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS
ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN
CORPORATION, COLOR SOLUTIONS, INC., AND IMPERIAL BANK.
DATED: JUNE 23, 1998
This Addendum is made and entered into June 23, 1998, between IMAGING
TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS
CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION AND
COLOR SOLUTIONS, INC. ("Borrowers") hereby jointly and severally, and Imperial
Bank ("Bank"). This Addendum amends and supplements the Security and Loan
Agreement. In the event of any inconsistency between the terms herein and the
terms of the Security and Loan Agreement, the terms herein shall in all cases
govern and control. All capitalized terms herein, unless otherwise defined
herein, shall have the meaning set forth in the Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on
September 30, 1999, subject to Bank's right to renew said commitment at its
sole discretion. Any renewal of the commitment shall not be binding upon
the Bank unless it is in writing and signed by an officer of the Bank.
2. Borrowers represent and warrant that:
a. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrowers, and Borrowers are not in
default with respect to any order, writ, injunction, decree or demand
of any court or other governmental or regulatory authority.
b. FINANCIAL CONDITION. The consolidated balance sheet of Borrowers as of
March 31, 1998, and the related consolidated profit and loss
statement on that date, a copy of which has heretofore been delivered
to Bank by Borrowers, and all other statements and data submitted in
writing by Borrowers to Bank in connection with this request for
credit are true and correct, and said balance sheet and profit and
loss statement truly present the financial condition of Borrowers as
of the date thereof and the results of the operations of Borrowers for
the period covered thereby, and have been prepared in accordance with
generally accepted accounting principles on a basis consistently
maintained. Since such date, there have been no material adverse
changes in the financial condition or business of Borrowers. Borrowers
have no knowledge of any liabilities, contingent or otherwise, at
such date not reflected in said balance sheet, and Borrowers have not
entered into any special commitments or substantial contracts which
are not reflected in said balance sheet, other than in the ordinary
and normal course of its business, which may have a material adverse
effect upon its financial condition, operations or business as now
conducted.
c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights,
and licenses to conduct its business as now operated, without any
known conflict with valid trademarks, trade names, copyrights patents
and license rights of others.
<PAGE>
d. TAX STATUS. Borrowers have no liability for any delinquent state,
local or federal taxes, and, if Borrowers have contracted with any
government agency, Borrowers have no liability for re-negotiation of
profits.
3. Borrowers agree that so long as they are indebted to Bank, or so long as
Bank has any obligation to extend credit to Borrowers, they WILL NOT,
without Bank's WRITTEN CONSENT:
a. TYPE OF BUSINESS, MANAGEMENT. Make any substantial change in the
character of their business; or make any change in its executive
management.
b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from Bank except
obligations now existing as shown in financial statement dated March
31, 1998, excluding those being refinanced by Bank; or sell or
transfer, either with or without recourse, any accounts or notes
receivable or any moneys due to become due.
c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon
property at any time purchased or acquired under conditional sale or
other title retention agreement) upon any asset now owned or hereafter
acquired by them, other than liens for taxes not delinquent and liens
in Bank's favor.
d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity other than in the normal and ordinary
course of their business as now conducted or make any investment in
the securities of any person or other entity other than the United
States Government; or guarantee or otherwise become liable upon the
obligation of any person or other entity, except by endorsement of
negotiable instruments for deposit or collection in the ordinary and
normal course of their business.
e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other
entity; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefore; or sell any assets except in the ordinary and
normal course of their business as now conducted; or sell, lease,
assign, or transfer any substantial part of their business or fixed
assets, or any property or other assets necessary for the continuance
of their business as now conducted, including without limitation the
selling of any property or other asset accompanied by leasing back of
same.
4. Should there be a default under the Security and Loan Agreement, the
General Security Agreement or under the Note, all obligations, loans and
liabilities of Borrowers to Bank, due or to become due, whether now
existing or hereafter arising, shall at the option of the Bank, become
immediately due and payable without notice or demand, and Bank shall
thereupon have the right to exercise all of its default rights and
remedies.
5. Pursuant to the provisions in the Security and Loan Agreement and this
exhibit, Eligible Accounts shall only include such accounts as Bank in its
sole discretion shall determine are eligible from time to time. Advance
rates for eligible accounts will be as follows:
<TABLE>
<CAPTION>
Domestic
--------
<S> <C>
Imaging Technology Corp. 80%
PCPI Technologies Corp. 80%
Prima International Corp. 80%
Newgen Imaging Systems Corp. 70%
</TABLE>
"Eligible Accounts" shall also NOT include any of the following:
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of any
Borrower
<PAGE>
b. Accounts with respect to which 25% or more of the account debtor's
total accounts or obligations outstanding to any Borrower are more
than 90 days from invoice date.
c. For accounts representing more than 20% of total accounts receivable,
the balance in excess of the 20% is not eligible. However, the Bank
may deem, at its sole discretion, the entire amount, or any portion
thereof, eligible.
d. Credit balances greater than 90 days from invoice date.
d. Government receivables, unless assigned to the Bank.
f. All accounts sold to and purchased from a company of common
name/ownership, whereby a potential offset exists.
g. Accounts over 90 calendar days from invoice date.
h. Consignment or guaranteed sales.
i. Bill and hold accounts.
j. Equipment rental offsets.
k. Collection accounts.
l. C.O.D. accounts more than 30 days from invoice date.
6. Borrower may borrow against eligible inventory deemed acceptable to Bank,
up to a $1,750,000 sublimit within the line of credit, not to exceed 50% of
the balance outstanding on the line of credit, contingent upon Borrowing
Base availability, and substantiated by monthly inventory certification
submitted by Borrower to Bank. Eligible Inventory shall only include
Inventory as Bank in its sole discretion shall determine are eligible from
time to time. The advance rate on eligible inventory will be as follows:
<TABLE>
<CAPTION>
Domestic
--------
<S> <C>
Imaging Technology Corp. 0%
PCPI Technologies Corp. 0%
Prima International Corp. 0%
Newgen Imaging Systems Corp. 40%
</TABLE>
Inventory eligible for advance under the Security and Loan agreement shall
NOT include the following:
a. any Inventory which is not located in the United States;
b. any demonstration Inventory or Inventory sold on consignment;
c. any Inventory consisting of proprietary software;
d. any Inventory which is damaged, obsolete, returned, defective,
recalled or unfit for further processing;
e. any Inventory which has been previously exported from the United
States;
f. any Inventory which constitutes defense articles or defense services;
g. any Inventory which would result in an ineligible Account;
h. Inventory reserve amounts;
<PAGE>
i. Inventory not insured, naming Bank loss payee;
j. Inventory with no liquidation value due to various causes, i.e.,
service requirements, warranty requirements, etc.;
k. Inventory located in areas making it difficult to verify its
existence, or which will cause undue expense in liquidation due to
transportation costs, or other logistical reasons;
l. Inventory other than finished goods (i.e. raw materials and work in
process).
7. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted
accounting principles applied on a basis consistent with previous years.
Compliance with financial covenants shall be calculated and monitored on a
quarterly basis. All financial reports and statements and calculation of
financial covenants will be on a consolidated basis.
8. Borrowers affirmatively covenant that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, or so long as Bank has
any obligation to extend credit to Borrowers, they WILL:
a. Have and maintain a minimum effective tangible net worth (meaning net
worth plus subordinated debt, less intangible assets including but not
limited to goodwill, patents, copyrights, and organization expenses),
of not less than $12,500,000 beginning with the period ending 6/30/98.
b. Have and maintain a trading ratio trading assets (accounts receivable
and inventory) to trading liabilities (accounts payable and bank lines
outstanding) of at least 1.30 to 1.00 beginning with the period ending
6/30/98, and thereafter.
c. Have and maintain a maximum ratio of total debt (less subordinated
debt), to tangible net worth (plus subordinated debt) not to exceed
1.75 to 1.00, beginning with the period ending 6/30/97, and
thereafter.
d. Have and maintain trading capital (trading assets minus trading
liabilities as defined in pp.8b above) of not less than $6,000,000 for
the period ending 6/30/98, and thereafter.
e. Have and maintain a minimum debt service coverage (EBIDA/P&I) of
2.50:1.
f. Borrowers shall maintain all significant bank accounts and banking
relationship with Bank.
g. Within 10 days from each month-end, deliver to Bank an accounts
receivable aging reconciled to the general ledger of Borrower's, a
detailed accounts payable aging reconciled to the Borrower's general
ledger and setting forth the amount of any book overdraft or the
amount of checks issued but not sent, and an inventory certification
outlining both inventory composition and activity for the month. All
the foregoing will be in form satisfactory to the Bank. Also provide
the Bank on a quarterly basis or more frequent if demanded by Bank, a
complete address list of all active customers.
h. Within 45 days after the end of each quarter end, deliver to Bank a
profit and loss statement and a balance sheet in form satisfactory to
Bank all certified by an officer of Borrowers.
i. Within 90 days after end of Borrower's fiscal year, deliver to Bank
the same financial statements as otherwise provided quarterly together
with Changes in Financial Position Statement, reviewed by an
independent certified public accountant selected by Borrower but
acceptable to Bank.
<PAGE>
j. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain
its properties, equipment and facilities in good order and repair;
conduct its business in an orderly manner without voluntary
interruption and, if a corporation or partnership, maintain and
preserve its existence.
k. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property
against fire and other hazards with responsible insurance carriers to
the extent usually maintained by similar businesses. Borrower shall
provide evidence of property insurance in amounts and types acceptable
to the Bank. Bank to be named as loss payee.
l. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments
and governmental changes upon or against it or any of its properties,
and any of its liabilities at any time existing, except to the extent
and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any material adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed
adequate with respect thereto.
m. RECORDS AND REPORTS. Maintain a standard and modem system of
accounting in accordance with generally accepted accounting principles
on a basis consistently maintained; permit Bank's representatives to
have access to, and to examine its properties, books and records at
all reasonable times.
9. INTEREST RATE. The rate of interest applicable to the Loan Accounts shall
be .75% above the rate of interest which Bank has announced as its prime
lending rate ("Prime Rate") which shall vary concurrently with any change
in such Prime Rate. Interest shall be computed at the above rate on the
basis of the actual number of days during which the principal balance of
the Loan Account is outstanding divided by 360, which shall, for interest
computation purposes, be considered one year. Bank at its option may demand
payment of any or all of the amount due under the Loan Account including
accrued but unpaid interest, at any time. Notice of such demand may be
given verbally or in writing and should be effective upon receipt by
Borrower. The default rate of interest shall be five percent per year in
excess of the rate otherwise applicable.
10. NOTICE OF DEFAULT. Borrowers shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice
and lapse of time would be an event of default.
11. JOINT AND SEVERAL LIABILITY OF BORROWERS. The liability of each Borrower
under the Security and Loan Agreement, this Addendum and all other
documents executed pursuant to the transaction contemplated herein is join
and several. Discharge of any Borrower except for full payment, or any
extension, forbearance, change of rate of interest, or acceptance, release
or substitution of any Collateral, or any impairment or suspension of
Bank's rights against any Borrower, or any transfer of a Borrower's
interest to another shall not affect the liability of any other Borrower.
All Borrowers waive: (a) any right to require the Bank to proceed against
any Borrower before any other, or to pursue any other remedy; (b)
presentment, protest and notice of protest, demand and notice of
nonpayment, demand or performance, notice of sale and advertisement of
sale; (c) any right to the benefit of or to direct the application of any
Collateral until all obligations of Borrowers to Bank are repaid in full;
(d) any and all right of subrogation to Bank until all obligations of
Borrowers to Bank are repaid in full.
<PAGE>
12. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or
delay on the part of Bank or any holder of Notes issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof or of any
other right, power or privilege. All rights and remedies existing under
this agreement or any not issued in connection with a loan that Bank may
make hereunder are cumulative to, not exclusive of, any rights or remedies
otherwise available.
13. The terms and conditions of this Addendum and the Security and Loan
Agreement extend to all obligations of Borrower to Bank and the Borrower
agrees to comply with all such terms and conditions until all obligations
of Borrower to Bank are repaid in full. Should there be a default under the
Security and Loan Agreement, this Addendum, any General Security Agreement
executed by Borrower, under any note executed by Borrower, or under any
other obligations of Borrower to Bank, or the provisions of any documents
executed by Borrower in relation to any such obligation (and Borrower shall
have failed to cure such default within any applicable cure period), all
obligations, loans and liabilities of Borrower to Bank, due or to become
due, whether now existing or hereafter arising, shall at the option of the
Bank, become immediately due and payable without notice or demand, and Bank
shall thereupon have the right to exercise all of its default rights and
remedies.
14. This Addendum is executed by and on behalf of the parties as of the date
first above written.
IMAGING TECHNOLOGIES CORPORATION, "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
PRIMA INTERNATIONAL "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
NEWGEN SYSTEMS ACQUISITIONS CORPORATION, "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
<PAGE>
ITEC EUROPE LIMITED, "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
AMT ACCEL UK LIMITED, "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
McMICAN CORP., "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
COLOR SOLUIONS, INC. "BORROWER"
BY: /s/ Brian Bonar
--------------------------
TITLE: CEO
-----------------------
BY: /s/ Gerry Berg
--------------------------
TITLE: VICE PRESIDENT
-----------------------
IMPERIAL BANK "BANK"
BY: /s/ Brian Bonar
--------------------------
TITLE: VICE PRESIDENT
-----------------------
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation Imaging Technologies Corporation, a Delaware
Corporation
Number of Shares: 60,000
Class of Stock: Common
Initial Exercise Price: $2.50 per share
Issue Date: June 23, 1998
Expiration Date: June 23, 2003
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, IMPERIAL BANK or registered assignee
("Holder") is entitled to purchase the number of fully paid and non-assessable
shares of the class of securities (the "Shares") of the corporation (the
"Company") at the initial exercise price per Share (the "Warrant Price") all as
set forth above and as adjusted pursuant to Article 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix I to the principal office of the Company. Unless Holder is
exercising the conversion fight set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1.3 ALTERNATIVE STOCK APPRECIATION RIGHT. At Holder's option, the Company
shall pay Holder the fair market value of the Shares issuable upon conversion of
this Warrant pursuant to Section 1.2 in cash in lieu of such Shares.
1.4 FAIR MARKET VALUE. If the Shares are traded regularly in a public
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of
<PAGE>
Exercise to the Company. If the Shares are not regularly traded in a public
market, the Board of Directors of the Company shall determine fair market value
in its reasonable good faith judgment. The foregoing notwithstanding, if Holder
advises the Board of Directors in writing that Holder disagrees with such
determination, then the Company and Holder shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the valuation of such
investment banking firm is greater than that determined by the Board of
Directors, then all fees and expenses of such investment banking firm shall be
paid by the Company. In all other circumstances, such fees and expenses shall be
paid by Holder.
1.5 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY.
1.7.1. "ACQUISITION". For the purpose of this Warrant,
"Acquisition"means any sale, license, or other disposition of all or
substantially all of the assets (including intellectual property) of the
Company, or any reorganization, consolidation, or merger of the Company where
the holders of the Company's securities before the transaction beneficially
own less than 50% of the outstanding voting securities of the surviving
entity after the transaction.
1.7.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
1.7.3. NONASSUMPTION. If upon the closing of any Acquisition the
successor entity does not assume the obligations of this WARRANT AND HOLDER has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the Acquisition on the
same terms as other holders of the same class of securities of the Company.
1.7.4 PURCHASE RIGHT. Notwithstanding the foregoing, at the election
of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant
2
<PAGE>
immediately before the record date for determining the shareholders entitled to
participate in the proceeds of the Acquisition, less (b) the aggregate Warrant
Price of the Shares, but in no event less than zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. Such an
event shall include any automatic conversion of the outstanding or issuable
securities of the Company of the same class or series as the Shares to common
stock pursuant to the terms of the Company's Articles of Incorporation upon the
closing of a registered public offering of the Company's common stock. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the number
of Shares issuable upon exercise of this Warrant shall be subject to adjustment,
from time to time, in the manner set forth on Exhibit B, if attached, in the
event of Diluting Issuances (as defined on Exhibit A).
2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
3
<PAGE>
2.6 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than the fair market value of the Shares as of the date
of this Warrant.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of SUCH registration rights.
3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
4
<PAGE>
3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit B.
ARTICLE 4. MISCELLANEOUS.
4.1 TERM: NOTICE OF EXPIRATION. This Warrant is exercisable, in whole or
in part, at any time and from time to time on or before the Expiration Date set
forth above. The Company shall give Holder written notice of Holder's right to
exercise this Warrant in the form attached as Appendix 2 not more than 90 days
and not less than 30 days before the Expiration Date. If the notice is not so
given, the Expiration Date shall automatically be extended until 30 days after
the date the Company delivers the notice to Holder.
4.2 LEGENDS. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.3, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 NOTICES. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
5
<PAGE>
4.6 WAIVER. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 ATTORNEYS' FEES. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
Imaging Technologies Corporation
By: /s/ Brian Bonar
-------------------------------
Name: Brian Bonar
-------------------------------
Title: CEO
-------------------------------
By: /s/ Gerry Berg
-------------------------------
Name: Gerry Berg
-------------------------------
Title: Vice President
-------------------------------
6
<PAGE>
APPENDIX I
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase _____ shares of the Common
Stock of Imaging Technologies Corporation pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to _____ of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bank
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the shares solely for its own
account and not as a nominee for any other party and not with a view toward the
resale or distribution thereof except in compliance with applicable securities
laws.
IMPERIAL BANK
- --------------------------------------
(Signature)
- -------------------------
(Date)
7
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
__________________,_____
Chief Financial Officer
Controllers Department
Imperial Bank
P.O. Box 92991
Los Angeles, CA 90009
Gentleperson:
This is to advise you that the Warrant issued to you described below will
expire on June 23, 2003.
Issuer: Imaging Technologies Corporation
Issue Date: June 23, 1998
Class of Security Issuable: Common
Exercise Price Per Share: $2.50
Number of Shares Issuable: 60,000
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your
only notice of pending expiration.
IMAGING TECHNOLOGIES CORPORATION
By: /s/ Brian Bonar
--------------------------------
Its: CEO
-------------------------------
By: /s/ Gerry Berg
--------------------------------
Its: Vice President
-------------------------------
8
<PAGE>
EXHIBIT A
IMPERIAL BANK
ANTIDILUTION AGREEMENT
This Antidilution Agreement is entered into as of June 23, 1998, by and
between Imperial Bank ("Purchaser") and Imaging Technologies Corporation ("the
Company").
RECITALS
A. Concurrently with the execution of this Antidilution Agreement, the
Purchaser is purchasing from the Company a Warrant to Purchase Stock (the
"Warrant") pursuant to which Purchaser has the right to acquire from the Company
the Shares (as defined in the Warrant).
B. By this Antidilution Agreement, the Purchaser and the Company desire
to set forth the adjustment in the number of Shares issuable upon exercise of
the Warrant as a result of a Diluting Issuance (as defined below).
C. Capitalized terms used herein shall have the same meaning as set forth
in the Warrant.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Definitions. As used in this Antidilution Agreement, the
following terms have the following respective meanings:
(a) "Option" means any right, option or warrant to subscribe for, purchase
or otherwise acquire common stock or Convertible Securities.
(b) "Convertible Securities" means any evidences of indebtedness, shares
of stock or other securities directly or indirectly convertible into or
exchangeable for common stock.
(c) "Issue" means to grant, issue, sell, assume or fix a record date for
determining persons entitled to receive any security (including Options),
whichever of the foregoing is the first to occur.
(d) "Additional Common Shares" means all common stock (including reissued
shares) Issued (or deemed to be issued pursuant to Section 2) after the date of
the Warrant. Additional Common Shares does not include, however, any common
stock Issued in a transaction described in Sections 2.1 and 2.2 of the Warrant;
any common stock Issued upon conversion of preferred stock outstanding on the
date of the Warrant; the Shares; or common stock Issued as incentive or in a
nonfinancing transaction to employees, officers, directors or consultants to the
Company.
10
<PAGE>
(e) The shares of common stock ultimately Issuable upon exercise of an
Option (including the shares of common stock ultimately Issuable upon conversion
or exercise of a Convertible Security Issuable pursuant to an Option) are deemed
to be Issued when the Option is Issued. The shares of common stock ultimately
Issuable upon conversion or exercise of a Convertible Security (other than a
Convertible Security Issued pursuant to an Option) shall be deemed Issued upon
Issuance of the Convertible Security.
2. DEEMED ISSUANCE OF ADDITIONAL COMMON SHARES. The shares of common
stock ultimately Issuable upon exercise of an Option (including the shares of
common stock ultimately Issuable upon conversion or exercise of a Convertible
Security Issuable pursuant to an Option) are deemed to be Issued when the Option
is Issued. The shares of common stock ultimately Issuable upon conversion or
exercise of a Convertible Security (other than a Convertible Security Issued
pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible
Security. The maximum amount of common stock Issuable is determined without
regard to any future adjustments permitted under the instrument creating the
Options or Convertible Securities.
3. ADJUSTMENT OF WARRANT PRICE FOR DILUTING ISSUANCES.
3.1 RATCHET ADJUSTMENT. If the Company issues Additional Common
Shares after the date of the Warrant and the consideration per Additional Common
Share (determined pursuant to Section 9) is less than the Warrant Price in
effect immediately before such Issue (a "Diluting Issuance"), the Warrant Price
shall be reduced to the lesser of:
(a) the amount of such consideration per Additional Common Share; or
(b) if the Company's common stock is traded on a national securities
exchange or the National Association of Securities Dealers Automated Quotation
System, the last reported bid or sale price of the Company's common stock on the
first trading day following a public announcement of the Issuance.
3.2 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the
Warrant Price the number of Shares Issuable upon exercise of the Warrant shall
be increased to equal the quotient obtained by dividing (a) the product
resulting from multiplying (i) the number of Shares Issuable upon exercise of
the Warrant and (ii) the Warrant Price, in each case as in effect immediately
before such adjustment, by (b) the adjusted Warrant Price.
3.3 SECURITIES DEEMED OUTSTANDING. For the purpose of this Section
3, all securities Issuable upon exercise of any outstanding Convertible
Securities or Options, Warrants, or other rights to acquire securities of the
Company shall be deemed to be outstanding.
4. NO ADJUSTMENT FOR ISSUANCES FOLLOWING DEEMED ISSUANCES. No adjustment
to the Warrant Price shall be made upon the exercise of Options or conversion of
Convertible Securities.
11
<PAGE>
5. ADJUSTMENT FOLLOWING CHANGES IN TERMS OF OPTIONS OR CONVERTIBLE
SECURITIES. If the consideration payable to, or the amount of common stock
Issuable by, the Company increases or decreases, respectively, pursuant to the
terms of any outstanding Options or Convertible Securities, the Warrant Price
shall be recomputed to reflect such increase or decrease. The recomputation
shall be made as of the time of the Issuance of the Options or Convertible
Securities. Any changes in the Warrant Price that occurred after such Issuance
because other Additional Common Shares were Issued or deemed Issued shall also
be recomputed.
6. RECOMPUTATION UPON EXPIRATION OF OPTIONS OR CONVERTIBLE SECURITIES.
The Warrant Price computed upon the original Issue of any Options or Convertible
Securities, and any subsequent adjustments based thereon, shall be recomputed
when any Options or rights of conversion under Convertible Securities expire
without having been exercised. In the case of Convertible Securities or Options
for common stock, the Warrant Price shall be recomputed as if the only
Additional Common Shares Issued were the shares of common stock actually Issued
upon the exercise of such securities, if any, and as if the only consideration
received therefor was the consideration actually received upon the Issue,
exercise or conversion of the Options or Convertible Securities. In the case of
Options for Convertible Securities, the Warrant Price shall be recomputed as if
the only Convertible Securities Issued were the Convertible Securities actually
Issued upon the exercise thereof, if any, and as if the only consideration
received therefor was the consideration actually received by the Company
(determined pursuant to Section 9), if any, upon the Issue of the Options for
the Convertible Securities.
7. LIMIT ON READJUSTMENTS. No readjustment of the Warrant Price pursuant
to Sections 5 or 6 shall increase the Warrant Price more than the amount of any
decrease made in respect of the Issue of any Options or Convertible Securities.
8. 30 DAY OPTIONS. In the case of any Options that expire by their terms
not more than 30 days after the date of Issue thereof, no adjustment of the
Warrant Price shall be made until the expiration or exercise of all such
Options.
9. COMPUTATION OF CONSIDERATION. The consideration received by the
Company for the Issue of any Additional Common Shares shall be computed as
follows:
(a) CASH shall be valued at the amount of cash received by the
Corporation, excluding amounts paid or payable for accrued interest or accrued
dividends.
(b) PROPERTY. Property, other than cash, shall be computed at the fair
market value thereof at the time of the Issue as determined in good faith by the
Board of Directors of the Company.
(c) MIXED CONSIDERATION. The consideration for Additional Ccommon Shares
Issued together with other property of the Company for consideration that covers
both shall be determined in good faith by the Board of Directors.
(d) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per Additional
Common Share for Options and Convertible Securities shall be determined by
dividing:
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(i) the total amount, if any, received or receivable by the Company
for the Issue of the Options or Convertible Securities, plus the minimum amount
of additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Company upon exercise of the Options or
conversion of the Convertible Securities, by
(ii) the maximum amount of common stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) ultimately Issuable upon the
exercise of such Options or the conversion of such Convertible Securities.
10. GENERAL.
10.1 GOVERNING LAW. This Antidilution Agreement shall be governed in
all respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
10.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
10.3 ENTIRE AGREEMENT. Except as set forth below, this Antidilution
Agreement and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
10.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Purchaser at Purchaser's address as set forth below, or at
such other address as Purchaser shall have furnished to the Company in writing,
or (b) if to the Company, at the Company's address set forth below, or at such
other address as the Company shall have furnished to the Purchaser in writing.
10.5 SEVERABILITY. In case any provision of this Antidilution
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Antidilution Agreement shall
not in any way be affected or impaired thereby.
10.6 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Antidilution Agreement.
10.7 COUNTERPARTS. This Antidilution Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
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PURCHASER ISSUER
IMPERIAL BANK IMAGING TECHNOLOGIES CORPORATION
By: /s/ Michael A. Berrier By: /s/ Brian Bonar
------------------------- -----------------------
Name: Michael A. Berrier Name: Brian Bonar
Title: Vice President Title: CEO
Address: 701 13 Street Address:
San Diego, CA 90181
By: /s/ Gerry Berg
-----------------------
Name: Gerry Berg
Title: Vice President
Address:
14
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EXHIBIT B
REGISTRATION RIGHTS
The Shares shall be deemed "registrable securities" or otherwise entitled
to "piggy back" registration rights in accordance with the terms of the
following agreement (the "Agreement") between the Company and its investor(s):
None
-----------------------------------------------------------
[Identify Agreement by date, title and parties. If no Agreement
exists, indicate by "none."]
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration thereunder without the
consent of Holder. By acceptance of the Warrant to which this Exhibit C is
attached, Holder shall not be deemed to be a party to the Agreement, but solely
entitled to the registration rights created thereby.
If no Agreement exists, then the Company and the Holder shall enter into
Holder's standard form of Registration Rights Agreement as in effect on the
Issue Date of the Warrant.
15
<PAGE>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of August 21,
1997, by and among Imaging Technologies Corporation, a Delaware corporation,
with headquarters located at 11031 Via Frontera, San Diego, California 92127
(the "COMPANY"), and the investors listed on the Schedule of Buyers attached
hereto (individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("REGULATION D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 ACT");
B. The Company has authorized the following new series of its Preferred
Stock, par value $1,000 per share (the "PREFERRED STOCK"): the Company's Series
C Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), which shall
be convertible into shares of the Company's Common Stock, par value $.005 per
share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of the Preferred Shares, substantially in the form
attached hereto as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially an aggregate of 500 of the Preferred Shares (the
"INITIAL PREFERRED SHARES") in the respective amounts set forth opposite each
Buyer's name on the Schedule of Buyers and one warrant, in substantially the
form attached hereto as EXHIBIT E (the "WARRANTS"), to acquire 400 shares of
Common Stock for each Preferred Share purchased, which Warrants shall expire
four years after the date of issuance;
D. Subject to the terms and conditions set forth in this Agreement, each
Buyer may have the right to purchase a number of additional Preferred Shares,
along with the related Warrant, equal to up to 40% of the number of Preferred
Shares held by such Buyer on December 31, 1997 (the "ADDITIONAL PREFERRED
SHARES") and the Company may have the right to cause the Buyers to purchase up
to an aggregate of 500 Preferred Shares, along with the related Warrants, (pro
rata based on the number of Initial Preferred Shares each Buyer purchased in
relation to the total number of Initial Preferred Shares) (the "PUT PREFERRED
SHARES") (the Initial Preferred Shares, the Additional Preferred Shares and the
Put Preferred Shares collectively are referred to in this Agreement as the
"PREFERRED SHARES");
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the
<PAGE>
Company has agreed to provide certain registration rights under the 1933 Act and
the rules and regulations promulgated thereunder, and applicable state
securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
a. PURCHASE OF PREFERRED SHARES. Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the Company
shall issue and sell to the Buyers and the Buyers shall purchase from the
Company an aggregate of 500 Initial Preferred Shares, in the respective amounts
set forth opposite each Buyer's name on the Schedule of Buyers along with one
Warrant for each Preferred Share purchased (the "INITIAL CLOSING"). Subject to
the satisfaction (or waiver) of the conditions set forth in Sections 1(c), 6(b)
and 7(b) below, at the option of each Buyer, the Company shall issue and sell to
each such Buyer and each such Buyer shall purchase from the Company at multiple
closings, if applicable, an aggregate of up to that number of Additional
Preferred Shares, along with the related Warrant, equal to 40% of the number of
the Initial Preferred Shares held by such Buyer on December 31, 1997 (the
"ADDITIONAL CLOSING"). Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 1(d), 1(e), 6(c) and 7(c) below, the Company may require
that each Buyer purchase that number of additional Preferred Shares, along with
the related Warrant, equal to such Buyer's pro rata portion of up to 500
Preferred Shares (based on the number of Initial Preferred Shares each Buyer
purchased in relation to the total number of Initial Preferred Shares purchased
by the Buyers) (the "PUT CLOSING"). The Initial Closing, the Additional Closing
and the Put Closing collectively are referred to in this Agreement as the
"CLOSINGS." The purchase price (the "PURCHASE PRICE") of each Preferred Share
and the related Warrant at each of the Closings shall be $10,000.
b. THE INITIAL CLOSING DATE. The date and time of the Initial
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time, within
three (3) business days following the date hereof, subject to notification of
satisfaction (or waiver) of the conditions to the Closing set forth in Sections
6(a) and 7(a) below (or such later date as is mutually agreed to by the Company
and the Buyers). The Initial Closing shall occur on the Initial Closing Date at
the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600,
Chicago, Illinois 60661-3693.
c. THE ADDITIONAL CLOSING DATE. The date and time of each of the
Additional Closings (the "ADDITIONAL CLOSING DATES") shall be 10:00 a.m. Central
Time, on the date specified in a Buyer's Additional Share Notice (as defined
below), subject to satisfaction (or waiver) of the conditions to the Additional
Closing set forth in Sections 6(b) and 7(b) and the conditions set forth in this
paragraph (or such later date as is mutually agreed to by the Company and the
Buyers). During the period beginning on and including January 1, 1998 and ending
on January 1, 2002, but subject to the requirements of Sections 6(b) and 7(b),
each Buyer may purchase Additional Preferred Shares by delivering written notice
to the Company (an "ADDITIONAL SHARE NOTICE") at least seven days but not more
than 20 days prior (an "ADDITIONAL SHARE NOTICE DATE") to the Additional Closing
Date set forth in such Buyer's Additional Share Notice. Each Additional Share
Notice shall set forth (i) the number of Additional Preferred Shares, along with
the related Warrants, to be purchased by such Buyer at such Additional
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<PAGE>
Closing, (ii) the aggregate Purchase Price for such Additional Preferred Shares
and the related Warrant and (iii) the date selected by such Buyer for the
Additional Closing Date, which Additional Closing Date shall be not later than
January 1, 2002. Notwithstanding the foregoing, no Buyer shall be entitled to
deliver an Additional Share Notice unless on the date of the delivery of the
Additional Share Notice the Market Price (as defined in the Certificate of
Designations) of the Common Stock is greater than $7.50 per share (subject to
adjustment as a result of any stock split, stock dividend, recapitalization,
reverse stock split, consolidation, exchange or similar event). Each Additional
Closing shall occur on the Additional Closing Date at the offices of Katten
Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois
60661-3693.
d. THE PUT CLOSING DATE. The date and time of the Put Closing (the
"PUT CLOSING DATE") shall be 10:00 a.m. Central Time, on the date specified in
the Company's Put Share Notice (as defined below), subject to satisfaction of
(or waiver) of the conditions to the Put Closing set forth in Sections 6(c) and
7(c) and the conditions set forth in Section 1(e), (or such later date as is
mutually agreed to by the Company and the Buyers). During the period beginning
on and including January 1, 1998 and ending on June 30, 1998, but subject to the
requirements of Sections 6(c) and 7(c) and satisfaction of the Put Notice
Conditions (as defined in Section 1(e) below), the Company on only one occasion
may require each Buyer to purchase Put Preferred Shares by delivering written
notice to each of the Buyers (a "PUT SHARE NOTICE") at least 30 days but not
more than 45 days (the "PUT SHARE NOTICE DATE") prior to the Put Closing Date
set forth in the Company's Put Share Notice. The Company's Put Share Notice
shall set forth (i) each Buyer's pro rata portion (based on the number of
Initial Preferred Shares each Buyer purchased in relation to the total number of
Initial Preferred Shares purchased by the Buyers) of the aggregate number of Put
Preferred Shares, which aggregate number shall not exceed 500 Preferred Shares,
along with the related Warrants, which the Company is requiring each Buyer to
purchase at the Put Closing, (ii) the aggregate Purchase Price for each such
Buyer's Put Preferred Shares and the related Warrants and (iii) the date
selected by the Company for the Put Closing Date, which Put Closing Date shall
be not later than June 30, 1998. The Put Closing shall occur on the Put Closing
Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite
1600, Chicago, Illinois 60661-3693. The Initial Closing Date, the Additional
Closing Dates and the Put Closing Date collectively are referred to in this
Agreement as the "CLOSINGS DATES."
e. THE PUT NOTICE CONDITIONS. Notwithstanding anything in this
agreement to the contrary, the Company shall not be entitled to deliver a Put
Share Notice and require the Buyers to purchase the Put Preferred Shares along
with the related Warrants unless, in addition to the satisfaction of the
requirements of Sections 6(c) and 7(c), all of the following conditions are
satisfied: (i) the Company's stockholders shall have approved the issuance of
the Securities (as defined below) on or prior to the Put Share Notice Date; (ii)
the Company's revenues for the period beginning and including April 1, 1997 and
ending and including September 30, 1997 are at least $12,000,000; (iii) during
the period beginning 45 days prior to the Put Share Notice Date and ending on
and including the Put Closing Date, the Registration Statement (as defined in
the Registration Rights Agreement) shall be effective and available for the sale
of no less than 125% of the sum of (A) the number of Conversion Shares then
issuable upon the conversion of all outstanding Preferred Shares and the Put
Preferred Shares to be issued by the Company, (B) the number of Warrant Shares
then issuable upon exercise of all outstanding Warrants and the
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<PAGE>
Warrants to be issued in connection with the Put Preferred Shares and (C) the
number of Conversion Shares and Warrant Shares that are then held by the Buyers,
(iv) during the period beginning 45 days prior to the Put Share Notice Date and
ending on and including the Put Closing Date, the Common Stock is designated for
quotation on the Nasdaq National Market or a national securities exchange and is
not suspended from trading; (v) no event constituting a Major Business Event (as
defined below), including an agreement to consummate a Major Business Event, or
a Triggering Event set forth in Section 3(d)(iv) of the Certificate of
Designations shall have occurred from the period beginning on the Initial
Issuance Date and ending on and including the Put Closing Date; (vi) on each
trading day during the period beginning 20 days prior to the Put Share Notice
Date and ending on and including the Put Closing Date, the Market Price of the
Common Stock is not less than $6.00 per share (subject to adjustment as a result
of any stock split, stock dividend, recapitalization, reverse stock split,
consolidation, exchange or similar event); (vii) during the period beginning 20
days prior to the Put Share Notice Date and ending on and including the Put
Closing Date, the Average Daily Trading Dollar Volume (as defined below) is not
less than $250,000; (viii) during the period beginning on the Initial Issuance
Date and ending on and including the Put Closing Date, the Company shall have
delivered Conversion Shares upon conversion of the Preferred Shares and Warrant
Shares upon exercise of the Warrants to the Buyers on a timely basis as set
forth in Section 2(f)(ii) of the Certificate of Designations and Sections 2(a)
and 2(b) of the Warrants, respectively; and (ix) the Company shall not have
previously delivered a Put Share Notice. For purposes of this Section 1(e)
"MAJOR BUSINESS EVENT" means (x) consolidation, merger or other business
combination of the Company with another entity (other than pursuant to a
migratory merger effected solely for the purpose of changing the Company's
jurisdiction of incorporation, (y) the sale or transfer of all or substantially
all of the Company's assets or (z) a purchase, tender or exchange offer made to
and accepted by the holders of more than 10% of the outstanding shares of Common
Stock. For purposes of this Section 1(e), "AVERAGE DAILY TRADING DOLLAR VOLUME"
means the average during any period of the number of shares of Common Stock sold
on each trading day multiplied by such day's weighted-average trading price as
reported by Bloomberg Financial Markets; provided, however, that for purposes of
determining the Average Daily Trading Dollar Volume, block trades in excess of
30,000 shares of Common Stock shall be counted as the sale of only 30,000
shares of Common Stock.
f. FORM OF PAYMENT. On each of the Closing Dates, (i) each Buyer
shall pay the Purchase Price to the Company for the Preferred Shares and the
Warrants to be issued and sold to such Buyer at the respective Closing, by wire
transfer of immediately available funds in accordance with the Company's written
wire instructions, and (ii) the Company shall deliver to each Buyer, stock
certificates (in the denominations as such Buyer shall request) (the "STOCK
CERTIFICATES") representing such number of the Preferred Shares which such Buyer
is then purchasing (as indicated opposite such Buyer's name on the Schedule of
Buyers) along with a Warrant exercisable for 400 shares of Common Stock for each
Preferred Share purchased, duly executed on behalf of the Company and registered
in the name of such Buyer or its designee.
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<PAGE>
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself that:
a. INVESTMENT PURPOSE. Such Buyer (i) is acquiring the Preferred
Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will
acquire the Conversion Shares then issuable and (iii) upon exercise of the
Warrants, will acquire the shares of Common Stock issuable upon exercise
thereof (the "WARRANT SHARES") (the Preferred Shares, the Conversion Shares,
the Warrants and the Warrant Shares collectively are referred to herein as
the "SECURITIES"), for its own account for investment only and not with a
view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under
the 1933 Act; provided, however, that by making the representations herein,
such Buyer does not agree to hold any of the Securities for any minimum or
other specific term and reserves the right to dispose of Preferred Shares at
any time in accordance with or pursuant to a registration statement or an
exemption under the 1933 Act.
b. ACCREDITED INVESTOR STATUS. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. RELIANCE ON EXEMPTIONS. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such securities.
d. INFORMATION. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Section 3 below. Such Buyer understands that its investment in the Securities
involves a high degree of risk. Such Buyer has sought such accounting, legal and
tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.
e. NO GOVERNMENTAL REVIEW. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. TRANSFER OR RESALE. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned
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<PAGE>
or transferred unless (A) subsequently registered thereunder, (B) such Buyer
shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, or (C) such Buyer provides the Company with reasonable
assurance that such Securities can be sold, assigned or transferred pursuant to
Rule 144 promulgated under the 1933 Act (or a successor rule thereto)("RULE
144"); (ii) any sale of the Securities made in reliance on Rule 144 may be made
only in accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the person through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the 1933 Act) may require compliance with some
other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (iii) neither the Company nor any other person is under any
obligation to register such Securities under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.
g. LEGENDS. Such Buyer understands that the certificates or other
instruments representing the Preferred Shares and the Warrants and, until such
time as the sale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of such Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that such
Securities can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold. Each Buyer acknowledges, covenants and agrees to sell the
Securities represented by a certificate(s) from which the legend has been
removed, only pursuant to (i) a registration statement effective under the 1933
Act, or (ii) advice of counsel that such sale is exempt from registration
required by Section 5 of the 1933 Act.
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<PAGE>
h. AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. RESIDENCY. Such Buyer is a resident of that country specified in its
address on the Schedule of Buyers.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
a. ORGANIZATION AND QUALIFICATION. The Company and its
subsidiaries (a complete list of which is set forth in Schedule 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on the
business, properties, assets, operations, results of operations, financial
condition or prospects of the Company and its subsidiaries, if any, taken as a
whole, or on the transactions contemplated hereby or by the agreements and
instruments to be entered into in connection herewith.
b. AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement and each of the
other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents, the
Certificate of Designations and the Warrants by the Company and the consummation
by it of the transactions contemplated hereby and thereby, including without
limitation the issuance of the Preferred Shares and the Warrants and the
reservation for issuance and the issuance of the Conversion Shares and the
Warrant Shares issuable upon conversion or exercise thereof, have been duly
authorized by the Company's Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
stockholders, (iii) the Transaction Documents and the Warrants have been duly
executed and delivered by the Company, (iv) the Transaction Documents and the
Warrants constitute the valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies, and (v) prior to the Closing Date, the Certificate of Designations has
been filed with the Secretary of State of the
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<PAGE>
State of Delaware and will be in full force and effect, enforceable against the
Company in accordance with its terms.
c. CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (i) 100,000,000 shares of Common Stock, of
which as of the date hereof, 9,880,585 shares were issued and outstanding,
4,592,748 shares are reserved for issuance pursuant to the Company's stock
option and purchase plans and 817,415 shares are reserved for issuance pursuant
to securities (other than the Preferred Shares and the Warrants) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii) 10,000
shares of Preferred Stock, of which as of the date hereof, 420.5 shares were
issued and outstanding. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
disclosed in Schedule 3(c), no shares of Common Stock or Preferred Stock are
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company. Except as disclosed in
Schedule 3(c), as of the effective date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement). Except as disclosed in Schedule 3(c), there are
no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities as described in this
Agreement. The Company has furnished to the Buyers true and correct copies of
the Company's Certificate of Incorporation, as amended and as in effect on the
date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as
in effect on the date hereof (the "BY-LAWS"), and the terms of all securities
convertible into or exercisable for Common Stock and the material rights of the
holders thereof in respect thereto.
d. ISSUANCE OF SECURITIES. The Preferred Shares and the Warrants
are duly authorized and, upon issuance in accordance with the terms hereof,
shall be (i) validly issued, fully paid and non-assessable, (ii) free from all
taxes, liens and charges with respect to the issue thereof and (iii) entitled to
the rights and preferences set forth in the Certificate of Designations.
3,000,000 shares of Common Stock (subject to adjustment pursuant to the
Company's covenant set forth in Section 4(f) below) have been duly authorized
and reserved for issuance upon conversion of the Preferred Shares and upon
exercise of the Warrants. Upon conversion or exercise in accordance with the
Certificate of Designations or the Warrants, as the case may be, the Conversion
Shares and the Warrant Shares will be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. The issuance by the Company of the Securities is exempt
from registration under the 1933 Act.
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e. NO CONFLICTS. Except as disclosed in Schedule 3(e), the
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby will not (i)
result in a violation of the Certificate of Incorporation, any Certificate of
Designations, Preferences and Rights of any outstanding series of Preferred
Stock of the Company or the By-laws or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or instrument
to which the Company or any of its subsidiaries is a party, or result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and regulations
of the principal market or exchange on which the Common Stock is traded or
listed) applicable to the Company or any of its subsidiaries or by which any
property or asset of the Company or any of its subsidiaries is bound or
affected. Except as disclosed in Schedule 3(e), neither the Company nor its
subsidiaries is in violation of any term of or in default under the Certificate
of Incorporation, any Certificate of Designation, Preferences and Rights of any
outstanding series of Preferred Stock or the By-laws or their organizational
charter or by-laws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries. The business
of the Company and its subsidiaries is not being conducted, and shall not be
conducted, in violation of any law, ordinance, regulation of any governmental
entity. Except as specifically contemplated by this Agreement and as required
under the 1933 Act, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under or contemplated by this Agreement or the Registration Rights
Agreement in accordance with the terms hereof or thereof. Except as disclosed in
Schedule 3(e), all consents, authorizations, orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence have
been obtained or effected on or prior to the date hereof. The Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.
f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since June 30, 1995, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The
Company has delivered to the Buyers or their respective representatives true and
complete copies of the SEC Documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied,
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during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading. Neither the Company nor any of its subsidiaries or
any of their officers, directors, employees or agents have provided the Buyers
with any material, nonpublic information.
g. ABSENCE OF CERTAIN CHANGES. Except as disclosed in Schedule
3(g), since June 30, 1996 there has been no material adverse change and no
material adverse development in the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries. The Company has not taken any steps, and does not currently expect
to take any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or its subsidiaries have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings.
h. ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its subsidiaries, threatened against or affecting the Company,
the Common Stock or any of the Company's subsidiaries, wherein an unfavorable
decision, ruling or finding would (i) have a material adverse effect on the
transactions contemplated hereby (ii) adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of the documents contemplated herein or
(iii), except as expressly set forth in the SEC Documents or in Schedule 3(h),
have a Material Adverse Effect.
i. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF PREFERRED SHARES.
The Company acknowledges and agrees that each of the Buyers is acting solely
in the capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that each Buyer is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
of the Buyers or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to such Buyer's purchase of the Securities. The Company
further represents to each Buyer that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
j. NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES. No event, liability, development or circumstance has occurred
or exists, or is contemplated to occur, with respect to the Company or its
subsidiaries or their respective business, properties,
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prospects, operations or financial condition, which has not been publicly
announced or disclosed in writing to the Buyers.
k. NO GENERAL SOLICITATION. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of the Nasdaq National Market, nor will the
Company or any of its subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
m. EMPLOYEE RELATIONS. Neither the Company nor any of its
subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. Neither the
Company nor any of its subsidiaries is a party to a collective bargaining
agreement, and the Company and its subsidiaries believe that relations with
their employees are good.
n. INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 3(n), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate within two years from the date of this Agreement. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or its
subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 3(n), there is no claim, action or
proceeding being made or brought against, or to the Company's knowledge, being
threatened against, the Company or its subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company and its subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties.
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o. ENVIRONMENTAL LAWS. The Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval.
p. TITLE. The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(p) or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company or any of
its subsidiaries. Any real property and facilities held under lease by the
Company or any of its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
q. INSURANCE. The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its subsidiaries are
engaged. Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
r. REGULATORY PERMITS. The Company and its subsidiaries possess
all certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
s. INTERNAL ACCOUNTING CONTROLS. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor
any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment,
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decree, order, rule or regulation which in the judgment of the Company's
officers has or is expected in the future to have a Material Adverse Effect.
Neither the Company nor any of its subsidiaries is a party to any contract or
agreement which in the judgment of the Company's officers has or is expected to
have a Material Adverse Effect.
u. TAX STATUS. Except as set forth on Schedule 3(u), the
Company and each of its subsidiaries has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and
has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports
and declarations, except those being contested in good faith and has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of
the Company know of no basis for any such claim.
v. CERTAIN TRANSACTIONS. Except as set forth on Schedule 3(v) and
in the SEC Documents and except for arm's length transactions pursuant to which
the Company makes payments in the ordinary course of business upon terms no less
favorable than the Company could obtain from third parties and other than the
grant of stock options disclosed on Schedule 3(c), none of the officers,
directors, or employees of the Company is presently a party to any transaction
with the Company or any of its subsidiaries (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
w. DILUTIVE EFFECT. The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares in accordance
with this Agreement and the Certificate of Designations and its obligation to
issue the Warrant Shares upon exercise of the Warrants in accordance with this
Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
4. COVENANTS.
a. BEST EFFORTS. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly
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after such filing. The Company shall, on or before each of the Closing Dates,
take such action as the Company shall reasonably determine is necessary to
qualify the Securities for, or obtain exemption for the Securities for, sale to
the Buyers at each of the Closings pursuant to this Agreement under applicable
securities or "Blue Sky" laws of the states of the United States, and shall
provide evidence of any such action so taken to the Buyers on or prior to the
Closing Date.
c. REPORTING STATUS. Until the earlier of (i) the date as of which
the Investors (as that term is defined in the Registration Rights Agreement) may
sell all of the Conversion Shares and the Warrant Shares without restriction
pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto),
or (ii) the date on which (A) the Investors shall have sold all the Conversion
Shares and the Warrant Shares and (B) none of the Preferred Shares or Warrants
is outstanding (the "REGISTRATION PERIOD"), the Company shall file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
otherwise permit such termination.
d. USE OF PROCEEDS. The Company will use the proceeds from the
sale of the Preferred Shares for substantially the same purposes and in
substantially the same amounts as indicated in Schedule 4(d).
e. FINANCIAL INFORMATION. The Company agrees to send the following
to each Investor (as that term is defined in the Registration Rights Agreement)
during the Registration Period: (i) within two (2) days after the filing thereof
with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports
on Form 10-Q, any Current Reports on Form 8-K and any registration statements or
amendments filed pursuant to the 1933 Act; (ii) on the same day as the release
thereof, facsimile copies of all press releases issued by the Company or any of
its subsidiaries and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.
f. RESERVATION OF SHARES. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 150% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares and the Warrant Shares.
g. RIGHT OF FIRST REFUSAL. Subject to the exceptions described
below, the Company and its subsidiaries shall not negotiate or contract with any
party for any equity financing (including any debt financing with an equity
component) or issue any equity securities of the Company or any subsidiary or
securities convertible or exchangeable into or for equity securities of the
Company or any subsidiary (including debt securities with an equity component)
in any form ("FUTURE OFFERINGS") during the period beginning on the Initial
Issuance Date and ending on, and including, the date which is 365 days after the
later of the Registration Statement (as defined in the Registration Rights
Agreement) covering the resale of the Common Stock issuable upon conversion of
the Initial Preferred Shares and the exercise of the related Warrants or the
Registration Statement covering the resale of the Common Stock issuable upon
conversion of the Put Preferred Shares and the exercise of the related Warrants
has been declared effective by the SEC, as the case may be, unless it shall have
first delivered to each Buyer or a designee
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appointed by such Buyer written notice (the "FUTURE OFFERING NOTICE") describing
the proposed Future Offering, including the terms and conditions thereof, and
providing each Buyer an option to purchase up to its Aggregate Percentage (as
defined below), as of the date of delivery of the Future Offering Notice, in the
Future Offering (the limitations referred to in this and the preceding sentence
are collectively referred to as the "CAPITAL RAISING LIMITATION"). For purposes
of this Section 4(g), "AGGREGATE PERCENTAGE" at any time with respect to any
Buyer shall mean the percentage obtained by dividing (i) the aggregate number of
Conversion Shares issued or issuable, as if a conversion occurred on such date,
upon conversion of the Initial Preferred Shares held by such Buyer by (ii) the
aggregate number of Conversion Shares issued or issuable, as if a conversion
occurred on such date, upon conversion of the Initial Preferred Shares held by
the Buyers. A Buyer can exercise its option to participate in a Future Offering
by delivering written notice thereof to participate to the Company within ten
(10) business days of receipt of a Future Offering Notice, which notice shall
state the quantity of securities being offered in the Future Offering that such
Buyer will purchase, up to its Aggregate Percentage, and that number of
securities it is willing to purchase in excess of its Aggregate Percentage. In
the event the Buyers fail to elect to fully participate in the Future Offering
within the periods described in this Section 4(g), the Company shall have 30
days thereafter to sell the securities of the Future Offering respecting which
such Buyer's rights were not exercised, upon terms and conditions, no more
favorable to the purchasers thereof than specified in the Future Offering
Notice. In the event the Company has not sold such securities of the Future
Offering within such 30 day period, the Company shall not thereafter issue or
sell such securities without first offering such securities to the Buyers in the
manner provided in this Section 4(g). The Capital Raising Limitation shall not
apply to (i) a loan from a commercial bank, (ii) any transaction involving the
Company's issuances of securities in connection with (A) a merger or
consolidation, (B) any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or (C) the disposition or
acquisition of a business, product or license by the Company, (iii) the issuance
of Common Stock in a firm commitment, underwritten public offering, (iv) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof, or
(v) the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants. The Buyers shall
not be required to participate or exercise their right of first refusal with
respect to a particular Future Offering in order to exercise their right of
first refusal with respect to later Future Offerings.
h. LISTING. The Company shall promptly secure the listing of all
of the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
the Nasdaq National Market and The Nasdaq SmallCap Market), if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Registrable Securities from time to time issuable
under the terms of the Transaction Documents. The Company shall maintain the
Common Stock's authorization for quotation on the Nasdaq National Market, The
Nasdaq SmallCap Market, The New York Stock Exchange, Inc. ("NYSE") or The
American Stock Exchange, Inc. ("AMEX"). Neither the Company nor any of its
subsidiaries shall take any action which may result in the delisting or
suspension of the Common Stock on The Nasdaq SmallCap Market, the Nasdaq
National Market, NYSE or AMEX. The Company shall promptly
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provide to each Buyer copies of any notices it receives from the Nasdaq National
Market, The Nasdaq SmallCap Market, NYSE or AMEX regarding the continued
eligibility of the Common Stock for listing on such automated quotation system
or securities exchange. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(h).
i. EXPENSES. Subject to Section 9(l) below, following the Initial
Closing, the Company shall reimburse the Buyers for the Buyers' expenses
(including attorneys fees and expenses) in connection with negotiating and
preparing the Transaction Documents and consummating the transactions
contemplated thereby up to an aggregate of $30,000.
j. PROXY STATEMENT. The Company shall hold its next meeting of
stockholders on or before November 30, 1997. The Company shall provide each
stockholder entitled to vote at such meeting of stockholders of the Company, a
proxy statement, which has been previously reviewed by the Buyers and a counsel
of their choice, soliciting each such stockholder's affirmative vote at such
annual stockholder meeting for approval of the Company's issuance of the
Securities as described in this Agreement and the Company shall use its best
efforts to solicit its stockholders' approval of such issuance of the Securities
and cause the Board of Directors of the Company to recommend to the stockholders
that they approve such proposal.
k. FILING OF FORM 8-K. On or before the tenth (10th) day following
each of the Closing Dates, the Company shall file a Form 8-K with the SEC
describing the terms of the transaction contemplated by the Transaction
Documents and consummated at such Closing, in each case in the form required by
the 1934 Act.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Preferred Shares or exercise of the
Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration
of the Conversion Shares and the Warrant Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares and the Warrant Shares, prior to registration of the
Conversion Shares and the Warrant Shares under the 1933 Act) will be given by
the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreements
set forth in Section 2(g) to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with an opinion of counsel, reasonably satisfactory in form, and
substance to the Company, that registration of a resale by such Buyer of any of
such Securities is not required under the 1933 Act, the Company shall permit the
transfer, and, in the case of the Conversion Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by such Buyer and without any
restrictive legends.
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The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
a. INITIAL CLOSING DATE. The obligation of the Company hereunder
to issue and sell the Initial Preferred Shares and the related Warrants to each
Buyer at the Initial Closing is subject to the satisfaction, at or before the
Initial Closing Date, of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion by providing each Buyer with prior written
notice thereof:
(i) Such Buyer shall have executed each of the Transaction
Documents and delivered the same to the Company.
(ii) The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares and the related Warrants being purchased by
such Buyer at the Initial Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer shall be true
and correct in all material respects as of the date when made and as of the
Initial Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by such Buyer at or
prior to the Initial Closing Date.
b. ADDITIONAL CLOSING DATES. The obligation of the Company
hereunder to issue and sell the Additional Preferred Shares and the related
Warrants to each Buyer at each of the Additional Closings is subject to the
satisfaction, at or before the respective Additional
-17-
<PAGE>
Closing Date, of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion by providing each Buyer with prior written
notice thereof:
(i) Such Buyer shall have complied with the requirements of Section
1(c).
(ii) Such Buyer shall have delivered to the Company the Purchase
Price for the Additional Preferred Shares and the related Warrants being
purchased by such Buyer at the Additional Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by
the Company.
(iii) The representations and warranties of such Buyer shall be true
and correct in all material respects as of the date when made and as of the
Additional Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by such Buyer at or
prior to the Additional Closing Date.
c. PUT CLOSING DATE. The obligation of the Company hereunder to
issue and sell the Put Preferred Shares and the related Warrants to each Buyer
at the Put Closing is subject to the satisfaction, at or before the Put Closing
Date, of each of the following conditions, provided that these conditions are
for the Company's sole benefit and may be waived by the Company at any time in
its sole discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase
Price for the Put Preferred Shares and the related Warrants being purchased
by such Buyer at the Put Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
(ii) The representations and warranties of such Buyer shall be true
and correct in all material respects as of the date when made and as of the
Put Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by such Buyer at or prior to
the Put Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
a. INITIAL CLOSING DATE. The obligation of each Buyer hereunder to
purchase the Initial Preferred Shares at the Initial Closing is subject to the
satisfaction, at or before the
-18-
<PAGE>
Initial Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware, and a copy thereof certified
by such Secretary of State shall have been delivered to such Buyer.
(iii) The Common Stock shall be authorized for quotation on the
Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX, trading
in the Common Stock issuable upon conversion of the Initial Preferred
Shares and the exercise of the related Warrants to be traded on the Nasdaq
National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall not have
been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and
all of the Conversion Shares and Warrant Shares issuable upon conversion of
the Initial Preferred Shares and exercise of the related Warrants to be
sold at the Initial Closing shall be listed upon the Nasdaq National
Market, The Nasdaq SmallCap Market, NYSE or AMEX.
(iv) The representations and warranties of the Company shall be true
and correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall
be true and correct without further qualification) as of the date when made
and as of the Initial Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Initial Closing Date. Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Initial Closing Date, to the foregoing effect and
as to such other matters as may be reasonably requested by such Buyer
including, without limitation, an update as of the Initial Closing Date
regarding the representation contained in Section 3(c) above.
(v) Such Buyer shall have received the opinion of the Company's
counsel dated as of the Initial Closing Date, in form, scope and substance
reasonably satisfactory to such Buyer and in substantially the form of
EXHIBIT C attached hereto.
(vi) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates (in such denominations as such Buyer
shall request) for the Initial Preferred Shares being purchased by such
Buyer at the Initial Closing.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "RESOLUTIONS").
-19-
<PAGE>
(viii) As of the Initial Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Preferred Shares and the exercise of the
Warrants, at least 3,000,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT D attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 10
days of the Initial Closing.
(xi) The Company shall have delivered to such Buyer certified copies
of its Certificate of Incorporation and Bylaws, each as in effect at the
Initial Closing.
(xii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
b. ADDITIONAL CLOSING DATES. The obligation of each Buyer
hereunder to purchase the Additional Preferred Shares and the related Warrants
at each of the Additional Closings is subject to the satisfaction, at or before
the Additional Closing Dates, of each of the following conditions, provided that
these conditions are for each Buyer's sole benefit and may be waived by such
Buyer at any time in its sole discretion:
(i) The Certificate of Designations shall be in full force and
effect and shall not have been amended since the Initial Closing Date, and
a copy thereof certified by the Secretary of State of the State of Delaware
shall have been delivered to such Buyer.
(ii) The Common Stock shall be authorized for quotation on the
Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX, trading
in the Common Stock issuable upon conversion of the Additional Preferred
Shares and the exercise of the related Warrants to be traded on the Nasdaq
National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall not have
been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and
all of the Conversion Shares and Warrant Shares issuable upon conversion of
the Additional Preferred Shares and the related Warrants to be sold at such
Additional Closing shall be listed upon the Nasdaq National Market, The
Nasdaq SmallCap Market, NYSE or AMEX.
(iii) The representations and warranties of the Company shall be true
and correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall
be true and correct without further qualification) as of the date when made
and as of the respective Additional Closing Date as though made at that
time (except for representations and warranties that speak as of a specific
date)
-20-
<PAGE>
and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by
the Company at or prior to the respective Additional Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of such Additional Closing Date, to the
foregoing effect and as to such other matters as may be reasonably
requested by such Buyer including, without limitation, an update as of such
Additional Closing Date regarding the representation contained in Section
3(c) above.
(iv) Such Buyer shall have received the opinion of the Company's
counsel dated as of such Additional Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the
form of EXHIBIT C attached hereto.
(v) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates (in such denominations as such Buyer
shall request) for the Additional Preferred Shares being purchased by such
Buyer at such Additional Closing.
(vi) The Board of Directors of the Company shall have adopted, and
shall not have amended, the Resolutions in a form reasonably acceptable to
such Buyer.
(vii) As of such Additional Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to at
least 150% of the number of shares of Common Stock which would be issuable
upon conversion and exercise in full, as the case may be, of the then
outstanding Preferred Shares and Warrants, including for such purposes any
Preferred Shares and Warrants to be issued at such Additional Closing.
(viii) The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT D attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
(ix) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 10
days of such Additional Closing.
(x) The Company shall have delivered to such Buyer certified copies
of its Certificate of Incorporation and Bylaws, each as in effect at such
Additional Closing.
(xi) During the period beginning on the Additional Share Notice Date
and ending on and including the Additional Closing Date, the Company shall
have delivered Conversion Shares upon conversion of the Preferred Shares
and Warrant Shares upon exercise of the Warrants to the Buyers on a timely
basis as set forth in Section 2(f)(ii) of the Certificate of Designations
and Sections 2(a) and 2(b) of the Warrants, respectively.
-21-
<PAGE>
(xii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
c. PUT CLOSING DATE. The obligation of each Buyer hereunder to
purchase the Put Preferred Shares at the Put Closing is subject to the
satisfaction, at or before the Put Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have complied with the requirements of
Section 1(d) and all of the Put Notice Conditions set forth in Section 1(e)
shall have been satisfied.
(ii) The Certificate of Designations shall be in full force and
effect and shall not have been amended since the Put Closing Date, and a
copy thereof certified by the Secretary of State of the State of Delaware
shall have been delivered to such Buyer.
(iii) The Common Stock shall be authorized for quotation on the
Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX, trading
in the Common Stock issuable upon conversion of the Put Preferred Shares
and the exercise of the related Warrants to be traded on the Nasdaq
National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall not have
been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and
all of the Conversion Shares and Warrant Shares issuable upon conversion of
the Put Preferred Shares and exercise of the related Warrants to be sold at
the Put Closing shall be listed upon the Nasdaq National Market, The Nasdaq
SmallCap Market, NYSE or AMEX.
(iv) The representations and warranties of the Company shall be true
and correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall
be true and correct without further qualification) as of the date when made
and as of the Put Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Put Closing Date. Such Buyer shall have received
a certificate, executed by the Chief Executive Officer of the Company,
dated as of the Put Closing Date, to the foregoing effect and as to such
other matters as may be reasonably requested by such Buyer including,
without limitation, an update as of the Put Closing Date regarding the
representation contained in Section 3(c) above.
(v) Such Buyer shall have received the opinion of the Company's
counsel dated as of the Put Closing Date, in form, scope and substance
reasonably satisfactory to such Buyer and in substantially the form of
EXHIBIT C attached hereto.
-22-
<PAGE>
(vi) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates (in such denominations as such Buyer
shall request) for the Put Preferred Shares being purchased by such Buyer
at the Put Closing.
(vii) The Board of Directors of the Company shall have adopted, and
shall not have amended, the Resolutions in a form reasonably acceptable to
such Buyer.
(viii) As of the Put Closing Date, the Company shall have reserved out
of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Preferred Shares and the exercise of the
Warrants, a number of shares of Common Stock equal to at least 150% of the
number of shares of Common Stock which would be issuable upon conversion
and exercise in full, as the case may be, of the then outstanding Preferred
Shares and Warrants, including for such purposes any Preferred Shares and
Warrants to be issued at such Put Closing.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT D attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 10
days of the Put Closing.
(xi) The Company shall have delivered to such Buyer certified copies
of its Certificate of Incorporation and Bylaws, each as in effect at the
Put Closing.
(xii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "INDEMNITEES") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents, the
Certificate of Designations or the Warrants or any other certificate, instrument
or document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents,
the Certificate of Designations or the Warrants or any other certificate,
instrument or document contemplated
-23-
<PAGE>
hereby or thereby, or (c) any cause of action, suit or claim brought or made
against such Indemnitee and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Indemnitees, any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities or the status of
such Buyer or holder of the Securities as an investor in the Company. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
9. GOVERNING LAW; MISCELLANEOUS.
a. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York without regard
to the principles of conflict of laws. Each party hereby irrevocably submits to
the non-exclusive jurisdiction of the state and federal courts sitting the City
of New York, borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
b. COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
c. HEADINGS. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons
-24-
<PAGE>
acting on their behalf with respect to the matters discussed herein, and this
Agreement and the instruments referenced herein contain the entire understanding
of the parties with respect to the matters covered herein and therein and,
except as specifically set forth herein or therein, neither the Company nor any
Buyer makes any representation, warranty, covenant or undertaking with respect
to such matters. No provision of this Agreement may be amended other than by an
instrument in writing signed by the Company and the holders of at least
two-thirds (2/3) of the Preferred Shares then outstanding, and no provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding.
f. NOTICES. Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically generated and kept on file by the
sending party); (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested, or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Imaging Technologies Corporation
11031 Via Frontera
San Diego, California 92127
Telephone: 619-485-8411
Facsimile: 619-487-5809
Attention: President
With a copy to:
Law Offices of Carmine J. Bua
3838 Camino Del Rio North, Suite 333
San Diego, California 92108-1789
Telephone: (619) 280-8000
Facsimile: (619) 280-8001
Attention: Carmine J. Bua, Esq.
If to the Transfer Agent:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Telephone: 718-921-8209
Facsimile: 718-921-8331
Attention: Mr. Herb Lemmer
-25-
<PAGE>
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Preferred Shares. Except as in
compliance with Section 3 of the Certificate of Designations, the Company shall
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the holders of two-thirds (2/3) of the Preferred Shares
then outstanding including by merger or consolidation. A Buyer may assign some
or all of its rights hereunder to affiliates or associates of such Buyer,
without the consent of the Company, and to others, with the consent of the
Company; provided, however, that any such assignment shall not release such
Buyer from its obligations hereunder unless such obligations are assumed by such
assignee and the Company has consented to such assignment and assumption.
h. NO THIRD PARTY BENEFICIARIES. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. SURVIVAL. Unless this Agreement is terminated under Section
9(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set forth in Section 8, shall survive each
of the Closings. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
j. PUBLICITY. The Company and each Buyer shall have the right to
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).
k. FURTHER ASSURANCES. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. TERMINATION. In the event that the Initial Closing shall not
have occurred with respect to a Buyer on or before three (3) business days from
the date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at
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<PAGE>
the close of business on such date without liability of any party to any other
party; provided, however, that if this Agreement is terminated pursuant to this
Section 9(l), the Company shall remain obligated to reimburse the non-breaching
Buyers for the expenses described in Section 4(i) above.
m. PLACEMENT AGENT. Each of the Company and the Buyers, on their
own behalf, acknowledges that it has not engaged a placement agent in connection
with the sale of the Preferred Shares.
n. NO STRICT CONSTRUCTION. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
-27-
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
IMAGING TECHNOLOGIES
CORPORATION NELSON PARTNERS
By: /s/ Ralph R. Barry By: /s/ Anne Dupuy
-------------------------------- ---------------------------------------
Name: Ralph R. Barry Name: Anne Dupuy
------------------------------ -----------------------------------
Its: Vice President and CFO Its: Officer
------------------------------- --------------------------------------
OLYMPUS SECURITIES, LTD.
By: /s/ Anne Dupuy
---------------------------------------
Name: Anne Dupuy
Its: Alternate Director
THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.
Its: General Partner
By: /s/ James F. O'Brien, Jr.
---------------------------------------
Name: James F. O'Brien, Jr.
Its: President
HERACLES FUND
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
---------------------------------------
Name: James F. O'Brien, Jr.
Its: President
<PAGE>
SAMYANG MERCHANT BANK
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
---------------------------------------
Name: James F. O'Brien, Jr.
Its: President
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
---------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: /s/ Michael L. Gordon
---------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
---------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
RAPHAEL, L.P.
By: /s/ Michael L. Gordon
---------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: /s/ Michael L. Gordon
---------------------------------------
Name: Michael L. Gordon
Its: Managing Officer
HICK INVESTMENTS, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: /s/ Michael L. Gordon
---------------------------------------
Name: Michael L. Gordon
Its: Managing Officer
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
NUMBER OF
INITIAL
INVESTOR ADDRESS PREFERRED INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER SHARES AND FACSIMILE NUMBER
- ----------------------- -------------------------------------- ------------------------------------------------------
<S> <C> <C> <C>
Nelson Partners c/o Leeds Management Services 100 Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Benjamin Kopin
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Olympus Securities, Ltd. c/o Leeds Management Services 100 Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Benjamin Kopin
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Themis Partners L.P. c/o Promethean Investment Group, L.L.C. 30 Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Heracles Fund Bank of Bermuda (Cayman) Limited 30 Promethean Investment Group, L.L.C.
P.O. Box 513 40 West 57th Street, Suite 1520
3rd Floor British American Center New York, New York 10019
Dr. Roy's Drive Attn: James F. O'Brien, Jr.
Georgetown, Grand Cayman Facsimile: 212-698-0505
Cayman Island, BWI
Attn: Allen J. Bernardo
Facsimile: 809-949-7802
Samyang Merchant Bank c/o Promethean Investment Group, L.L.C. 40 Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 100
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
GAM Arbitrage c/o Angelo, Gordon & Co., L.P. 10
Investments, Inc. 245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
AG Super Fund c/o Angelo, Gordon & Co., L.P. 10
International Partners, 245 Park Avenue - 26th Floor
L.P. New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
<PAGE>
<CAPTION>
NUMBER OF
INITIAL
INVESTOR ADDRESS PREFERRED INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER SHARES AND FACSIMILE NUMBER
- ----------------------- -------------------------------------- ------------------------------------------------------
<S> <C> <C> <C>
Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 30
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 40
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
Hick Investments, Ltd. c/o Angelo, Gordon & Co., L.P. 10
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
</TABLE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of August 21,
1997, by and among Imaging Technologies Corporation, a Delaware corporation,
with headquarters located at 11031 Via Frontera, San Diego, California 92127
(the "COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively,
the "BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to (i) issue and sell to the Buyers shares of the Company's
Series C Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), which
will be convertible into shares of the Company's common stock, par value $.005
per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of the Series C Redeemable Convertible Preferred Stock
(the "CERTIFICATE OF DESIGNATIONS"), and (ii) issue Warrants (the "WARRANTS")
which will be exercisable to purchase shares of Common Stock (the "WARRANT
SHARES"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer and any transferee or assignee thereof
to whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
<PAGE>
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
d. "REGISTRABLE SECURITIES" means the Conversion Shares and the
Warrant Shares issued or issuable upon conversion of the Preferred Shares and
exercise of the Warrants, respectively, and any shares of capital stock issued
or issuable with respect to the Conversion Shares, the Warrant Shares, the
Warrants or the Preferred Shares as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. MANDATORY REGISTRATION. The Company shall prepare, and, on or
prior to 45 days after the date of issuance of the relevant Preferred Shares,
file with the SEC a Registration Statement or Registration Statements (as is
necessary) on Form S-3 (or, if such form is unavailable for such a registration,
on such other form as is available for such a registration, subject to the
consent of the Investors holding a majority of the Registrable Securities and
the provisions of Section 2(c), which consent will not be unreasonably
withheld), covering the resale of all of the Registrable Securities, which
Registration Statement(s) shall state that, in accordance with Rule 416
promulgated under the 1933 Act, such Registration Statement(s) also covers such
indeterminate number of additional shares of Common Stock as may become issuable
upon conversion of the Preferred Shares or exercise of the Warrants (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of changes in the Conversion Price or Conversion
Rate of the Preferred Shares in accordance with the terms thereof. Such
Registration Statement shall initially register for resale at least 3,000,000
shares of Common Stock, subject to adjustment as provided in Section 3(b). Such
registered shares of Common Stock shall be allocated among the Investors pro
rata based on the total number of Registrable Securities issued or issuable as
of each date that a Registration Statement, as amended, relating to the resale
of the Registrable Securities is declared effective by the SEC. The Company
shall use its best efforts to have the Registration Statement(s) declared
effective by the SEC as soon as practicable, but in no event later than 150 days
after the issuance of the relevant Preferred Shares.
b. COUNSEL AND INVESTMENT BANKERS. Subject to Section 5 hereof, in
connection with any offering pursuant to Section 2, the Buyers shall have the
right to select one legal counsel and an investment banker or bankers and
manager or managers to administer their interest in the offering, which
investment banker or bankers or manager or managers shall be
-2-
<PAGE>
reasonably satisfactory to the Company. The Company shall reasonably cooperate
with any such counsel and investment bankers.
c. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration
of the Registration Period (as hereinafter defined) the Company proposes to file
with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the 1933 Act of any of its securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans) the Company shall promptly send to each Investor
who is entitled to registration rights under this Section 2(c) written notice of
the Company's intention to file a Registration Statement and of such Investor's
rights under this Section 2(c) and, if within twenty (20) days after receipt of
such notice, such Investor shall so request in writing, the Company shall
include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, subject to the priorities
set forth in Section 2(d) below. No right to registration of Registrable
Securities under this Section 2(c) shall be construed to limit any registration
required under Section 2(a). The obligations of the Company under this Section
2(c) may be waived by Investors holding a majority of the Registrable
Securities. If an offering in connection with which an Investor is entitled to
registration under this Section 2(c) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering.
d. PRIORITY IN PIGGY-BACK REGISTRATION RIGHTS IN CONNECTION WITH
REGISTRATIONS FOR COMPANY ACCOUNT. If the registration referred to in Section
2(c) is to be an underwritten public offering and the managing underwriter(s)
advise the Company in writing, that in their reasonable good faith opinion,
marketing or other factors dictate that a limitation on the number of shares of
Common Stock which may be included in the Registration Statement is necessary
to facilitate and not adversely affect the proposed offering, then the Company
shall include in such registration: (1) first, all securities the Company
proposes to sell for its own account, (2) second, up to the full number of
securities proposed to be registered for the account of the holders of
securities entitled to inclusion of their securities in the Registration
Statement by reason of demand registration rights, and (3) third, the securities
requested to be registered by the Investors and other holders of securities
entitled to participate in the registration, as of the date hereof, drawn from
them pro rata based on the number each has requested to be included in such
registration.
e. ELIGIBILITY FOR FORM S-3. The Company represents, warrants and
covenants that on and after the date hereof it meets and will meet the
requirements for the use of Form S-3 for registration of the sale by the
Investors of the Registrable Securities and the Company has filed and shall file
all reports required to be filed by the Company with the SEC in a timely manner
so as to obtain and maintain such eligibility for the use of Form S-3. In the
event that Form S-3 is not available for sale by the Investors of the
Registrable Securities, then the Company (i) with the consent of the Investors
holding a majority of the Registrable Securities
-3-
<PAGE>
pursuant to Section 2(a), shall register the sale of the Registrable Securities
on another appropriate form and (ii) the Company shall undertake to register the
Registrable Securities on Form S-3 as soon as such form is available, provided
that the Company shall maintain the effectiveness of the Registration Statement
then in effect until such time as a Registration Statement on Form S-3 covering
the Registrable Securities has been declared effective by the SEC.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(c) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the forty-fifth (45th) day after the date of issuance of any Preferred Shares
for the registration of Registrable Securities pursuant to Section 2(a)) and use
its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than 150 days after the issuance of any Preferred Shares
for the registration of Registrable Securities pursuant to Section 2(a)), and
keep such Registration Statement effective pursuant to Rule 415 at all times
until the earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities without restriction pursuant to Rule 144(k) promulgated
under the 1933 Act (or successor thereto) or (ii) the date on which (A) the
Investors shall have sold all the Registrable Securities and (B) none of the
Preferred Shares or Warrants is outstanding (the "REGISTRATION PERIOD"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the event the
number of shares available under a Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the Registrable Securities, the
Company shall amend such Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as
to cover all of the Registrable Securities, in each case, as soon as
practicable, but in any event within fifteen (15) days after the necessity
therefor arises
-4-
<PAGE>
(based on the market price of the Common Stock and other relevant factors on
which the Company reasonably elects to rely). The Company shall use it best
efforts to cause such amendment and/or new Registration Statement to become
effective as soon as practicable following the filing thereof. For purposes of
the foregoing provision, the number of shares available under a Registration
Statement shall be deemed "insufficient to cover all of the Registrable
Securities" if at any time the number of Registrable Securities issued or
issuable upon conversion of the Preferred Shares and exercise of the Warrants is
greater than the quotient determined by dividing (i) the number of shares of
Common Stock available for resale under such Registration Statement by (ii) 1.5.
For purposes of the calculation set forth in the foregoing sentence, any
restrictions on the convertibility of the Preferred Shares or exerciseability of
the Warrants shall be disregarded and such calculation shall assume that the
Preferred Shares and the Warrants are then convertible and exercisable,
respectively, into shares of Common Stock at the then prevailing Conversion Rate
(as defined in the Company's Certificate of Designations) and Warrant Exercise
Price (as defined in the Warrant), respectively, if applicable.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel
without charge (i) promptly after the same is prepared and filed with the SEC at
least one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regards to such
Registration Statement(s), any correspondence by or on behalf of the Company to
the SEC or the staff of the SEC and any correspondence from the SEC or the staff
of the SEC to the Company or its representatives, (ii) upon the effectiveness
of any Registration Statement, ten (10) copies of the prospectus included in
such Registration Statement and all amendments and supplements thereto (or such
other number of copies as such Investor may reasonably request) and (iii) such
other documents, including any preliminary prospectus, as such Investor may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
d. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as any Investor reasonably requests, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities
-5-
<PAGE>
for sale under the securities or "blue sky" laws of any jurisdiction in the
United States or its receipt of actual notice of the initiation or threatening
of any proceeding for such purpose.
e. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters for the offering,
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor in writing of the happening of any event
as a result of which the prospectus included in a Registration Statement, as
then in effect, includes an untrue statement of a material fact or omission to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Investor (or such other
number of copies as such Investor may reasonably request). The Company shall
also promptly notify each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to each Investor by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, and (iii) of the Company's
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify each Investor who holds Registrable Securities being sold
(and, in the event of an underwritten offering, the managing underwriters) of
the issuance of such order and the resolution thereof or its receipt of actual
notice of the initiation or threat of any proceeding for such purpose.
h. The Company shall permit each Investor and a single firm of
counsel, initially Katten Muchin & Zavis or such other counsel as thereafter
designated as selling stockholders' counsel by the Investors who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement and all amendments and supplements thereto at least four
(4) business days prior to their filing with the SEC, and not file any document
in a form to which such counsel reasonably objects. The Company shall not submit
a request for acceleration of the effectiveness of a Registration Statement or
any amendment or supplement thereto without the prior approval of such counsel,
which consent shall not be unreasonably withheld.
-6-
<PAGE>
i. At the request of the Investors who hold a majority of the
Registrable Securities being sold, the Company shall furnish, on the date that
Registrable Securities are delivered to an underwriter, if any, for sale in
connection with the Registration Statement (i) if required by an underwriter, a
letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, and (ii) an opinion, dated as of such date, of
counsel representing the Company for purposes of such Registration Statement, in
form, scope and substance as is customarily given in an underwritten public
offering, addressed to the underwriters and the Investors.
j. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to a
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in strict confidence and shall not make any disclosure (except to an
Investor) or use of any Record or other information which the Company determines
in good faith to be confidential, and of which determination the Inspectors are
so notified, unless (a) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement or is otherwise
required under the 1933 Act, (b) the release of such Records is ordered pursuant
to a final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector has knowledge. Each Investor
agrees that it shall, upon learning that disclosure of such Records is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
-7-
<PAGE>
l. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on The Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(l).
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
n. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
o. The Company shall provide a transfer agent and registrar for all
such Registrable Securities not later than the effective date of such
Registration Statement.
p. If requested by the managing underwriters or an Investor, the
Company shall (i) immediately incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by a shareholder or any underwriter of such Registrable Securities.
q. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
-8-
<PAGE>
r. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
s. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
t. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as EXHIBIT A.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing
date of a Registration Statement, the Company shall notify each Investor in
writing of the information the Company requires from each such Investor if such
Investor elects to have any of such Investor's Registrable Securities included
in such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such Investor agrees
to enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities, unless
such Investor notifies the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from such Registration
Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f),
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<PAGE>
such Investor will immediately discontinue disposition of Registrable Securities
pursuant to any Registration Statement(s) covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(g) or the first sentence of 3(f).
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and fees and disbursements of
one counsel for the Investors, shall be paid by the Company; provided, however,
that the Company shall not be obligated to pay more than $2,500 of the fees and
disbursements of one counsel for the Investors for each Registration Statement
that is filed.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents of,
and each Person, if any, who controls, any Investor within the meaning of the
1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"),
and any underwriter (as defined in the 1933 Act) for the Investors, and the
directors and officers of, and each Person, if any, who controls, any such
underwriter within the meaning of the 1933 Act or the 1934 Act (each, an
"INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in
settlement or expenses, joint or several, (collectively, "CLAIMS") incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any
court or governmental, administrative or other regulatory agency, body or the
SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become
subject insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
"blue sky" laws of any jurisdiction in which Registrable Securities are offered
-10-
<PAGE>
("BLUE SKY FILING"), or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements therein were made, not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a Registration Statement (the matters in the
foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c); (ii) with respect to any preliminary prospectus, shall
not inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject thereof (or
to the benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company; and (iv)
shall not apply to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of the Company, which consent
shall not be unreasonably withheld. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED
PARTY"), against any Claim or Indemnified Damages to which any of them may
become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim or Indemnified Damages arise out of or are
-11-
<PAGE>
based upon any Violation, in each case to the extent, and only to the extent,
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and, subject to Section 6(d), such
Investor will reimburse any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) and the agreement
with respect to contribution contained in Section 7 shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim or Indemnified Damages as does
not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
on a timely basis in the prospectus, as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates
-12-
<PAGE>
to such action or claim. The indemnifying party shall keep the Indemnified Party
or Indemnified Person fully apprised at all times as to the status of the
defense or any settlement negotiations with respect thereto. No indemnifying
party shall be liable for any settlement of any action, claim or proceeding
effected without its written consent, provided, however, that the indemnifying
party shall not unreasonably withhold, delay or condition its consent. No
indemnifying party shall, without the consent of the Indemnified Party or
Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of fraudulent misrepresentation; and (iii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of
Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at
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<PAGE>
any time permit the Investors to sell securities of the Company to the public
without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement; and (vi) such transferee shall be an "accredited investor" as that
term is defined in Rule 501 of Regulation D promulgated under the 1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and
either retroactively or prospectively), only with the written consent of the
Company and Investors who hold two-thirds (2/3) of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section
10 shall be binding upon each Investor and the Company.
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<PAGE>
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically generated and kept on file by the sending
party); (iii) three (3) days after being sent by U.S. certified mail, return
receipt requested; or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Imaging Technologies Corporation
11031 Via Frontera
San Diego, California 92127
Telephone: 619-485-8411
Facsimile: 619-487-5809
Attention: President
With a copy to:
Law Offices of Carmine J. Bua
3838 Camino Del Rio North, Suite 333
San Diego, California 92108-1789
Telephone: (619) 280-8000
Facsimile: (619) 280-8001
Attention: Carmine J. Bua, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers attached hereto, with copies to such Buyer's counsel as set
forth on the Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
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<PAGE>
d. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York without regard to the principles of
conflict of laws. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting the City of New York,
borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
e. This Agreement and the Securities Purchase Agreement constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement and the Securities Purchase Agreement supersede all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors
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<PAGE>
holding a majority of the Registrable Securities, determined as if all of the
Preferred Shares and the Warrants then outstanding have been converted into or
exercised for Registrable Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
IMAGING TECHNOLOGIES
CORPORATION NELSON PARTNERS
By: /s/ Ralph R. Barry By: /s/ Anne Dupuy
-------------------------- -------------------------------------
Name: Ralph R. Barry Name: Anne Dupuy
------------------------- Its: Officer
Its: Vice President and CFO
-------------------------
OLYMPUS SECURITIES, LTD.
By: /s/ Anne Dupuy
--------------------------------------
Name: Anne Dupuy
Its: Alternate Director
THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.
Its: General Partner
By: /s/ James F. O'Brien, Jr.
-------------------------------------
Name: James F. O'Brien, Jr.
Its: President
HERACLES FUND
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
------------------------------------
Name: James F. O'Brien, Jr.
Its: President
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<PAGE>
SAMYANG MERCHANT BANK
By: Promethean Investment Group L.L.C.
Its: Investment Advisor
By: /s/ James F. O'Brien, Jr.
------------------------------------
Name: James F. O'Brien, Jr.
Its: President
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: /s/ Michael L. Gordon
------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: /s/ Michael L. Gordon
------------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
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<PAGE>
RAPHAEL, L.P.
By: /s/ Michael L. Gordon
----------------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: /s/ Michael L. Gordon
----------------------------------
Name: Michael L. Gordon
Its: Managing Officer
HICK INVESTMENTS, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: /s/ Michael L. Gordon
----------------------------------
Name: Michael L. Gordon
Its: Managing Officer
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<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER
- ------------------------ ------------------------------ -----------------------------------
<S> <C> <C>
Nelson Partners c/o Leeds Management Services Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Benjamin Kopin
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Olympus Securities, Ltd. c/o Leeds Management Services Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Benjamin Kopin
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Themis Partners L.P. c/o Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Heracles Fund Bank of Bermuda (Cayman) Limited Promethean Investment Group, L.L.C.
P.O. Box 513 40 West 57th Street, Suite 1520
3rd Floor British American Center New York, New York 10019
Dr. Roy's Drive Attn: James F. O'Brien, Jr.
Georgetown, Grand Cayman Facsimile: 212-698-0505
Cayman Island, BWI
Attn: Allen J. Bernardo
Facsimile: 809-949-7802
Samyang Merchant Bank c/o Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
GAM Arbitrage c/o Angelo, Gordon & Co., L.P.
Investments, Inc. 245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
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<PAGE>
<CAPTION>
INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER
- ------------------------ ------------------------------ -----------------------------------
<S> <C> <C>
AG Super Fund c/o Angelo, Gordon & Co., L.P.
International Partners, 245 Park Avenue - 26th Floor
L.P. New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
Raphael, L.P. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
Hick Investments, Ltd. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: 212-867-6449
</TABLE>
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<PAGE>
WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO
COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS.
IMAGING TECHNOLOGIES CORPORATION
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: 5 Number of Shares: 40,000
Date of Issuance: August 21, 1997
Imaging Technologies Corporation, a Delaware corporation (the "COMPANY"), hereby
certifies that, for Ten United States Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Nelson Partners, the registered holder hereof or its permitted
assigns, is entitled, subject to the terms set forth below, to purchase from the
Company upon surrender of this Warrant, at any time or times on or after the
date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as
defined herein) Forty Thousand (40,000) fully paid nonassessable shares of
Common Stock (as defined herein) of the Company (the "WARRANT SHARES") at the
purchase price per share provided in Section l(b) below (the "WARRANT EXERCISE
PRICE"); provided, however, that in no event shall the holder be entitled to
exercise this Warrant for a number of Warrant Shares in excess of that number of
Warrant Shares which, upon giving effect to such exercise, would cause the
aggregate number of shares of Common Stock beneficially owned by the holder and
its affiliates to exceed 4.9% of the outstanding shares of the Common Stock
following such exercise. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such proviso
is being made, but shall exclude shares of Common Stock which would be issuable
upon (i) exercise of the remaining, unexercised Warrants beneficially owned by
the holder and its affiliates and (ii) exercise or conversion of the unexercised
or unconverted portion of any other securities of the Company beneficially owned
by the holder and its affiliates (including, without limitation, any convertible
notes or preferred stock) subject to a limitation on conversion or exercise
analogous to the limitation contained herein. Except as set forth in the
preceding sentence, for purposes
<PAGE>
of this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. The holder may
waive the foregoing limitations by written notice to the Company upon not less
than 61 days prior notice (with such waiver taking effect only upon the
expiration of such 61 day notice period).
Section 1.
(a) SECURITIES PURCHASE AGREEMENT. This Warrant is one of the
Warrants (the "PREFERRED SHARE WARRANTS") issued pursuant to Section 1 of that
certain Securities Purchase Agreement dated as of August 21, 1997, among the
Company and the Buyers referred to therein (the "PURCHASE AGREEMENT").
(b) DEFINITIONS. The following words and terms as used in this
Warrant shall have the following meanings:
"MARKET PRICE" means, with respect to any security for any date,
the lowest Closing Bid Price (as defined below) for such security during the
seven consecutive trading days immediately preceding such date.
"CLOSING BID PRICE" means, for any security as of any date, the
last closing bid price for such security on the Nasdaq National Market as
reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid 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 closing bid price is reported for such
security by Bloomberg, the last closing trade price for such security as
reported by Bloomberg, or, if no last closing trade 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 Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holders of the Preferred Shares. If the Company and the holders of the
Preferred Shares are unable to agree upon the fair market value of the Common
Stock, then such dispute shall be resolved pursuant to Section 2(a) of this
Warrant with the term "Closing Bid Price" being substituted for the term "Market
Price." (All such determinations to be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period.)
"APPROVED STOCK PLAN" shall mean any contract, plan or agreement
which has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer, director,
consultant or other service provider for services provided to the Company.
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"CERTIFICATE OF DESIGNATIONS" means the Company's Certificate of
Designations, Preferences and Rights of the Series C Redeemable Convertible
Preferred Stock.
"COMMON STOCK" means (i) the Company's common stock, par value
$.005 per share, and (ii) any capital stock into which such Common Stock shall
have been changed or any capital stock resulting from a reclassification of such
Common Stock.
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the
number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as defined below)
or Convertible Securities (as defined below) are actually exercisable or
convertible at such time, but excluding any shares of Common Stock issuable upon
exercise of the Preferred Share Warrants.
"EXPIRATION DATE" means the date four years from the date of this
Warrant or, if such date falls on a Saturday, Sunday or other day on which banks
are required or authorized to be closed in the City of New York or the State of
New York (a "HOLIDAY"), the next preceding date that is not a Holiday.
"OTHER SECURITIES" means (i) those warrants of the Company issued
prior to, and outstanding on, the date of issuance of this Warrant, (ii) the
Preferred Shares (as defined below) and (iii) the shares of Common Stock issued
upon conversion of the Preferred Shares.
"PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
"PREFERRED SHARES" means the shares of the Company's Series C
Redeemable Convertible Preferred Stock issued pursuant to the Purchase
Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"WARRANT" means this Warrant and all Warrants issued in exchange,
transfer or replacement of any thereof.
"WARRANT EXERCISE PRICE" shall be $7.50, subject to adjustment as
hereinafter provided.
(c) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references
herein (A) to the Company shall be deemed to include the Company's successors
and (B) to any applicable law defined or referred to herein, shall be deemed
references to such applicable law as the same may have been or may be amended
or supplemented from time to time.
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(ii) When used in this Warrant, the words "HEREIN," "HEREOF,"
and "HEREUNDER," and words of similar import, shall refer to this Warrant as
a whole and not to any provision of this Warrant, and the words "SECTION,"
"SCHEDULE," and "EXHIBIT" shall refer to Sections of, and Schedules and
Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender
includes the masculine or feminine, and the singular number includes the
plural, and vice versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time during normal business hours on any business day
on or after the opening of business on the date hereof and prior to 11:59 P.M.
Eastern Time on the Expiration Date by (i) delivery of a written notice, in the
form of the subscription notice attached as Exhibit A hereto, of such holder's
election to exercise this Warrant, which notice shall specify the number of
Warrant Shares to be purchased, (ii) payment to the Company of an amount equal
to the Warrant Exercise Price multiplied by the number of Warrant Shares as to
which the Warrant is being exercised (plus any applicable issue or transfer
taxes) (the "AGGREGATE EXERCISE PRICE") in cash or by check or wire transfer or
by notifying the Company that it should subtract from the number of Warrant
Shares issuable to the holder upon such exercise an amount of Warrant Shares
having a last reported sale price (as reported by Bloomberg) on the date
immediately preceding the date of the subscription notice equal to the Aggregate
Exercise Price of the Common Stock being acquired upon exercise, and (iii) the
surrender of this Warrant, at the principal office of the Company; provided,
that if such Warrant Shares are to be issued in any name other than that of the
registered holder of this Warrant, such issuance shall be deemed a transfer and
the provisions of Section 7 shall be applicable. In the event of any exercise of
the rights represented by this Warrant in compliance with this Section 2(a), a
certificate or certificates for the Warrant Shares so purchased, in such
denominations as may be requested by the holder hereof and registered in the
name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable after such
rights shall have been so exercised, and in any event no later than three
business days after such exercise. In the case of a dispute as to the
determination of the Warrant Exercise Price or the last reported sale price (as
reported by Bloomberg) of a security or the arithmetic calculation of the
Warrant Shares, the Company shall promptly issue to the holder the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile within one
business day of receipt of the holder's subscription notice. If the holder and
the Company are unable to agree upon the determination of the Warrant Exercise
Price or the last reported sale price (as reported by Bloomberg) or arithmetic
calculation of the Warrant Shares within one day of such disputed determination
or arithmetic calculation being submitted to the holder, then the Company shall
immediately submit via facsimile (i) the disputed determination of the Warrant
Exercise Price or the last reported sale price (as reported by Bloomberg) to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder
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of the results no later than forty-eight (48) hours from the time it receives
the disputed determinations or calculations. Such investment banking firm's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than ten business days after any exercise and at its own
expense, issue a new Warrant identical in all respects to the Warrant exercised
except (i) it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under the Warrant exercised, less
the number of Warrant Shares with respect to which such Warrant is exercised,
and (ii) the holder thereof shall be deemed for all corporate purposes to have
become the holder of record of such Warrant Shares immediately prior to the
close of business on the date on which the Warrant is surrendered and payment of
the amount due in respect of such exercise and any applicable taxes is made,
irrespective of the date of delivery of certificates evidencing such Warrant
Shares, except that, if the date of such surrender and payment is a date when
the stock transfer books of the Company are properly closed, such person shall
be deemed to have become the holder of such Warrant Shares at the opening of
business on the next succeeding date on which the stock transfer books are open.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(d) If the Company shall fail for any reason or for no reason to issue
to the holder on a timely basis as described in this Section 2, a certificate
for the number of shares of Common Stock to which the holder is entitled upon
the holder's exercise of this Warrant or a new Warrant for the number of shares
of Common Stock to which such holder is entitled pursuant to Section 2(b)
hereof, the Company shall, in addition to any other remedies under this Warrant
or the Securities Purchase Agreement or otherwise available to such holder,
including any indemnification under Section 8 of the Securities Purchase
Agreement, pay as additional damages in cash to such holder on each date after
the tenth business day following receipt by the Company of the exercise notice
that such exercise is not timely effected in an amount equal to 1% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis and to which the holder is entitled and, in the event
the Company has failed to timely deliver a new Warrant, the number of shares
represented by the portion of this Warrant which is not being converted, as the
case may be, and (B) the average of the Closing Bid Prices for the three
consecutive trading days immediately preceding the last possible date which the
Company could have issued such Common Stock to the holder without violating this
Section 2.
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and
agrees as follows:
(a) This Warrant is, and any Preferred Share Warrants issued in
substitution for or replacement of this Warrant will upon issuance be, duly
authorized and validly issued.
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<PAGE>
(b) All Warrant Shares which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.
(c) During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the shares of
Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Certificate of Designations or any
waiver thereof which has an adverse effect on the rights granted hereunder shall
be given effect until the Company has taken appropriate action (satisfactory to
the holders of Preferred Share Warrants representing a majority of the shares of
Common Stock issuable upon the exercise of such Preferred Share Warrants then
outstanding) to avoid such adverse effect with respect to this Warrant. Without
limiting the generality of the foregoing, the Company (i) will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Warrant Exercise Price then in effect, and (ii) will take all
such actions as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.
Section 4. TAXES. The Company shall pay any and all taxes which may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
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Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors of the
Company. Notwithstanding this Section 5, the Company will provide the holder of
this Warrant with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by
the acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment and not with a view to, or for
sale in connection with, any distribution hereof or of any of the shares of
Common Stock or other securities issuable upon the exercise thereof, and not
with any present intention of distributing any of the same. The holder of this
Warrant further represents, by acceptance hereof, that, as of this date, such
holder is an "ACCREDITED INVESTOR" as such term is defined in Rule 501(a)(1) of
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act (an "ACCREDITED INVESTOR"). Upon exercise of this Warrant, the
holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Warrant Shares so purchased are being
acquired solely for the holder's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale and
that such holder is an Accredited Investor. Notwithstanding the foregoing, by
making the representations herein, the holder does not agree to hold the Warrant
or the Warrant Shares for any minimum or other specified term and reserves the
right to dispose of the Warrant and the Warrant Shares at any time in accordance
with or pursuant to a registration statement or an exemption under the
Securities Act. If such holder cannot make such representations because they
would be factually incorrect, it shall be a condition to such holder's exercise
of the Warrant that the Company receive such other representations as the
Company considers reasonably necessary to assure the Company that the issuance
of its securities upon exercise of the Warrant shall not violate any United
States or state securities laws.
Section 7. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as
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<PAGE>
the owner and holder thereof for all purposes, notwithstanding any notice to the
contrary, but in all events recognizing any transfers made in accordance with
the terms of this Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable to affiliates or associates of the holder hereof, without the
written consent of the Company, and to other Persons, with the consent of the
Company, which consent shall not be unreasonably withheld, in whole or in part,
upon surrender of this Warrant, together with a properly executed warrant power
in the form of Exhibit B attached hereto; provided, however, that any transfer
or assignment shall be subject to the conditions set forth in Section 7(c)
below.
(c) The holder of this Warrant understands that this Warrant has not
been and is not expected to be, registered under the Securities Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (a) subsequently registered thereunder, or (b) such holder shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the securities to be
sold, assigned or transferred may be sold, assigned or transferred pursuant to
an exemption from such registration; provided that (i) any sale of such
securities made in reliance on Rule 144 promulgated under the Securities Act may
be made only in accordance with the terms of said Rule and further, if said Rule
is not applicable, any resale of such securities under circumstances in which
the seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (ii)
neither the Company nor any other person is under any obligation to register the
Preferred Share Warrants under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder.
(d) The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
dated August 21, 1997 by and between the Company and the Buyers listed on the
signature page thereto (the "REGISTRATION RIGHTS AGREEMENT") and the initial
holder of this Warrant (and certain assignees thereof) is entitled to the
registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES.
In order to prevent dilution of the rights granted under this Warrant, the
Warrant Exercise Price and the number of shares of Common Stock issuable upon
exercise of this Warrant shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES UPON
ISSUANCE OF COMMON STOCK. If and whenever on or after the date of issuance of
this Warrant, the Company issues or sells, or is deemed to have issued or sold,
any shares of Common Stock (other than shares of Common Stock deemed to have
been issued by the Company in connection with an Approved Stock Plan or upon
exercise or conversion of the Other Securities) for a consideration per share
less than the Warrant Exercise Price in effect immediately prior to such time
(the "APPLICABLE PRICE"), then immediately after such issue or sale the Warrant
Exercise
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Price shall be reduced to an amount equal to the product of (x) the Warrant
Exercise Price in effect immediately prior to such issue or sale and (y) the
quotient determined by dividing (1) the sum of (I) the product derived by
multiplying the Applicable Price by the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale, plus (II) the
consideration, if any, received by the Company upon such issue or sale, by (2)
the product derived by multiplying the (I) Applicable Price by (II) the number
of shares of Common Stock Deemed Outstanding immediately after such issue or
sale. Upon each such adjustment of the Warrant Exercise Price hereunder, the
number of shares of Common Stock acquirable upon exercise of this Warrant shall
be adjusted to the number of shares determined by multiplying the Warrant
Exercise Price in effect immediately prior to such adjustment by the number of
shares of Common Stock acquirable upon exercise of this Warrant immediately
prior to such adjustment and dividing the product thereof by the Warrant
Exercise Price resulting from such adjustment.
(b) EFFECT ON WARRANT EXERCISE PRICE OF CERTAIN EVENTS. For purposes
of determining the adjusted Warrant Exercise Price under Section 8(a) above, the
following shall be applicable:
(i) ISSUANCE OF OPTIONS. If the Company in any manner grants
any rights or options to subscribe for or to purchase Common Stock (other
than pursuant to an Approved Stock Plan or Other Securities) or any stock or
other securities convertible into or exchangeable for, directly or
indirectly, Common Stock (such rights or options being herein called
"OPTIONS" and such convertible or exchangeable stock or securities being
herein called "CONVERTIBLE SECURITIES") and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon conversion
or exchange of such Convertible Securities is less than the Applicable Price,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such
Options shall be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For purposes of this Section 8(b)(i),
the "price per share for which Common Stock is issuable upon exercise of such
Options or upon conversion or exchange of such Convertible Securities" is
determined by dividing (A) the total amount, if any, received or receivable
by the Company as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the Company
upon the exercise of all such Options, plus in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the issuance or sale of
such Convertible Securities and the conversion or exchange thereof, by (B)
the total maximum number of shares of Common Stock issuable upon exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No adjustment of the
Warrant Exercise Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options or
upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less
than the Applicable Price, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible
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Securities shall be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. For the purposes of this Section 8(b)(ii),
the "price per share for which Common Stock is issuable upon such conversion or
exchange" is determined by dividing (A) the total amount received or receivable
by the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (B) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities. No adjustment of the Warrant
Exercise Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Warrant Exercise Price had been or are to be made
pursuant to other provisions of this Section 8(b), no further adjustment of the
Warrant Exercise Price shall be made by reason of such issue or sale.
(iii) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Warrant
Exercise Price in effect at the time of such change shall be readjusted to
the Warrant Exercise Price which would have been in effect at such time had
such Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or changed conversion rate,
as the case may be, at the time initially granted, issued or sold and the
number of shares of Common Stock acquirable hereunder shall be
correspondingly readjusted; provided that no adjustment shall be made if such
adjustment would result in an increase of the Warrant Exercise Price then in
effect.
(c) EFFECT ON WARRANT EXERCISE PRICE OF CERTAIN EVENTS. For purposes
of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b),
the following shall be applicable:
(i) CALCULATION OF CONSIDERATION RECEIVED. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be
deemed to be the net amount received by the Company therefor. In case any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Company will be the fair value of such consideration,
except where such consideration consists of securities, in which case the
amount of consideration received by the Company will be the last reported
sale price (as reported by Bloomberg) of such securities for the twenty (20)
consecutive trading days immediately preceding the date of receipt. In case
any Common Stock, Options or Convertible Securities are issued to the owners
of the non-surviving entity in connection with any merger in which the
Company is the surviving entity the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the holders of Warrants representing a majority of the shares of
Common Stock issuable upon exercise of such Warrants then
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outstanding. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the "VALUATION EVENT"),
the fair value of such consideration will be determined within forty-eight (48)
hours of the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser selected by the Company. The determination of such appraiser
shall be final and binding upon all parties.
(ii) INTEGRATED TRANSACTIONS. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed
to have been issued for a consideration of $.01.
(iii) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or
held will be considered an issue or sale of Common Stock.
(iv) RECORD DATE. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date will be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(d) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR
COMBINATION OF COMMON STOCK. If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of shares
of Common Stock obtainable upon exercise of this Warrant will be proportionately
decreased.
(e) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets to another Person (as
defined below) or other transaction which is effected in such a way that holders
of Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as "ORGANIC CHANGE." Prior to the
consummation of any Organic Change, the Company will make appropriate provision
(in form and substance satisfactory to the holders of the Preferred Share
Warrants representing a majority of the shares of Common Stock issuable upon
exercise of such Preferred Share Warrants then
-11-
<PAGE>
outstanding) to insure that each of the holders of the Preferred Share
Warrants will thereafter have the right to acquire and receive in lieu of or
addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the exercise of such holder's
Preferred Share Warrants, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares
of Common Stock immediately theretofore acquirable and receivable upon the
exercise of such holder's Preferred Share Warrants had such Organic Change
not taken place. In any such case, the Company will make appropriate
provision (in form and substance satisfactory to the holders of the Preferred
Share Warrants representing a majority of the shares of Common Stock issuable
upon exercise of such Preferred Share Warrants then outstanding) with respect
to such holders' rights and interests to insure that the provisions of this
Section 8 and Section 9 below will thereafter be applicable to the Preferred
Share Warrants (including, in the case of any such consolidation, merger or
sale in which the successor entity or purchasing entity is other than the
Company, an immediate adjustment of the Warrant Exercise Price to the value
for the Common Stock reflected by the terms of such consolidation, merger or
sale, and a corresponding immediate adjustment in the number of shares of
shares of Common Stock acquirable and receivable upon exercise of the
Preferred Share Warrants, if the value so reflected is less than the Warrant
Exercise Price in effect immediately prior to such consolidation, merger or
sale). The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor entity (if other than
the Company) resulting from consolidation or merger or the entity purchasing
such assets assumes, by written instrument (in form and substance
satisfactory to the holders of Preferred Share Warrants representing a
majority of shares of Common Stock issuable upon exercise of the Preferred
Share Warrants then outstanding), the obligation to deliver to each holder of
Preferred Share Warrants such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
(f) CERTAIN EVENTS. If any event occurs of the type contemplated by
the provisions of this Section 8 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the Warrant
Exercise Price and the number of shares of Common Stock obtainable upon exercise
of this Warrant so as to protect the rights of the holders of the Preferred
Share Warrants; provided that no such adjustment will increase the Warrant
Exercise Price or decrease the number of shares of Common Stock obtainable as
otherwise determined pursuant to this Section 8.
(g) NOTICES.
(i) Immediately upon any adjustment of the Warrant Exercise
Price, the Company will give written notice thereof to the holder of this
Warrant, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Company will give written notice to the holder of
this Warrant at least twenty (20) days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
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<PAGE>
vote with respect to any Organic Change, dissolution or liquidation, except that
in no event shall such notice be provided to such holder prior to such
information being made known to the public.
(iii) The Company will also give written notice to the holder
of this Warrant at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place.
Section 9. PURCHASE RIGHTS. In addition to any adjustments pursuant to
Section 8 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"PURCHASE RIGHTS"), then the holder of this Warrant 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 exercise of this Warrant
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. NOTICE. Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy
is mailed by U.S. certified mail, return receipt requested; (iii) three days
after being sent by U.S. certified mail, return receipt requested, or (iv) one
(1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
If to the Company:
Imaging Technologies Corporation
11031 Via Frontera
San Diego, California 92127
Telephone: 619-485-8411
Facsimile: 619-487-5809
Attention: President
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<PAGE>
With copy to:
Law Offices of Carmine J. Bua
3838 Camino Del Rio North, Suite 333
San Diego, California 92108-1789
Telephone: 619-280-8000
Facsimile: 619-280-8001
Attention: Carmine J. Bua, Esq.
If to a holder of this Warrant, to it at the address set forth below
such holder's signature on the signature page hereof.
Each party shall provide five (5) days' prior written notice to the other party
of any change in address or facsimile number.
Section 12. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Warrant are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Warrant shall be governed by and interpreted under the laws
of the State of New York
Section 13. DATE. The date of this Warrant is August 21, 1997. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
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<PAGE>
IMAGING TECHNOLOGIES CORPORATION
By: /s/ Ralph R. Barry
------------------------------------
Name: Ralph R. Barry
---------------------------------
Title: Vice President and CFO
---------------------------------
-15-
<PAGE>
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
IMAGING TECHNOLOGIES CORPORATION
The undersigned hereby exercises the right to purchase the number of
Warrant Shares covered by this Warrant specified below according to the
conditions thereof and herewith makes payment therefor in the amount of
$___________ , the Aggregate Exercise Price of such Warrant Shares in full, and
requests that such Warrant Shares be issued in the name of:
[HOLDER]
Dated: , 199_.
--------------
By:
---------------------------------
Name:
-------------------------------
Title:
-------------------------------
Address:
-----------------------------
-------------------------------------
-------------------------------------
-------------------------------------
Number of Warrant Shares
Being Purchased:
-------------------
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<PAGE>
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
__________ Federal Identification No. _______________, a warrant to
purchase ______________ shares of the capital stock of Imaging
Technologies Corporation, a Delaware corporation, represented by warrant
certificate no. _______________, standing in the name of the undersigned
on the books of said corporation. The undersigned does hereby irrevocably
constitute and appoint _____________, attorney to transfer the warrants
of said corporation, with full power of substitution in the premises.
Dated: , 199
---------------- --
--------------------------------
By:
----------------------------
Its:
----------------------------
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<PAGE>
PROMISSORY NOTE
This Promissory Note ("Note") is effective on June 30, 1998.
NewGen Imaging Systems, Inc. and its parent company Imaging Technologies
Corporation, collectively referred to herein as "Company", for value received
(including but not limited to Dataproducts Corporation's forbearance in pursuing
collection of the delinquent balance owed by Company to Dataproducts
Corporation), hereby accept joint and several liability for and promise to pay
to the order of Dataproducts Corporation, a Delaware Corporation ("Holder"), by
wire transfer to its account at Union Bank, Los Angeles Main Office at the
remittance address given in Schedule B, the principal sum of Nine Hundred
Thirty-four Thousand Five Hundred and 21/100 Dollars ($934,500.21) with interest
on the declining balance of said principal amount from the date hereof at the
rate of eight percent (8.00%) per annum on a 360-day basis in accordance with
Schedules A and B, attached hereto and incorporated herein by this reference.
Principal and interest due hereunder shall be paid in seven (7) installments,
including accrued interest, as per the payment schedule set forth in Schedule B.
In any event, payment in full of both principal and interest shall be made no
later than February 28, 1999.
Prepayment of principal under this Note may occur at any time without penalty.
Any partial prepayment under this Note shall, however, not operate to postpone
or suspend the obligation of Company to make payments as and when due hereunder
and shall not alter any other regularly scheduled installments provided for
herein.
This Note shall be paid to the Holder without claim of set-off or deduction of
any nature or for any cause whatsoever on the part of the Company against the
Holder, and should suit be instituted to enforce payment of this Note, the
Company hereby waives any and all rights of setoff, deduction, cross-complaint
or counterclaim of any nature or for any cause whatsoever on its part against
the Holder.
In the event that (a) any installment provided for hereunder is not paid in full
on its scheduled due date, or (b) the undersigned defaults in the performance of
any material covenant or promise contained herein, or (c) a petition is filed
seeking reorganization or arrangement of the undersigned under the federal
bankruptcy laws, or (d) the undersigned makes a general assignment for the
benefit of creditors, or (e) the undersigned suffers the appointment of a
receiver, then in any of such events, the entire remaining unpaid balance of
both principal and interest owing hereunder shall, at the option of the holder
hereof, become immediately due and payable. Thereafter, said unpaid balance of
principal and interest shall, until paid, both before and after judgment, earn
penalties at the rate of fourteen percent (14.00%) per annum. The acceptance of
any installment payment after the occurrence of a default or any other event
giving rise to the right of acceleration provided for in this paragraph shall
not constitute a waiver of any such right of acceleration with respect to any
such default or event or any subsequent default or event. Neither this Note nor
Holder's forbearance hereunder shall operate to or be construed as limiting,
modifying or extinguishing any rights or remedies Holder may have under the OEM
Purchase Agreement between Company and Holder dated September 23, 1996 and
Amendments thereto, or other existing contracts or agreements between them. This
Note is intended as a good faith accommodation by the Holder.
In the event that any payment under this Promissory Note is not made at the time
and in the manner required hereby, Company consents to the entry of a judgment
against it for the amount
Page 1
<PAGE>
outstanding, and agrees to reimburse the Holder for commercially reasonable
costs and expenses, including but not limited to attorney's fees incurred by the
Holder to third parties, (whether with or without suit or before or after
judgment) in connection with any proceedings to secure payment of amounts due
under this Note.
The undersigned hereby waives presentment for payment, protest, demand notice of
dishonor, objection to confession of judgment, and notice of nonpayment.
Every provision hereof is intended to be several. If any provision of this Note
is determined by a court of competent jurisdiction to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall not affect
the other provisions hereof, which shall remain binding and enforceable.
This Note and all of its provisions shall be binding upon any and all
successors-in-interest of the Company and shall inure to the benefit of the
successors or assigns of the Holder.
This Note and its enforcement shall be governed and construed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused the Note to be signed by its
authorized officer and by its parent company's authorized officer.
NEWGEN IMAGING SYSTEMS, INC. IMAGING TECHNOLOGIES
CORPORATION
By /s/ Frank Leonardi By /s/ Brian Bonar
----------------------------- ------------------------------
Name Frank Leonardi Name Brian Bonar
--------------------------- ----------------------------
[print/type] [print/type]
Title VP Sales Title CEO.
-------------------------- ---------------------------
SIGNATURE OF HOLDER
By /s/ R. P. Kramer
----------------------------
Name R. P. Kramer
---------------------------
Title Vice President & Treasurer
-------------------------
For DATAPRODUCTS CORPORATION
Page 2
<PAGE>
STOCK PURCHASE AGREEMENT
Stock Purchase Agreement ("Agreement"), dated as of November 28,
1997, by and between Imaging Technologies Corporation, a Delaware
Corporation, with offices at 11031 Via Frontera, San Diego, California 92127
("ITEC"), and Timothy E. McCanna, residing at 21776 Alarez, Mission Viejo,
California 92675 ("McCanna"); and Michael W. Johnson, residing at 33812 Ave.
Pescador, San Juan Capistrano, California 92675 ("Johnson"), McCanna and
Johnson being all of the shareholders of New Media Memory, Inc., a California
Corporation ("NMM") (hereinafter sometimes collectively referred to as the
"Stockholders").
WITNESSETH
WHEREAS, the Stockholders own 1,000 shares of the Common Stock no par
value of NMM (hereinafter "Stock"), which constitutes all of the outstanding
shares of the Stock of NMM; and
WHEREAS, the Stockholders desire to sell and ITEC desires to purchase
the Stock, pursuant to the terms and conditions of this Agreement; and
WHEREAS, it is intention of the parties hereto that, upon the
consummation of the purchase and sale of the Stock pursuant to this
Agreement, ITEC shall own all of the outstanding Stock of NMM;
NOW, THEREFORE, in consideration of the mutual covenants and
conditions herein contained, it is agreed as follows;
ARTICLE 1
SALE OF STOCK
1.1 Subject to the terms and conditions hereinafter set forth,
the Stockholders agree to sell, assign, transfer and deliver to ITEC on the
Closing Date as hereinafter set forth, and ITEC agrees to purchase from the
Stockholders on the Closing Date, the number of shares of Stock set forth
opposite the name of such Shareholder on Schedule 1 annexed hereto. The
certificates representing the Stock shall be duly endorsed in blank, or
accompanied by Stock Powers, duly executed in blank by the Stockholder
transferring the same, and with all necessary transfer tax and other revenue
stamps acquired at the Stockholders expense duly fixed and cancelled. Each
Stockholder agrees to cure any deficiencies with respect to the endorsement
of the certificates representing the Stock owned by such Stockholder or with
respect to the endorsement of the certificates representing the Stock owned
by such Stockholder or with respect to the Stock Power accompanying any such
certificate.
1.2 PRICE. ITEC shall purchase the stock from the Stockholders
for the sum of Ten ($10) Dollars, 200,000 unregistered shares of ITEC's
common stock (subject to adjustment as described under Article 1.6) and other
good and valuable consideration.
1.3 The closing of the sale contemplated by this Agreement shall
take place at 10:00 A.M. at the offices of ITEC, 11031 Via Frontera, San
Diego, California on November 28, 1997,
<PAGE>
or such other time and date as shall be mutually agreed to by the parties
(said time and date are hereinafter referred to as the "Closing Date").
1.4 Effective on the Closing Date of the purchase Tim McCanna
shall enter into employment agreement with NMM calling for him to serve as an
executive officer of NMM for no less three years. Compensation under the
agreements shall be at the fair market value of the services to be provided
and will based on the AEA Compensation Study or such other amount as agreed
to by ITEC's Compensation Committee and Mr. McCanna. Mr. McCanna shall also
receive health benefits under comparable terms and conditions as other
employees in similar positions within ITEC subsidiaries.
1.5 Reserved
1.6 ADJUSTMENT OF SHARES. If after the completion of the due
diligence procedures, it is determined that the net equity as of November 30,
1997 is less than $400,000 then the number of shares issueable by ITEC shall
be reduced by an amount equal to 10.0% divided by $400,000 times the amount
of the net equity below $400,000 times 200,000 shares.
ARTICLE 2
REPRESENTATION AND WARRANTIES OF THE STOCKHOLDERS
The Stockholders, jointly and severally represent, and warrant to the
best of their knowledge, and agree, except as otherwise herein indicated, as
follows:
2.1 CORPORATE STATUS OF NMM. NMM is a corporation duly
organized, validly existing and in good standing under laws of the State of
California, and is duly qualified to do business as a foreign corporation and
is in good standing in all jurisdictions in which the nature of its business
or the ownership of its properties or both makes such qualification
necessary, except as described in the NMM Reports herein provided, and except
where failure to be so qualified would not have a material adverse effect on
the financial condition, business or operations of NMM.
2.2 Each Stockholder is the lawful owner of the number of shares
of Stock listed opposite the name of such Stockholder in Schedule 1 hereto,
free and clear all liens, encumbrances, restrictions and claims of every
kind; Each Stockholder has full and legal right, power and authority to enter
into this Agreement and to sell, assign, transfer and convey the shares of
Stock so owned by him pursuant to the provisions of this Agreement will
transfer to ITEC valid title thereto, free and cleat of all liens,
encumbrances, restrictions and claims of every kind.
2.3 CAPITAL STOCK. The authorized capital stock of NMM consists
of ______ shares of NMM Common Stock of which 1,000 shares were outstanding
November 28, 1997. All of the outstanding shares of NMM Common Stock have
been validly issued and are fully paid and nonassessable. Except with
respect to such 1,000 shares, NMM does not have any outstanding
subscriptions, options, warrants, rights or other agreements or commitments
obligating NMM to issue or sell shares of its capital stock or any securities
or obligations convertible into, or exercisable, or exchangeable for, any
shares of its capital stock.
<PAGE>
2.4 STATEMENTS, DOCUMENTS AND REPORTS. NMM has previously
furnished to ITEC certain disclosures which shall be included as part of the
NMM Reports. Each of the balance sheets included in the NMM Reports
(including any related notes and schedules) fairly presents the financial
position of NMM as of its date and the other financial statements included in
the NMM Reports (including any related notes and schedules) fairly presents
the consolidated results of operations or other information included therein
of NMM for the periods or as of the dates therein set forth, subject, where
appropriate, to normal period-end adjustments, in each case in accordance
with generally accepted accounting principles consistently applied during the
periods involved (except as otherwise stated therein). Except as and to the
extent reflected, reserved against or otherwise disclosed in NMM's
consolidated balance sheet at October 31, 1997 (including the notes thereto),
or as otherwise disclosed in the NMM Reports, NMM, to the best of its
knowledge, did not have at such date and does not now have any liabilities or
obligations of any kind (other than non-monetary performance obligations
under the NMM Material Contracts), whether accrued, absolute, asserted or
unasserted, contingent or otherwise, and whether or not required to be
disclosed on a balance sheet prepared in accordance with generally accepted
accounting principles consistently applied, which would have a material
adverse effect on the business, financial condition or prospects of NMM.
This Agreement does not contain, and none of the NMM Reports contained as of
its date with respect to NMM, any untrue statement of a material fact or any
omission to state a material fact required to be stated herein or therein or
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
2.5 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in
the NMM Reports, since October 31, 1997 NMM has not;
(a) undergone any change in its financial condition,
business or operations, other than changes in the ordinary course of
business which have not been, either in any case or in the aggregate,
materially adverse to NMM taken as a whole;
(b) experienced any damage, destruction or loss, whether
covered by insurance or not, materially and adversely affecting its
prospects, properties or businesses.
(c) declared, set aside or paid any dividend (whether in
cash, stock or property) with respect to the capital stock of NMM;
(d) entered into, or materially amended, a material
employment agreement or severance agreement or effected (other than
normal increases in the ordinary course of its business that are
consistent with past practices and that, in the aggregate, have not
resulted in a material increase in benefits or compensation expense) any
material increase in the compensation payable or to become payable to
its directors, officers or employees or any material increase in
any bonus, insurance, pension or other employee benefit plan, payment
or arrangement made to, for or with any such officers or key employees;
(e) entered into any material transaction other than in the
ordinary course of business;
(f) waived any valuable right or any material debt owed to
it;
(g) changed or amended any material contract or arrangement
by which it or any of its assets or properties is bound or subject;
<PAGE>
Each NMM Employee Plan has been established and maintained in all
material respects in accordance with its terms and in compliance with all
applicable laws, including, but not limited to, the Code (if applicable) and
ERISA (if applicable). Neither NMM, the NMM Employee Plans nor any of their
respective current or former directors, officers, employees or agents have,
with respect to any NMM Employee Plan, engaged directly or indirectly in any
non-exempt "prohibited transaction," as such term is defined in Section 4975
of the Code or Section 406 or ERISA.
NMM neither provides nor has represented, promised or contracted
(whether in oral or written form) to any employee or former employee (either
individually or to employees or former employees as a group) that such
employee(s) or former employees are, or would be, provided with
post-retirement medical, dental, welfare or life insurance benefits upon
their retirement.
2.11 NMM SUPPLIED INFORMATION. None of the information relating
to NMM to be supplied by NMM in writing expressly for inclusion in any filing
made with the U.S. Securities and Exchange Commission ("Commission"),
including any amendments or supplements thereto, will, at the time of filing
thereof with the Commission, at the time of the meeting of NMM shareholders
to be held in connection with the merger, or at the Effective Time contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
2.12 INTELLECTUAL PROPERTY. The NMM Reports list all patents,
trademarks, trade names, trademark and trade name registrations, copyright
registrations and all pending applications for any of the foregoing
(collectively, "Rights") owned by NMM and any licenses or Rights granted by
or to NMM. Except as set forth in the NMM Reports, to the best of NMM's
knowledge, NMM owns or is licensed to use the Rights, trade secret rights and
other proprietary rights necessary for the conduct of its business as
currently conducted, or it can obtain licenses therefor upon commercially
reasonable terms, all without infringement of the rights of others, and to
the best of NMM's knowledge no person is infringing upon the Rights, trade
secret rights and other proprietary rights owned by NMM or used by NMM.
2.13 MATERIAL CONTRACTS. All contracts, agreements and
instruments to which NMM is a party, which involve future revenue to or
payments by NMM that are material, are listed in the NMM Reports
(collectively, the "NMM Material Contracts"). Except as set forth in the NMM
Reports, all the NMM Material Contracts to which NMM is a party are in full
force and effect in all material respects. NMM has no notice that any party
to any such NMM Material Contract intends to cancel, withdraw, modify or
amend such NMM Material Contract. NMM is not in material default or breach,
and no event has occurred or shall occur by reason of the transactions
contemplated herein which would constitute a default or breach, where such
default or breach would entitle another party hereto to accelerate or
terminate such NMM Material Contract or otherwise impose a material penalty
or forfeiture thereunder (whether with or without notice, lapse of time or
the happening or occurrence of any other event), under any NMM Material
Contract.
2.14 FEES. NMM has not paid nor become obligated to pay any
Investment banking, brokerage or finders fee or commission to any broker,
finder or intermediary in connection with the transactions contemplated
hereby or any other transaction of the type contemplated hereby.
2.15 GENERAL INDEMNITY. NMM and its shareholders will indemnify,
hold harmless, and at ITEC's request, defend ITEC and ITEC's subsidiaries,
affiliates, directors, officers, employees, agents and independent
contractors from any against any loss, cost, liability, fine, penalty or
expense (including court costs and reasonable fees of attorneys and other
professionals) but only to the extent to which they have been compensated,
arising out of or in
<PAGE>
connection with any claim or action, whether based on contract or tort
(including negligence and strict products liability), concerning any known,
either disclosed or undisclosed, patent infringement action(s) for any NMM
products or technologies existing as of the Effective Time.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ITEC
ITEC represents and warrants to the best of its knowledge, and agree,
except as otherwise herein indicated, as follows:
3.1 CORPORATE STATUS OF ITEC. ITEC is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, and is duly qualified to do business as a foreign corporation
and is in good standing in all jurisdictions in which the nature of its
business or the ownership of its properties or both makes such qualification
necessary, except where failure to be so qualified would not have a material
adverse effect on the financial condition, business or operations of ITEC and
its Subsidiaries taken as a whole.
3.2 CAPITAL STOCK. The authorized capital stock of ITEC consists
of 100,000,000 shares of ITEC Common Stock, $0.005 par value, of which
9,977,145 shares were outstanding on September 30, 1997; 7,500 authorized
shares of ITEC 5% Preferred Stock of which 420.5 shares were outstanding on
September 30, 1997; 1,200 authorized shares of ITEC's Series C Redeemable
Convertible Preferred Stock of which 500 shares were outstanding on September
30, 1997; and 1,183 authorized shares of ITEC Preferred Stock none of which
were outstanding on September 30, 1997 ("Shares"). All of the outstanding
Shares have been validly issued and are fully paid and nonassessable. As of
September 30, 1997, ITEC (a) had reserved up to 1,295,589 authorized but
unissued shares of ITEC Common Stock for issuance upon exercise of stock
options outstanding pursuant to ITEC's stock option plans, (b) had reserved
up to 500,000 authorized but unissued shares of ITEC Common Stock for
issuance upon purchase under ITEC's stock purchase plan; (c) had reserved up
to 3,212,901 authorized but unissued shares of ITEC Common Stock for issuance
upon exercise of certain warrants, (d) had reserved up to 64,516 authorized
but unissued shares of ITEC Common Stock for issuance upon conversion of the
Convertible Debentures, (e) had reserved up to 24,029 authorized but unissued
shares of ITEC Common Stock for issuance upon conversion of ITEC 5% Preferred
Stock; (f) had reserved up to 3,000,000 authorized but unissued shares of
ITEC Common Stock for issuance upon conversion of ITEC Series C Redeemable
Convertible Preferred Stock. Except with respect to such 18,074,180 shares,
ITEC does not have any outstanding subscriptions, options, warrants, rights
or other agreements or commitments obligating ITEC to issue or sell shares of
its capital stock or any securities or obligations convertible into, or
exchangeable for, any shares of its capital stock; provided, however, that
ITEC may in the business judgment of its Board of Directors issue and sell
additional equity securities before or after the Effective Time.
3.3 SUBSIDIARIES. The ITEC Annual Report on Form 10-KSB for the
year ended June 30, 1997 heretofore delivered by ITEC to NMM, together with
all items incorporated by reference therein and all exhibits thereto, sets
forth each Subsidiary of ITEC. Except as is disclosed in the ITEC Reports,
ITEC owns, directly or indirectly, all of the outstanding capital stock of,
or other equity interests in, each of its subsidiaries free and clear of all
liens, charges, pledges, security interests or other encumbrances and all of
such capital stock or other equity interests has been duly authorized and
validly issued and is fully paid and nonassessable. Except as otherwise
<PAGE>
disclosed in the ITEC Reports, none of such Subsidiaries has any outstanding
subscriptions, options, warrants, rights or other agreements or commitments
obligating it to issue or sell any shares of its capital stock, or any other
equity interest, or any securities or obligations convertible into or
exercisable or exchangeable for, any shares of capital stock of, or any other
equity interest in, such Subsidiary. Each such Subsidiary is duly organized,
validly existing an in good standing under the laws of its jurisdiction of
organization, has corporate power and authority to carry on its business as
it is now being conducted, and is duly qualified to do business and is in
good standing in all jurisdictions in which the nature of its business or the
ownership of its properties or both makes such qualification necessary,
except where failure to be so organized, to have such power or authority or
to be so qualified would not have a material adverse effect on the financial
condition, business or operations of ITEC and its Subsidiaries taken as a
whole.
3.4 RESERVED.
3.5 AUTHORITY FOR AGREEMENT. ITEC has the corporate power to
enter into this Agreement and to carry out their obligations hereunder. No
further corporate proceedings on the part of ITEC are necessary to authorize
this Agreement and the transactions contemplated hereby. The execution and
delivery of this Agreement and the other transactions contemplated hereby
will not, with or without the giving of notice or the lapse of time, or both,
conflict with, or result in any violation of or default under, or in any
right to accelerate or the creation of any lien, charge or encumbrance
pursuant to, any provision of the Certificate of Incorporation, Bylaws or
other organizational documents of ITEC or any other Subsidiaries of ITEC, or
of any mortgage, indenture, lease, agreement or other instrument, permit,
concession, grant, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to ITEC or any other Subsidiaries of
ITEC, or any of their respective properties, except as noted in the second
following sentence, or constitute an event under any employee benefit plan or
arrangement or individual agreement or contract that may result in any
payment (whether of severance pay or otherwise), any acceleration of payment
or funding or vesting, or any increases in benefits or compensation. The
consolidation of the transaction contemplated hereby will not require ITEC to
obtain the consent or approval of any other party to any of the above or
affect the validity or effectiveness of any of the above. Other than in
connection with or in compliance with the provisions of the California
Statute, the Securities Act, the Exchange Act, and the securities or blue sky
laws of the various states, no authorization, consent or approval of, or
declaration of, filing with or notice to any governmental body or authority
is necessary for the execution and delivery of this Agreement by ITEC or the
consummation by ITEC of the transactions contemplated hereby.
3.6 NEW SECURITIES. The shares of ITEC Common issuable pursuant
to this Agreement have been duly and validly authorized and when issued
pursuant to this Agreement will be validly issued, fully paid, and
nonassessable and shall be issued in accordance with all applicable federal
and state securities laws.
3.7 ANNUAL AND QUARTERLY REPORTS AND OTHER DISCLOSURES. ITEC has
previously furnished to NMM (a) true and complete copies of (i) its Annual
Reports on Form 10-KSB filed with the Commission for the year ended June 30,
1997, (ii) its Quarterly Report on Form 10-QSB filed with the Commission for
the fiscal quarter ended September 30, 1997, (iii) definitive proxy
statements filed by ITEC with the Commission, (iv) each Current Report on
Form 8-K filed by ITEC with the Commission on or after January 1, 1997, and
(v) each document, if any, filed by any Subsidiary of ITEC with the
Commission on or after January 1, 1997, and (b) certain other written
disclosures (all of which are included in the ITEC Reports). Each of the
ITEC Reports which was filed with the Commission complied as to form in all
material respects with the
<PAGE>
requirements of the Securities Act or the Exchange Act, as applicable. Each
of the balance sheets included in the ITEC Reports (including any related
notes and schedules) fairly presents the consolidated financial position of
ITEC as of its date and the other financial statements included in the ITEC
Reports (including any related notes and schedules) fairly present the
consolidated results of operations or other information included therein of
ITEC for the periods or as of the dates therein set forth, subject, where
appropriate, to normal year-end adjustments, in each case in accordance with
generally accepted accounting principles consistently applied during the
periods involved (except as otherwise stated therein). Except as and to the
extent reflected, reserved against or otherwise disclosed in ITEC's
consolidated balance sheet at June 30, 1997 (including the notes thereto), or
as otherwise disclosed in the ITEC Reports, ITEC, to the best of its
knowledge, did not have at such date and does not now have any liabilities or
obligations of any kind (other than non-monetary performance obligations
under the ITEC Material Contracts), whether accrued, absolute, asserted or
unasserted, contingent or otherwise, and whether or not required to be
disclosed on a balance sheet prepared in accordance with generally accepted
accounting principles consistently applied, which would have a material
adverse effect on the business, financial condition or prospects of ITEC.
This Agreement does not contain, and none of the ITEC Reports
contained as of its date, any untrue statement of a material fact or any
omission to state a material fact required to be stated herein or therein or
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
3.8 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in
the ITEC Reports since September 30, 1997 neither ITEC nor any of its
Subsidiaries has:
(a) undergone any change in its financial condition,
business or operations, other than changes in the ordinary course of
business which have not been, either in any case or in the aggregate,
materially adverse to ITEC and its Subsidiaries taken as a whole;
(b) experienced any damage, destruction or loss, whether
covered by insurance or not, materially and adversely affecting its
prospects, properties or businesses;
(c) declared, set aside or paid any dividend (whether in
cash, stock or property) with respect to the capital stock of ITEC;
(d) entered into, or materially amended, a material
employment agreement or severance agreement or effected (other than
normal increases in the ordinary course of its business that are
consistent with past practices and that, in the aggregate, have not
resulted in a material increase in benefits or compensation expense) any
material increase in the compensation payable or to become payable to
its directors, officers or employees or any material increase in any
bonus, insurance, pension or other employee benefit plan, payment or
arrangement made to, or with any such officers or key employees;
(e) entered into any material transaction other than in the
ordinary course of business;
(f) waived any valuable right or any material debt owed to
it;
<PAGE>
(g) changed or amended any material contract or arrangement
by which it or any of its assets or properties is bound or subject;
(h) materially changed its accounting methods, principles or
practices; or
(i) other than in the ordinary course of business consistent
with past practices, materially revalued any of its assets, including,
without limitation, write-downs of inventory or write-offs of accounts
receivable.
3.9 COMPLIANCE WITH APPLICABLE LAW. The businesses of ITEC and
its Subsidiaries are not being conducted in violation of any applicable law,
ordinance, regulation, decree or order of any governmental entity, except for
violations which either singly or in the aggregate do not and are not
expected to have a material adverse effect on the financial condition,
business or operations of ITEC and its Subsidiaries taken as a whole.
3.10 TITLE TO PROPERTY AND ASSETS. ITEC owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business
and do not materially impair ITEC's ownership or use of such property or
assets. With respect to the property and assets it leases, ITEC is in
compliance in all material respects with such leases and, to the best of its
knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances.
3.11 LITIGATION. Except as described in any of the ITEC Reports,
(a) no material investigation or review by any governmental entity with
respect to ITEC or any of its subsidiaries is pending or, to the best of
ITEC's knowledge, threatened, nor has any governmental entity indicated to
ITEC an intention to conduct the same, and (b) there is no action, suit or
proceeding pending or, to the best of ITEC's knowledge, threatened against,
or affecting ITEC or its Subsidiaries at law or in equity, or before any
arbitrator or any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, which (i) seeks to
enjoin or otherwise attacks this Agreement or the transactions contemplated
hereby, or (ii) either singly or in the aggregate are not expected to have
any material adverse effect on the financial condition, business or
operations of ITEC and its Subsidiaries taken as a whole.
3.12 TAX MATTERS. ITEC and its consolidated subsidiaries have
timely filed all Federal, state, local and foreign tax returns required to be
filed by them or on their behalf. All taxes shown by such returns to be due
and payable have been paid or are reflected as a liability on the ITEC
balance sheets included in the ITEC Reports. The accruals for taxes
reflected on such ITEC balance sheets are adequate for all unpaid Federal,
state, local or foreign taxes (including interest and penalties, if any,
hereon) due or which will become due for any period commencing prior to the
date of such ITEC balance sheets.
3.13 EMPLOYEE BENEFIT PLANS. Except as disclosed in the ITEC
Reports, there is no bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, plan, fund or
other arrangement for the benefit or welfare of any former or current
director, consultant, officer or employee between ITEC and any directors or
executive officers of ITEC.
The ITEC Reports set forth a list of each employee benefit plan,
policy, program or contract including, but not limited to, all such plans,
policies and programs that are covered by Title I of ERISA, which are
maintained or contributed to by ITEC for the benefit of, or pursuant to which
ITEC has any liability with respect to, any current or former employees of
ITEC (a "ITEC
<PAGE>
Employee Plan" and any trust (including a trust intended to qualify under
Section 501 (c)(9) of the code).
Each ITEC Employee Plan has been established and maintained in all
material respects in accordance with its terms and in compliance with all
applicable laws, including, but not limited to, the Code (if applicable) and
ERISA (if applicable). Neither ITEC, the ITEC Employee Plans nor any of their
respective current or former directors, officers, employees or agents have,
with respect to any ITEC Employee Plan, engaged directly or indirectly in any
non-exempt "prohibited transaction," as such term is defined in Section 4975
of the Code or Section 406 of ERISA.
ITEC neither provides nor has represented, promised or contracted
(whether in oral or written form) to any employee or former employee (either
individually or to employees or former employees as a group) that such
employee(s) or former employees are, or would be, provided with
postretirement medical, dental, welfare or life insurance benefits upon their
retirement.
3.14 INTELLECTUAL PROPERTY. The ITEC Reports list all Rights
owned by ITEC and any licenses of Rights granted by or to ITEC. Except as
set forth in the ITEC Reports, to ITEC's knowledge, ITEC owns or is licensed
to use the Rights, trade secret rights and other proprietary rights necessary
for the conduct of its business as currently conducted, or it can obtain
licenses therefor upon commercially reasonable terms, all without
infringement of the rights of others, and to the best of ITEC's knowledge no
person is infringing upon the Rights, trade secret rights and other
proprietary rights owned by ITEC or used by ITEC.
3.15 MATERIAL CONTRACTS. All contracts, agreements and
instruments to which, ITEC is a party, which involve future revenue to or
payments by ITEC that are material are listed in the ITEC Reports
(collectively, the "ITEC Material Contacts"). Except as set forth in the
ITEC Reports, all the ITEC Material Contracts to which ITEC is a party are in
full force and effect in all material respects, ITEC has no notice that any
party to any such ITEC Material Contract intends to cancel, withdraw, modify
or amend such ITEC Material Contract. ITEC is not in material default or
breach, and no event has occurred or shall occur by reason of the
transactions contemplated herein which would constitute a default or breach,
where such default or breach would entitle another party hereto to accelerate
or terminate such ITEC Material Contract or otherwise impose a material
penalty or forfeiture thereunder (whether with or without notice, lapse of
time or the happening or occurrence of any other event), under any ITEC
Material Contract.
3.16. FEES. ITEC has not paid nor become obligated to pay any
investment banking, brokerage or finder's fee or commission to any broker,
finder or intermediary in connection with the transactions contemplated
hereby or any other transaction of the type contemplated hereby.
ARTICLE 4
COVENANT
It is further agreed as follows:
4.1 CONDUCT OF BUSINESS. Prior to the Closing Date, or the date,
if any, on which this Agreement is earlier terminated pursuant to Section 6.1
hereof, ITEC and its Subsidiaries shall cause, and the Stockholders shall
cause NMM and its Subsidiaries conduct their respective operations according
to their ordinary usual course of business, (ii) use their reasonable
efforts, and shall cause said Subsidiaries to use their reasonable efforts,
to preserve intact their
<PAGE>
respective business organizations and good will, keep available the services
of their respective officers and employees and maintain satisfactory
relationships with businesses, suppliers, distributors, customers and others
having business relationships with them, (iii) confer on a regular and
frequent basis with one or more representatives of one another to report
operational matters of materiality and the general status of ongoing
operations, (iv) not amend their respective Articles/Certificates of
Incorporation or Bylaws, except as provided for in the Agreement, (v) notify
one another of any material emergency or other material change in the normal
course of ITEC's, NMM's or their Subsidiaries' respective properties, and of
any governmental complaints, investigations or hearings (or communications
indicating that, the same may be contemplated), (vi) deliver to the other
true and correct copies of any reports, statements or schedules filed by
ITEC, NMM or their respective Subsidiaries with the SEC subsequent to the
date of this Agreement within one day of the date on which such document is
so filed, (vii) neither declare nor pay any dividends on their outstanding
shares of capital stock nor redeem any capital stock, (viii) not (a) except
pursuant to the exercise of options, warrants, conversion rights and other
contractual rights existing on the date hereof and described otherwise
contemplated pursuant to this Agreement, issue any shares of their respective
capital stocks, affect any stock split or otherwise change their respective
capitalizations as they existed on the date hereof, or (b) grant, confer or
award any options, warrants, conversion rights or other rights not existing
on the date hereof to acquire any shares of their respective capital stocks
other than as contemplated hereby (ix) not guarantee any indebtedness, (x)
not acquire (by merger, consolidation, or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof,
(xi) not release or relinquish any material contract or other rights, (xii)
not adopt or materially amend any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust,
plan fund or other arrangement for the benefit or welfare of any director,
officer or employee, or (except for normal increases ordinary course of
business that are consistent with past practices and that, in the aggregate,
do not result in a material increase in benefits or compensation expense)
increase in any manner the compensation or fringe benefits of any officer or
employee or pay any benefit not required by any existing plan and
arrangement, (xiii) not enter into any material transaction other than in the
ordinary course of business except for transactions heretofore disclosed in
writing to the other parties, and (xiv) not enter into any contract,
agreement, commitment or arrangement to do any of the foregoing.
4.2 NO SHOP. Unless and until this agreement has been terminated
pursuant to Section 6.2, the Stockholders agree to cause NMM not to (directly
or indirectly, through any officer, director employee, agent or otherwise,
(a) acquire or agree to acquire any person or (outside the ordinary course of
business) any solicit any acquisition or investment proposals; (b) except as
required by NMM's directors' fiduciary duty (as determined in the specific
case by a written opinion of NMM's outside legal counsel), disclose to any
person other than ITEC any non-public information concerning NMM, its assets,
its business and/or its financial condition, immediately after experiencing
each and any solicitation, contact or inquiry from any with respect thereto,
and/or so entertaining, discussing, or disclosing, the Stockholders shall
cause NMM to immediately the President of ITEC by telephone (confirmed in
writing) all relevant details thereof.
4.3 PUBLIC DISCLOSURES. Non disclosure of this Agreement, its
contents or the transactions contemplated hereby shall be made person except
at such time and in such form and content as maybe selected by ITEC
(provided, however, that such content shall be
<PAGE>
reasonably satisfactory to NMM). After the initial public disclosure
thereof, the Stockholders will, and will cause NMM to consult with ITEC
before issuing any press release or otherwise making any public statement
(including, without limitation, statements by NMM generally to its customers,
employees or suppliers) with respect to the transactions contemplated hereby.
4.4 FOREWARNING. Each party shall promptly give written notice
to the other parties upon becoming aware of the occurrence or to its
knowledge, impending or threatened occurrence, of any event which would cause
or constitute a breach of any of its representations, warranties, or
covenants contained in this Agreement or an inability to satisfy the
conditions to another party's obligation to effect the Acquisition, and will
use its best to prevent or promptly remedy the same. In an instrument in
writing signed on behalf of such party by a duly authorized officer.
ARTICLE 5
CONDITIONS PRECEDENT
5.1 The sale of the Stock shall be subject, at the stockholder's
option to the following conditions:
5.1.1 REPRESENTATIONS, COVENANTS, CERTIFICATE.
(a) The representation and warranties of ITEC herein contained
shall in all material respects be true as of the date of this
Agreement and as of the Closing Date with the same effect as though
made at the Closing Date; (b) ITEC shall in all material respects
have Performed all obligations and complied with all covenants
required by this Agreement to be performed or complied with by it
on or prior to the Closing Date; (c) there shall have been no
material adverse change in ITEC's business, assets, financial
condition or prospects; and (d) ITEC shall have delivered to the
Stockholders a certificate, dated the Closing Date and signed on
its behalf by its president or a Vice President, to such affect.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ITEC. The obligations
of ITEC to purchase the Shares and of ITEC to deliver the shares of ITEC
Common Stock options issuable pursuant to this Agreement, shall be subject,
at its option, to the following conditions:
5.2.1 REPRESENTATIONS AND COVENANTS. (a) The
representations and warranties of the Stockholders herein contained
shall in all material respects be true as of the date of this
Agreement of the Closing Date with the same effect as though made
at the Closing Date; (b) the Stockholders shall in all material
respects have performed all obligations and complied with all
covenants required by this Agreement to be performed or complied
them on or prior to the Closing Date, and shall have caused NMM to
perform all obligations and comply with all covenants by this
Agreement to be performed or complied with by it on or prior to the
Closing Date; and (c) there shall have been no material adverse
change in NMM's business, assets, financial condition or prospects.
5.3 INJUNCTIONS. No preliminary or permanent injunction or other
order by any United States Federal or state court which the consummation of the
transactions contemplated by this Agreement shall have been issued.
<PAGE>
ARTICLE 6
MISCELLANEOUS
6.1 EXTENSIONS AND WAIVERS. At any time prior to the Closing
Date, the parties hereto may, (i) extend the time for the performance of any
of the obligations or other acts of the parties hereto (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in
an instrument in writing signed on behalf of such party by a duly authorized
officer.
6.2 RESERVED.
6.3 No Stockholder, officer or director of NMM or any of it's
subsidiaries possesses directly or indirectly any financial interest in or is
a director, officer or employee of any corporation, firm, association or
business organization which is a client, supplier, customer, lessor, lessee
or competitor or potential competitor of ITEC or any of its subsidiaries.
Ownership of securities of a company whose securities are registered under
the Exchange Act, not in excess of 1% of any class of such securities shall
not be deemed to be of financial interest for the purposes of this section.
6.4 The Stockholders represent and warrant that they are not
subject to any agreement, judgment or decree adversely affecting their
ability to act as employees of NMM or any of its subsidiaries as the case may
be.
6.5 All indebtedness other than travel and similar advances of
the Stockholders, directors, officers and employees of NMM, and of any of its
subsidiaries, shall be repaid in full prior to the Closing Date.
6.6 As ITEC's sole and exclusive remedy for any failure or breach
of representation or warranty made by the Stockholders in this Agreement, or
made in any schedule delivered pursuant hereto to be true and correct in all
respects as of the date of this Agreement and as of the Closing Date, the
Stockholders agree, jointly and severally, to indemnify and hold ITEC and its
officers, directors and agents harmless from damages, losses or expenses
suffered, or paid directly or indirectly through application of NMM's assets
as a result of any and all claims, demands, suits, causes of action,
proceedings, judgments and liabilities, including reasonable counsel fees
incurred in litigation or otherwise assessed, incurred or sustained by or
against any of them with respect to or arising out of such failure or breach
of any such representation or Warranty up to an amount equal to the
"Indemnity Amount". For purposes hereof, the Indemnity Amount shall be an
amount stated in United States Dollars, equal to the product of (i) 250,000
and (ii) the exercise price per share under the options granted to each of
the Stockholders hereunder. Each of the Stockholder's liability hereunder,
if any, shall be satisfied by the delivery of a promissory note due and
payable in three equal annual installments, commencing on the first
anniversary of the Closing Date, and on the same day in each of the next two
consecutive years, bearing interest at the minimum legal rate to avoid
imputed interest. Notwithstanding the foregoing, in the event of a willful
and deliberate misrepresentation by the Stockholders, the Stockholders shall
be liable for the full amount of damages, losses or expenses suffered or paid
by ITEC and its officers, directors and agents.
<PAGE>
6.7 ITEC agrees to indemnify and hold the Stockholders harmless
from damages, losses and expanses in the aggregate, suffered or paid,
directly ox indirectly, as a result of any and all claims, demands, suits,
causes of action, proceedings, judgments and liabilities, including
reasonable counsel fees incurred in litigation or otherwise assessed,
incurred or sustained by or against any of them with respect to or arising
out of the failure of any representation or warranty made by ITEC in this
Agreement to be true and correct in all respects as of the date of this
Agreement and as of the Closing Date,
6.8 In the event any claim is made against either ITEC or the
stockholders pursuant to Paragraphs 6.6 or 6.7 hereof, the party against whom
such claim is made shall give the other party prompt written notice of any
such claim against it or of breach of any representation or warranty made in
this Agreement by the other party hereto. The party against whom such claim
or breach is alleged shall have the option to defend, settle or compromise
any such claim, breach or litigation resulting from such claim or breach at
it's sole cost and expense; through counsel of its own choosing.
6.9 The respective representations, warranties and
indemnification of each of the Stockholders and of ITEC contained in this
Agreement or in any schedule delivered pursuant to this Agreement shall
survive the purchase and sale of the Stock contemplated hereby for a period
of one Year from the Closing Data, except in the event of willful and
deliberate misrepresentation, in which event, there shall be no time
limitation on survival of such representations, warranties and
indemnification.
6.10 This Agreement may be executed in one or more counter parts,
all of which taken together shall constitute one instrument.
6.11 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California.
<PAGE>
6.12 NOTICES. All notices and other communications shall be
hereunder in writing and shall be deemed given if delivered by hand or mailed
by registered or certified mail (return receipt requested) to the parties at
the following addressees (or at such other address for a party as shall be
specified by like notice) and shall be deemed given on the date on which so
hand-delivered or on the third business day following the date on which so
mailed:
To ITEC:
11031 Via Frontera
San Diego, California 92127
Attn: Edward W. Savarese
TO NMM:
----------------------------
----------------------------
Attn: Tim McCanna
6.13 EQUITABLE REMEDIES. The Shareholders acknowledge and agree
that the legal remedies available to ITEC in the event the Shareholders or
NMM violates the covenants and agreements made in this Agreement would be
inadequate and that ITEC would be entitled, without posting any bond or other
security, to temporary preliminary and permanent injunctive relief, specific
performance, and other equitable remedies in the event of such a violation,
in addition to any other remedies which ITEC may have at law or in equity.
6.14 SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extant of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad (but
fully as broad) as is enforceable.
6.15 ENTIRE AGREEMENT ASSIGNABILITY ETC. This Agreement (i)
constitutes the entire agreement, supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them,
with respect to the subject matter hereof (including without limitation the
letter of intent) (ii) is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder, and (iii) shall not be
assignable by operation of law or otherwise.
<PAGE>
SCHEDULE 1
Tim McCanna 5,000 shares
Johnson 5,000 shares
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
IMAGING TECHNOLOGIES CORPROATION
- ---------------------------------
Edward W. Savarese
Chief Executive Officer
The foregoing is acknowledged
and agreed to by NEW MEDIA MEMORY
Tim McCanna
- --------------------------------
President
- --------------------------------
- --------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
IMAGING TECHNOLOGIES CORPROATION
/s/ Brian Bonar
- --------------------------------
Brian Bonar
President & COO
THE FOREGOING IS ACKNOWLEDGED
AND AGREED TO BY MCMICAN CORPORATION
/s/ Timothy E. McCanna
- ---------------------------------
Timothy E. McCanna
/s/ Michael W. Johnson
- ---------------------------------
Michael W. Johnson
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND
PLAN OF REORGANIZATION
THIS AGREEMENT and PLAN OF MERGER and PLAN OF REORGANIZATION, (the
"Agreement"), is made as of November 30, 1997, between and among Color
Solutions, Inc. a California corporation ("CSI"), ITEC Sub, a Nevada corporation
("ITEC Sub") and Imaging Technologies Corporation, a Delaware corporation
("ITEC") and the holder of all of the issued and outstanding capital stock of
ITEC Sub.
RECITALS
WHEREAS, the parties hereto desire to clarify the understanding of the
parties; and
WHEREAS, it is deemed advisable and in the best interests of each of CSI,
ITEC Sub and ITEC and of their respective stockholders that ITEC Sub be merged
into CSI pursuant to the General Corporations Law of the State of California
(the "California Statute") and the General Corporations Law of the State of
Nevada (the "Nevada Statute") in a transaction that would qualify as a
"reorganization" as that term is used in Section 368 of the Internal Revenue
code of 1986, as amended (the "Code"), and upon the terms and conditions
contained in this Agreement.
AGREEMENT
NOW, THEREFORE, CSI, ITEC Sub and ITEC hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 CONSTITUENT, SURVIVING CORPORATIONS. CSI and ITEC shall be the
constituent corporations to the Merger (such term and certain other capitalized
terms used herein are defined in Section 6.1 hereof). At the Effective Time,
ITEC Sub shall be merged into CSI in accordance with the California Statute and
the Nevada Statute, and CSI shall be the surviving corporation of the Merger
(herein sometimes called the "Surviving Corporation"). The name, identity,
existence, rights, privileges, powers, franchises, properties and assets of CSI
shall continue unaffected and unimpaired by the Merger. At the Effective Time,
the identity and separate existence of ITEC Sub shall cease, and all of the
rights, privileges, powers, franchises, properties and assets of ITEC Sub shall
be vested in CSI.
1.2 ARTICLES OF INCORPORATION; BYLAWS. The Restated Articles of
Incorporation of CSI, as in effect immediately prior to the Effective Time,
shall thereafter continue in full force and effect as the Articles of
Incorporation of the Surviving Corporation until amended as provided therein or
by law. The Bylaws of CSI in effect at the Effective Time shall be the Bylaws of
the Surviving Corporation, until amended or repealed as provided therein or by
law.
1.3 CONVERSION, ETC. OF CSI STOCK
1.3.1 CONVERSION OF COMMON STOCK. At the Effective Time, all shares
of CSI Common Stock issued and outstanding immediately prior to the
Effective Time shall, by
1
<PAGE>
virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become the right to receive an aggregate of
eight hundred and fifty thousand (850,000) fully paid, nonassessable,
unregistered shares of ITEC Common Stock, subject to adjustment, if any,
pursuant to Article 1.3.4 of this Agreement to be issued to the parties set
forth in Exhibit 1.3.1.
1.3.2 ISSUANCE OF ITEC SECURITIES. Subject to the terms and
conditions hereof, immediately prior to the Effective Time, ITEC shall
issue and deliver to American Stock Transfer and Trust, as exchange agent
for the Merger (the "Exchange Agent"), certificates and/or instructions
representing the number of shares of ITEC Common Stock into which the
shares of CSI Common Stock outstanding at the Effective Time are to be
converted in accordance with Sections 1.3.1 hereof.
1.3.3 ISSUANCE OF NEW CERTIFICATES. As soon as practicable after the
Effective Time, the Exchange Agent shall mail to each record holder, as of
the Effective Time, of an outstanding certificate or certificates which
immediately prior to the Effective Time represented shares of CSI capital
stock (the "Certificates") a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and instructions for use in effecting the surrender of
the Certificates for payment therefor. Each holder of a Certificate or
Certificates shall be entitled to receive, upon surrender to the Exchange
Agent of the Certificate or Certificates for cancellation, together with
such letter of transmittal duly executed, and subject to any required
withholding of taxes, the ITEC securities into which the shares previously
represented by such Certificate or Certificates shall have been converted
in the Merger. Until surrendered to the Exchange Agent, each Certificate
shall be deemed for all CSI corporate purposes to evidence only the right
to receive upon such surrender the ITEC securities into which the shares
represented thereby have been converted, subject to any required
withholding of taxes.
1.3.4 ADJUSTMENT OF ITEC SHARES. If after the completion of the due
diligence procedures, it is determined that the net income for the ten
month period ended October 31, 1997 was less than $75,000 then the number
of shares issuable by ITEC shall be reduced by an amount equal to 12.5%
divided by $125,000 times the amount of the net income below $75,000 times
800,000 shares.
1.4 CONVERSION OF CSI COMMON STOCK. At the Effective Time, all of the
shares of CSI Common Stock (including any options, warrants or other instruments
which would otherwise be convertible into Common Stock of CSI) outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into eight
hundred and fifty thousand (850,000) shares of Common Stock of ITEC, subject to
adjustment, if any, pursuant to Article 1.3.4 of this Agreement.
1.5 CSI STOCK OPTIONS. At the Effective Time, all options then outstanding
under the CSI Stock Option Plans shall be canceled as of the Effective Time.
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1.6 CONVERSION OF ITEC SUB STOCK. At the Effective Time, all of the
outstanding shares of Common Stock of ITEC Sub shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into an
equal number of shares of the Common Stock of CSI. Such shares will not be
subject to Sections 1.3.1, 1.3.2 or 1.4 hereof and shall constitute all of the
outstanding Common Stock of CSI immediately following the Effective Time.
1.7 CLOSING OF TRANSFER BOOKS. At the Effective Time the transfer books
for CSI capital stock shall be closed, and no transfer of shares of CSI capital
stock shall thereafter be made on such books.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF CSI
Except as set forth as Schedule 2 hereto (the "CSI Reports") CSI represents and
warrants to ITEC and ITEC Sub as follows:
2.1 CORPORATE STATUS OF CSI. CSI is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and is
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions in which the nature of its business or the ownership of its
properties or both makes such qualification necessary, except as described in
the CSI Reports and except where failure to be so qualified would not have a
material adverse effect on the financial condition, business or operations of
CSI taken as a whole.
2.2 CAPITAL STOCK. The authorized capital stock of CSI consists of
10,000,000 shares of CSI Common Stock, of which 1,030 shares have been validly
issued and are fully paid and nonassessable. Except with respect to such shares,
CSI does not have any outstanding subscriptions, options, warrants, rights or
other agreements or commitments obligating CSI to issue or sell shares of its
capital stock or any securities or obligations convertible into, or exercisable
or exchangeable for, any shares of its capital stock.
2.3 AUTHORITY FOR AGREEMENT. CSI has the corporate power to enter into
this Agreement and to carry out its obligations hereunder. Except for approval
of this Agreement by CSI shareholders in accordance with Section 4.5 hereof, no
other corporate proceedings on the part of CSI are necessary to authorize this
Agreement and the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the Merger and the other transactions
contemplated hereby will not, with or without the giving of notice or the lapse
of time, or both, conflict with, or result in any violation of or default under,
or in any right to accelerate or the creation of any lien, charge or encumbrance
pursuant to, any provision (a) of the Articles of Incorporation, Bylaws or other
organizational documents of CSI, or (b) of any mortgage, indenture, lease,
agreement or other instrument, permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to CSI, or any of their respective properties, except as noted in the second
following sentence (and except where such conflict violation, etc. would not
result in loss or damage to CSI or its Subsidiaries in excess of $20,000), or
(c) except as described in the CSI Reports, constitute an event under any
employee benefit plan or arrangement or individual agreement or contract that
may result in any payment (whether of severance pay or otherwise), any
acceleration of payment or funding or
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vesting, or any increase in benefits or compensation. Except as described in the
CSI Reports, the consummation of the transaction contemplated hereby will not
require CSI to obtain the consent or approval of any other party to any of the
above or affect the validity or effectiveness of any of the above. Other than in
connection with or in compliance with the provisions of the California statute,
the Nevada statute, the Securities Act, the Exchange Act, and the securities or
blue sky laws of the various states, no authorization, consent or approval of,
or declaration of, filing with or notice to any governmental body or authority
is necessary for the execution and delivery of this Agreement by CSI or the
consummation by CSI of the transactions contemplated hereby.
2.4 STATEMENTS, DOCUMENTS AND REPORTS. CSI has previously furnished to
ITEC certain written disclosures and will provide its audited financial
statements as of and for the year ended October 31, 1997 which shall be included
as part of the CSI Reports. Each of the balance sheets included in the CSI
Reports (including any related notes and schedules) fairly presents the
consolidated financial position of CSI as of its date and the other financial
statements included in the CSI Reports (including any related notes and
schedules) fairly presents the consolidated results of operations or other
information included therein of CSI for the periods or as of the dates therein
set forth, subject, where appropriate, to normal year-end adjustments, in each
case in accordance with generally accepted accounting principles consistently
applied during the periods involved (except as otherwise stated therein). Except
as and to the extent reflected, reserved against or otherwise disclosed in CSI's
consolidated balance sheet at October 31, 1997 (including the notes thereto), or
as otherwise disclosed in the CSI Reports, CSI, to the best of its knowledge,
did not have at such date and does not now have any liabilities or obligations
of any kind (other than non-monetary performance obligations under the CSI
Material Contracts), whether accrued, absolute, asserted or unasserted,
contingent or otherwise, and whether or not required to be disclosed on a
balance sheet prepared in accordance with generally accepted accounting
principles consistently applied, which would have a material adverse effect on
the business, financial condition or prospects of CSI. This Agreement does not
contain, and none of the CSI Reports contained as of its date with respect to
CSI, any untrue statement of a material fact or any omission to state a material
fact required to be stated herein or therein or necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading. ITEC agrees to grant an extension for submitting
CSI's audited financial statements until December 31, 1997.
2.5 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in the CSI
Reports, since October 31,1997 CSI has not;
(a) undergone any change in its financial condition, business or
operations, other than changes in the ordinary course of business which
have not been, either in any case or in the aggregate, materially adverse
to CSI taken as a whole;
(b) experienced any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting its prospects,
properties or businesses;
(c) declared, set aside or paid any dividend (whether in cash, stock
or Property) with respect to the capital stock of CSI;
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(d) entered into, or materially amended, a material employment
agreement or severance agreement or effected (other than normal increases
in the ordinary course of its business that are consistent with past
practices and that, in the aggregate, have not resulted in a material
increase in benefits or compensation expense) any material increase in the
compensation payable or to become payable to its directors, officers or
employees or any material increase in any bonus, insurance, pension or
other employee benefit plan, payment or arrangement made to, for or with
any such officers or key employees;
(e) entered into any material transaction other than in the ordinary
course of business;
(f) waived any valuable right or any material debt owed to it;
(g) changed or amended any material contract or arrangement by which
it or any of its assets or properties is bound or subject;
(h) materially changed its accounting methods, principles or
practices; or
(i) other than in the ordinary course of business consistent with
past practices, materially revalued any of its assets, including, without
limitation, write-downs of inventory or write-offs of accounts receivable.
2.6 COMPLIANCE WITH APPLICABLE LAW. The businesses of CSI is not being
conducted in violation of any applicable law, ordinance, regulation, decree or
order of any governmental entity, except for violations which either singly or
in the aggregate do not and are not expected to have a material adverse effect
on the financial condition, business or operations of CSI taken as a whole.
2.7 TITLE TO PROPERTY AND ASSETS. CSI owns its Property and assets free
and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens which arise in the ordinary course of business and do not
materially impair CSI's ownership or use of such Property or assets. With
respect to the property and assets it leases, CSI is in compliance in all
material respects with such leases and, to the best of its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
2.8 LITIGATION. Except as described in the CSI Reports, (a) to CSI's
knowledge no material investigation or review by any governmental entity with
respect to CSI is pending or threatened, nor has any governmental entity
indicated to CSI an intention to conduct the same, and (b) there is no action,
suit or proceeding pending or, to the best of CSI's knowledge, threatened
against CSI at law or in equity, or before any arbitrator or any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, which (i) seeks to enjoin or otherwise attacks this Agreement
or the transactions contemplated hereby, or (ii) either singly or in the
aggregate are not expected to have any material adverse effect on the financial
condition, business or operations of CSI taken as a whole.
2.9 TAX MATTERS. CSI has timely filed all Federal, state, local and
foreign tax returns required to be filed by them or on their behalf. All taxes
shown by such returns to be due and payable have been paid or are reflected as a
liability on the CSI balance sheets included in the CSI Reports. The accruals
for taxes reflected on such CSI balance sheets are adequate for all
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unpaid Federal, state, local or foreign taxes (including interest and penalties,
if any, thereon) due or which will become due for any period commencing prior to
the date of such CSI balance sheets.
2.10 EMPLOYEE BENEFIT PLANS. There are no bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensation, employment or other employee benefit plan, agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any former
or current director, consultant, officer or employee between CSI and any
directors or executive officers of CSI.
The CSI Reports set forth a list of each employee benefit plan, policy,
program or contract including, but not limited to, all such plans, policies and
programs that are covered by Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which are maintained or contributed to by CSI
for the benefit of, or pursuant to which CSI has any liability with respect to,
any current or former employees of CSI (an "CSI Employee Plan") and any trust
(including a trust intended to qualify under Section 501 (c)(9) of the Code).
Each CSI Employee Plan has been established and maintained in all material
respects in accordance with its terms and in compliance with all applicable
laws, including, but not limited to, the Code (if applicable) and ERISA (if
applicable). Neither CSI, the CSI Employee Plans nor any of their respective
current or former directors, officers, employees or agents have, with respect to
any CSI Employee Plan, engaged directly or indirectly in any non-exempt
"prohibited transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA.
CSI neither provides nor has represented, promised or contracted (whether
in oral or written form) to any employee or former employee (either individually
or to employees or former employees as a group) that such employee(s) or former
employees are, or would be, provided with post-retirement medical, dental,
welfare or life insurance benefits upon their retirement.
2.11 CSI SUPPLIED INFORMATION. None of the information relating to CSI to
be supplied by CSI in writing expressly for inclusion in any filing made with
the U.S. Securities and Exchange Commission ("Commission"), including any
amendments or supplements thereto, will, at the time of filing thereof with the
Commission, at the time of the meeting of CSI shareholders to be held in
connection with the merger, or at the Effective Time contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
2.12 INTELLECTUAL PROPERTY. The CSI Reports list all patents, trademarks,
trade names, trademark and trade name registrations, copyright registrations and
all pending applications for any of the foregoing (collectively, "Rights") owned
by CSI and any licenses or Rights granted by or to CSI. Except as set forth in
the CSI Reports (including notification of possible patent infringement under
letter dated February 18, 1997), to the best of CSI's knowledge, CSI owns or is
licensed to use the Rights, trade secret rights and other proprietary rights
necessary for the conduct of its business as currently conducted, or it can
obtain licenses therefor upon commercially reasonable terms, all without
infringement of the rights of others, and to the best of CSI's knowledge no
person is infringing upon the Rights, trade secret rights and other proprietary
rights owned by CSI or used by CSI.
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2.13 MATERIAL CONTRACTS. All contracts, agreements and instruments to
which CSI is a party, which involve future revenue to or payments by CSI that
are material, are listed in the CSI Reports (collectively, the "CSI Material
Contracts"). Except as set forth in the CSI Reports, all the CSI Material
Contracts to which CSI is a party are in full force and effect in all material
respects. CSI has no notice that any party to any such CSI Material Contract
intends to cancel, withdraw, modify or amend such CSI Material Contract. CSI is
not in material default or breach, and no event has occurred or shall occur by
reason of the transactions contemplated herein which would constitute a default
or breach, where such default or breach would entitle another party hereto to
accelerate or terminate such CSI Material Contract or otherwise impose a
material penalty or forfeiture thereunder (whether with or without notice, lapse
of time or the happening or occurrence of any other event), under any CSI
Material Contract.
2.14 FEES. CSI has not paid nor become obligated to pay any investment
banking, brokerage or finders fee or commission to any broker, finder or
intermediary in connection with the transactions contemplated hereby or any
other transaction of the type contemplated hereby.
2.15 GENERAL INDEMNITY. CSI and its shareholders will indemnify, hold
harmless, and at ITEC's request, defend ITEC and ITEC's subsidiaries,
affiliates, directors, officers, employees, agents and independent contractors
from and against any loss, cost, liability, fine, penalty or expense (including
court costs and reasonable fees of attorneys and other professionals) to the
extent to which they have been compensated, arising out of or in connection with
any claim or action, whether based on contract or tort (including negligence and
strict products liability), concerning any known, either disclosed or
undisclosed, patent infringement action(s) for any CSI products or technologies
existing as of the Effective Time.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ITEC AND ITEC SUB
Except as set forth in Schedule 3 hereto (the "ITEC Reports") ITEC and ITEC Sub
represent and warrant to CSI as follows;
3.1 CORPORATE STATUS OF ITEC AND ITEC SUBSIDIARIES. ITEC is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and is duly qualified to do business as a foreign corporation
and is in good standing in all jurisdictions in which the nature of its business
or the ownership of its properties or both makes such qualification necessary,
except where failure to be so qualified would not have a material adverse effect
on the financial condition, business or operations of ITEC and its Subsidiaries
taken as a whole.
3.2 CAPITAL STOCK. The authorized capital stock of ITEC consists of
100,000,000 shares of ITEC Common Stock, $0.005 par value, of which 9,977,145
shares were outstanding on September 30, 1997; 7,500 authorized shares of ITEC
5% Preferred Stock of which 420.5 shares were outstanding on September 30, 1997;
1,200 authorized shares of ITEC's Series C Redeemable Convertible Preferred
Stock of which 500 shares were outstanding on September
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30, 1997; and 1,183 authorized shares of ITEC Preferred Stock none of which were
outstanding on September 30, 1997 ("Shares"). All of the outstanding Shares have
been validly issued and are fully paid and nonassessable. As of September 30,
1997, ITEC (a) had reserved up to 1,295,589 authorized but unissued shares of
ITEC Common Stock for issuance upon exercise of stock options outstanding
pursuant to ITEC's stock option plans, (b) had reserved up to 500,000 authorized
but unissued shares of ITEC Common Stock for issuance upon purchase under ITEC's
stock purchase plan; (c) had reserved up to 3,212,901 authorized but unissued
shares of ITEC Common Stock for issuance upon exercise of certain warrants, (d)
had reserved up to 64,516 authorized but unissued shares of ITEC Common Stock
for issuance upon conversion of the Convertible Debentures, (e) had reserved up
to 24,029 authorized but unissued shares of ITEC Common Stock for issuance upon
conversion of ITEC 5% Preferred Stock; (f) had reserved up to 3,000,000
authorized but unissued shares of ITEC Common Stock for issuance upon conversion
of ITEC Series C Redeemable Convertible Preferred Stock. Except with respect to
such 18,074,180 shares, ITEC does not have any outstanding subscriptions,
options, warrants, rights or other agreements or commitments obligating ITEC to
issue or sell shares of its capital stock or any securities or obligations
convertible into, or exchangeable for, any shares of its capital stock;
provided, however, that ITEC may in the business judgment of its Board of
Directors issue and sell additional equity securities before or after the
Effective Time.
3.3 SUBSIDIARIES. The ITEC Annual Report on Form 10-KSB for the year ended
June 30, 1997 heretofore delivered by ITEC to CSI, together with all items
incorporated by reference therein and all exhibits thereto, sets forth each
Subsidiary of ITEC. Except as is disclosed in the ITEC Reports, ITEC owns,
directly or indirectly, all of the outstanding capital stock of, or other equity
interests in, each of its subsidiaries free and clear of all liens, charges,
pledges, security interests or other encumbrances and all of such capital stock
or other equity interests has been duly authorized and validly issued and is
fully paid and nonassessable. Except as otherwise disclosed in the ITEC Reports,
none of such Subsidiaries has any outstanding subscriptions, options, warrants,
rights or other agreements or commitments obligating it to issue or sell any
shares of its capital stock, or any other equity interest, or any securities or
obligations convertible into or exercisable or exchangeable for, any shares of
capital stock of, or any other equity interest in, such Subsidiary. Each such
Subsidiary is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization, has corporate power and authority to
carry on its business as it is now being conducted, and is duly qualified to do
business and is in good standing in all jurisdictions in which the nature of its
business or the ownership of its properties or both makes such qualification
necessary, except where failure to be so organized, to have such power or
authority or to be so qualified would not have a material adverse effect on the
financial condition, business or operations of ITEC and its Subsidiaries taken
as a whole.
3.4 ITEC SUB CORPORATE STATUS. ITEC Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada with
full corporate power and authority to enter into this Agreement and to carry out
the transactions contemplated hereby. The authorized capital stock of ITEC Sub
consists of 100,000,000 shares of Common Stock, $.001 par value, all of which
are duly authorized, validly issued and outstanding, fully paid and
nonassessable, and are owned of record and beneficially by ITEC, free and clear
of all liens, charges, pledges, security interests or other encumbrances. There
are no outstanding subscriptions, options, warrants, rights or other agreements
or commitments obligating ITEC Sub
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to issue or sell any shares of its capital stock or any securities or
obligations convertible into or exchangeable for any shares of its capital
stock.
3.5 AUTHORITY FOR AGREEMENT. ITEC and ITEC Sub have the corporate power to
enter into this Agreement and to carry out their obligations hereunder. No
further corporate proceedings on the part of ITEC or ITEC Sub are necessary to
authorize this Agreement and the transactions contemplated hereby, except for
approval of this Agreement by the sole stockholder of ITEC Sub (which ITEC
covenants to accomplish). The execution and delivery of this Agreement and the
consummation of the Merger and the other transactions contemplated hereby will
not, with or without the giving of notice or the lapse of time, or both,
conflict with, or result in any violation of or default under, or in any right
to accelerate or the creation of any lien, charge or encumbrance pursuant to,
any provision of the Certificate of Incorporation, Bylaws or other
organizational documents of ITEC, ITEC Sub or any other Subsidiaries of ITEC, or
of any mortgage, indenture, lease, agreement or other instrument, permit,
concession, grant, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to ITEC, ITEC Sub or any other
Subsidiaries of ITEC, or any of their respective properties, except as noted in
the second following sentence, or constitute an event under any employee benefit
plan or arrangement or individual agreement or contract that may result in any
payment (whether of severance pay or otherwise), any acceleration of payment or
funding or vesting, or any increases in benefits or compensation. The
consolidation of the transaction contemplated hereby will not require ITEC to
obtain the consent or approval of any other party to any of the above or affect
the validity or effectiveness of any of the above. Other than in connection with
or in compliance with the provisions of the California Statute, the Nevada
Statute, the Securities Act, the Exchange Act, and the securities or blue sky
laws of the various states, no authorization, consent or approval of, or
declaration of, filing with or notice to any governmental body or authority is
necessary for the execution and delivery of this Agreement by ITEC or ITEC Sub
or the consummation by ITEC or ITEC Sub of the transactions contemplated hereby.
3.6 NEW SECURITIES. The shares of ITEC Common issuable pursuant to the
Merger have been duly and validly authorized and when issued pursuant to the
Merger will be validly issued, fully paid, and nonassessable and shall be issued
in accordance with all applicable federal and state securities laws.
3.7 ANNUAL AND QUARTERLY REPORTS AND OTHER DISCLOSURES. ITEC has
previously furnished to CSI (a) true and complete copies of (i) its Annual
Reports on Form 10-KSB filed with the Commission for the year ended June 30,
1997, (ii) its Quarterly Report on Form 10-QSB filed with the Commission for
the fiscal quarter ended September 30, 1997, (iii) definitive proxy statements
filed by ITEC with the Commission, (iv) each Current Report on Form 8-K filed by
ITEC with the Commission on or after January 1, 1997, and (v) each document, if
any, filed by any Subsidiary of ITEC with the Commission on or after January 1,
1997, and (b) certain other written disclosures (all of which are included in
the ITEC Reports). Each of the ITEC Reports which was filed with the Commission
complied as to form in all material respects with the requirements of the
Securities Act or the Exchange Act, as applicable. Each of the balance sheets
included in the ITEC Reports (including any related notes and schedules) fairly
presents the consolidated financial position of ITEC as of its date and the
other financial statements included in the ITEC Reports (including any related
notes and schedules) fairly present the consolidated
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results of operations or other information included therein of ITEC for the
periods or as of the dates therein set forth, subject, where appropriate, to
normal year-end adjustments, In each case in accordance with generally accepted
accounting principles consistently applied during the periods involved (except
as otherwise stated therein). Except as and to the extent reflected, reserved
against or otherwise disclosed in ITEC's consolidated balance sheet at June 30,
1997 (including the notes thereto), or as otherwise disclosed in the ITEC
Reports, ITEC, to the best of its knowledge, did not have at such date and does
not now have any liabilities or obligations of any kind (other than non-monetary
performance obligations under the ITEC Material Contracts), whether accrued,
absolute, asserted or unasserted, contingent or otherwise, and whether or not
required to be disclosed on a balance sheet prepared in accordance with
generally accepted accounting principles consistently applied, which would have
a material adverse effect on the business, financial condition or prospects of
ITEC.
This Agreement does not contain, and none of the ITEC Reports contained as
of its date, any untrue statement of a material fact or any omission to state a
material fact required to be stated herein or therein or necessary in order to
make the statements herein or therein, in light of the circumstances under which
they were made, not misleading.
3.8 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in the ITEC
Reports, since September 30, 1997 neither ITEC nor any of its Subsidiaries has:
(a) undergone any change in its financial condition, business or
operations, other than changes in the ordinary course of business which
have not been, either in any case or in the aggregate, materially adverse
to ITEC and its Subsidiaries taken as a whole;
(b) experienced any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting its prospects,
properties or businesses;
(c) declared, set aside or paid any dividend (whether in cash, stock
or property) with respect to the capital stock of ITEC;
(d) entered into, or materially amended, a material employment
agreement or severance agreement or effected (other than normal increases
in the ordinary course of its business that are consistent with past
practices and that, in the aggregate, have not resulted in a material
increase in benefits or compensation expense) any material increase in the
compensation payable or to become payable to its directors, officers or
employees or any material increase in any bonus, insurance, pension or
other employee benefit plan, payment or arrangement made to, for or with
any such officers or key employees;
(e) entered into any material transaction other than in the ordinary
course of business;
(f) waived any valuable right or any material debt owed to it;
(g) changed or amended any material contract or arrangement by which
it or any of its assets or properties is bound or subject;
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(h) materially changed its accounting methods, principles or
practices; or
(i) other than in the ordinary course of business consistent with
past practices, materially revalued any of its assets, including, without
limitation, write-downs of inventory or write-offs of accounts receivable.
3.9 COMPLIANCE WITH APPLICABLE LAW. The businesses of ITEC and its
Subsidiaries are not being conducted in violation of any applicable law,
ordinance, regulation, decree or order of any governmental entity, except for
violations which either singly or in the aggregate do not and are not expected
to have a material adverse effect on the financial condition, business or
operations of ITEC and its Subsidiaries taken as a whole.
3.10 TITLE TO PROPERTY AND ASSETS. ITEC owns its property and assets free
and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens which arise in the ordinary course of business and do not
materially impair ITEC's ownership or use of such property or assets. With
respect to the property and assets it leases, ITEC is in compliance in all
material respects with such leases and, to the best of its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
3.11 LITIGATION. Except as described in any of the ITEC Reports, (a) no
material investigation or review by any governmental entity with respect to ITEC
or any of its subsidiaries is pending or, to the best of ITEC's knowledge,
threatened, nor has any governmental entity indicated to ITEC an intention to
conduct the same, and (b) there is no action, suit or proceeding pending or, to
the best of ITEC's knowledge, threatened against or affecting ITEC or its
Subsidiaries at law or in equity, or before any arbitrator or any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, which (i) seeks to enjoin or otherwise attacks this
Agreement or the transactions contemplated hereby, or (ii) either singly or in
the aggregate are not expected to have any material adverse effect on the
financial condition, business or operations of ITEC and its Subsidiaries taken
as a whole.
3.12 TAX MATTERS. ITEC and its consolidated subsidiaries have timely filed
all Federal, state, local and foreign tax returns required to be filed by them
or on their behalf. All taxes shown by such returns to be due and payable have
been paid or are reflected as a liability on the ITEC balance sheets included in
the ITEC Reports. The accruals for taxes reflected on such ITEC balance sheets
are adequate for all unpaid Federal, state, local or foreign taxes (including
interest and penalties, if any, thereon) due or which will become due for any
period commencing prior to the date of such ITEC balance sheets.
3.13 EMPLOYEE BENEFIT PLANS. Except as disclosed in the ITEC Reports,
there is no bonus, profit sharing, compensation, severance, termination, stock
option, pension, retirement, deferred compensation, employment or other employee
benefit plan, agreement, trust, plan, fund or other arrangement for the benefit
or welfare of any former or current director, consultant, officer or employee
between ITEC and any directors or executive officers of ITEC.
The ITEC Reports set forth a list of each employee benefit plan, policy,
program or contract including, but not limited to, all such plans, policies and
programs that are covered by Title I of ERISA, which are maintained or
contributed to by ITEC for the benefit of, or pursuant to which ITEC has any
liability with respect to, any current or former employees of ITEC (a "ITEC
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Employee Plan") and any trust (including a trust intended to qualify under
Section 501 (c)(9) of the Code).
Each ITEC Employee Plan has been established and maintained in all material
respects in accordance with its terms and in compliance with all applicable
laws, including, but not limited to, the Code (if applicable) and ERISA (if
applicable). Neither ITEC, the ITEC Employee Plans nor any of their respective
current or former directors, officers, employees or agents have, with respect to
any ITEC Employee Plan, engaged directly or indirectly in any non-exempt
"prohibited transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA.
ITEC neither provides nor has represented, promised or contracted (whether
in oral or written form) to any employee or former employee (either individually
or to employees or former employees as a group) that such employee(s) or former
employees are, or would be, provided with postretirement medical, dental,
welfare or life insurance benefits upon their retirement.
3.14 INTELLECTUAL PROPERTY. The ITEC Reports list all Rights owned by ITEC
and any licenses of Rights granted by or to ITEC. Except as set forth in the
ITEC Reports, to ITEC's knowledge, ITEC owns or is licensed to use the Rights,
trade secret rights and other proprietary rights necessary for the conduct of
its business as currently conducted, or it can obtain licenses therefor upon
commercially reasonable terms, all without infringement of the rights of others,
and to the best of ITEC's knowledge no person is infringing upon the Rights,
trade secret rights and other proprietary rights owned by ITEC or used by ITEC.
3.15 MATERIAL CONTRACTS. All contracts, agreements and instruments to
which ITEC is a party, which involve future revenue to or payments by ITEC that
are material are listed in the ITEC Reports (collectively, the "ITEC Material
Contracts"). Except as set forth in the ITEC Reports, all the ITEC Material
Contracts to which ITEC is a party are in full force and effect in all material
respects. ITEC has no notice that any party to any such ITEC Material Contract
intends to cancel, withdraw, modify or amend such ITEC Material Contract. ITEC
is not in material default or breach, and no event has occurred or shall occur
by reason of the transactions contemplated herein which would constitute a
default or breach, where such default or breach would entitle another party
hereto to accelerate or terminate such ITEC Material Contract or otherwise
impose a material penalty or forfeiture thereunder (whether with or without
notice, lapse of time or the happening or occurrence of any other event), under
any ITEC Material Contract.
3.16 FEES. ITEC has not paid nor become obligated to pay any investment
banking, brokerage or finder's fee or commission to any broker, finder or
intermediary in connection with the transactions contemplated hereby or any
other transaction of the type contemplated hereby.
ARTICLE 4
COVENANTS
It is further agreed as follows:
4.1 CONDUCT OF BUSINESS. Prior to the Effective Time, or the date, if any,
on which this Agreement is earlier terminated pursuant to Section 6.2 hereof,
ITEC, ITEC Sub and CSI (i) shall, and shall cause each of the respective
Subsidiaries to, conduct their respective operations
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according to their ordinary and usual course of business, (ii) shall use their
reasonable efforts, and shall cause each of their respective subsidiaries to use
their reasonable efforts, to preserve intact their respective business
organizations and good will, keep available the services of their respective
officers and employees and maintain satisfactory relationships with businesses,
suppliers, distributors, customers and others having business relationships with
them, (iii) shall confer on a regular and frequent basis with one or more
representatives of one another to report operational matters of materiality and
the general status of ongoing operations, (iv) shall not amend their respective
Articles/Certificates of Incorporation or Bylaws, except as provided for in this
Agreement, (v) shall notify one another of any material emergency or other
material change in the normal course of their or their Subsidiaries' respective
businesses or in the operation of their or their Subsidiaries' respective
properties and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), (vi) shall deliver
to the other true and correct copies of any reports, statements or schedules
filed by them or their respective Subsidiaries with the Commission subsequent to
the date of this Agreement within one day of the date on which such document is
so filed, (vii) shall neither declare nor pay any dividends on their outstanding
shares of capital stock nor redeem any capital stock, (viii) shall not (a)
except pursuant to the exercise of options, warrants, conversion rights and
other contractual rights existing on the date hereof and described in Sections
2.2 or 3.2 hereof or as otherwise contemplated by Section 3.2 hereof or as
described in the CSI Reports, issue any shares of their respective capital
stocks, effect any stock split or otherwise change their respective
capitalizations as they existed on the date hereof, or (b) grant, confer or
award any options, warrants, conversion rights or other rights not existing on
the date hereof to acquire any shares of their respective capital stocks other
than as contemplated by Section 3.2 hereof, (ix) shall not guarantee any
indebtedness, (x) shall not acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business organization or
division thereof, (xi) shall not release or relinquish any material contract or
other rights, (xii) other than as contemplated by Section 5.2.5 hereof, shall
not adopt or materially amend any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, plan,
fund or other arrangement for the benefit or welfare of any director, officer or
employee, or (except for normal increases in the ordinary course of business
that are consistent with past practices and that, in the aggregate do not result
in a material increase in benefits or compensation expense) increase in any
manner the compensation or fringe benefits of any officer or employee or pay any
benefit not required by any existing plan and arrangement, (xiii) shall not
enter into any material transaction other than in the ordinary course of
business except for transactions heretofore disclosed in writing to the other
parties, and (xiv) shall not enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
4.2 ACCESS AND INFORMATION; CONFIDENTIALITY. CSI, ITEC and ITEC Sub shall
each afford to one another and to one another's officers, employees,
accountants, counsel and other authorized representatives full and complete
access, throughout the period prior to the earlier of the Effective Time or the
termination of this Agreement, if any, pursuant to Section 6.2 hereof, to its
plants, properties, assets, projections, plans, documents, books and records,
and shall use their best efforts to cause their respective representatives to
furnish to one another such additional financial and operating data and any and
all other information as to their and their Subsidiaries' respective businesses,
prospects, liabilities, assets and personnel as the other may
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from time to time reasonably request (including, without limitation, making
available for inquiry their officers, employees and advisers), all for the
purpose of verifying the accuracy of each other's representations and warranties
made in this Agreement.
ITEC, ITEC Sub and CSI shall each cause all information obtained by it or
its representatives pursuant to this Agreement or in connection with the
negotiation hereof to be treated as strictly confidential and shall not use, nor
permit others to use, any such information in a manner detrimental to the other.
4.3 CSI AUDITED FINANCIAL STATEMENTS. CSI shall at its own expense prepare
a balance sheet, statements of operations, cash flows and shareholder's equity
as of and for the ten months ended October 31, 1997 and for the year ended
December 31, 1996 and shall obtain and deliver to ITEC a favorable audit
certification by independent public accountants acceptable to ITEC on such
financial statements. Such audited financial statements shall include as a
supplemental unaudited schedule or unaudited note to the financial statement a
statement of operations for each quarterly periods presented. Such audited
financial statements shall be delivered by CSI to ITEC not later than December
31, 1997.
4.4 FILINGS AND SUBMISSIONS. ITEC shall, with CSI's cooperation and
participation, (i) prepare and file with the Commission as soon as reasonably
practicable such filings with the Commission as may be necessary and/or required
with respect to the transactions contemplated by this Agreement under the
Securities Act or the Exchange Act, as applicable, and (ii) take all such action
as may be required under state blue sky or securities laws in connection with
the transactions contemplated by this Agreement. CSI and ITEC shall each furnish
to one another and one another's counsel all such information as may be required
for the effectuation of the foregoing actions, and each represents and warrants
to the other that no information furnished in connection with such actions or
otherwise in connection with the consummation of the Merger and the other
transactions contemplated by this Agreement with respect to itself will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated in order to make any information so furnished, in the
circumstances under which it is so furnished, not misleading. CSI and ITEC shall
each promptly notify the other if at any time before the Effective Time it
becomes aware of filing or submission, whether to the Commission or others,
contains information pertaining to it, an untrue statement of material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading. In such event, CSI and ITEC shall together
prepare a supplement or amendment to such filing or submission which corrects
such misstatement or omission, and shall cause the same to be filed with the
Commission or others as necessary.
4.5 SHAREHOLDERS' MEETING. In lieu of calling a special meeting of its
shareholders to consider and vote upon the approval and adoption of this
Agreement and to the transactions contemplated hereby, CSI may obtain approval
of the Agreement and such transactions by written consent of holders of a
majority of the capital stock of CSI. Delivery to ITEC of an executed copy of
such written consent shall constitute satisfaction of CSI's obligations
hereunder. CSI will call a special meeting of its shareholders to consider and
vote upon the approval and adoption of this Agreement and the transactions
contemplated hereby. The record date for and the date of such meeting shall be
determined jointly by CSI and ITEC, but each shall occur as soon as practicable.
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Except as may be required by CSI's directors' fiduciary duty (as determined in
the specific case by a written opinion of CSI's outside legal counsel), CSI (a)
will, through its Board of Directors and management, recommend to its
shareholders the approval and adoption of this Agreement and the transactions
contemplated hereby and (b) will use its best efforts to solicit the requisite
vote of approval.
CSI hereby represents that the Board of Directors of CSI has unanimously
(a) determined that the Merger is fair and in the best interest of the company
and its shareholders, (b) approved this Agreement and the Merger, and (c)
resolved to (except as may be required by CSI's directors' fiduciary duty (as
determined in the specific case by a written opinion of CSI's outside legal
counsel)) recommend approval and adoption of the Merger and this Agreement by
the CSI shareholders.
4.6 EXEMPTION FROM REGISTRATION. The parties hereto intend that the shares
of ITEC to be issued to the shareholders of CSI shall be exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
pursuant to Section 4(2) of the Act and the rules and regulations promulgated
thereunder and exempt from the registration requirements of the applicable
states. In furtherance thereof, the Shareholders of CSI will execute and deliver
to ITEC on the closing date, investment letters suitable to ITEC counsel, in
form substantially as per Exhibit 4.6 attached hereto.
4.7 RESERVED
4.8 REASONABLE EFFORTS; FURTHER ASSURANCES. Subject to the terms and
conditions herein provided, each of the parties agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to more fully effectuate the parties' intentions as expressed in
this Agreement, to cause all closing conditions of the other parties to be
satisfied, and to consummate and make effective the Merger and the other
transactions in accordance with the terms of this Agreement. No party hereto
will, however, take or permit steps to be taken that would cause such party to
be in breach or default of any covenant, representation or warranty of that
party contained herein, or which result in a breach of applicable statutory or
non-statutory laws.
4.9 PUBLIC DISCLOSURES. No disclosure of this Agreement, its contents or
the transactions contemplated hereby shall be made by any person except at such
time and in such form and content as may be agreed upon by ITEC and CSI
(provided, however, that such content shall be reasonably satisfactory to CSI).
After the initial public disclosure thereof, CSI will consult with ITEC before
issuing any press release or otherwise making any public statement (including,
without limitation, statements by CSI generally to its customers, employees or
suppliers) with respect to the transactions contemplated hereby.
4.10 FOREWARNING. Each party shall promptly give written notice to the
other parties upon becoming aware of the occurrence or, to its knowledge,
impending or threatened occurrence, of any event which would cause or constitute
a breach of any of its representations, warranties, or covenants contained in
this Agreement or an inability to satisfy the conditions to another party's
obligation to effect the Merger, and will use its best efforts to prevent or
promptly remedy the same.
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ARTICLE 5
CONDITIONS PRECEDENT
5.1 CONDITIONS PRECEDENT TO CSI'S OBLIGATION TO EFFECT THE MERGER. The
obligation of CSI to effect the Merger shall be subject, at its option, to the
following conditions:
5.1.1 REPRESENTATIONS, COVENANTS, CERTIFICATE. (a) The
representations and warranties of ITEC and ITEC Sub herein contained shall
in all material respects be true as of the date of this Agreement and as of
the Effective Time with the same effect as though made at the Effective
Time; (b) ITEC and ITEC Sub shall in all material respects have performed
all obligations and complied with all covenants required by this Agreement
to be performed or complied with by them on or prior to the Effective Time;
(c) there shall have been no material adverse changes in ITEC's or ITEC
Sub's business, assets, financial condition or prospects; and (d) ITEC and
ITEC Sub shall each have delivered to CSI a certificate, dated the
Effective Time and signed on its behalf by its President or a Vice
President, to both such effects.
5.1.2 OPINION OF COUNSEL FOR ITEC AND ITEC SUB. CSI shall have
received from Carmine Bua, Esq., counsel for ITEC and ITEC Sub (or, if ITEC
utilizes other counsel in connection with any suit or proceeding, from such
other counsel with respect thereto), an opinion (subject to reasonable
exceptions, limitations, qualifications and assumptions), dated the
Effective Time, in form and substance reasonably satisfactory to CSI, to
the effect that (a) ITEC is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, has corporate
power to own all of its properties and assets and to carry an its business
as it is now being conducted and has corporate power and authority to enter
into this Agreement and to carry out the transactions contemplated hereby;
(b) ITEC Sub in a corporation duly organized, validly existing and in good
standing under the laws of the State of Nevada, and has corporate power to
enter into this Agreement, consummate the Merger and to carry out the other
transactions contemplated hereby; (c) this Agreement has been duly
authorized, executed and delivered by ITEC and ITEC Sub and constitutes
their valid and binding obligation, and all corporate action by them
required in order to effect the transactions contemplated hereby has been
taken; (d) the shares of ITEC Common Stock issuable pursuant to the Merger
have been duly and validly authorized and upon issuance will be validly
issued, fully paid and nonassessable shares; (e) except as provided in
Section 3.5 hereof, no order, authorization, consent or approval of, or
registration, declaration or filing with any governmental authority is
required in connection with the consummation by ITEC and ITEC Sub of the
Merger or by ITEC and ITEC Sub of the other transactions contemplated by
this Agreement; (f) the execution, delivery and performance of this
Agreement by ITEC and ITEC Sub and the consummation of the transactions
contemplated hereby will not constitute a breach or violation of or default
under the Certificate of Incorporation or Bylaws of ITEC or ITEC Sub; (g)
upon the filing of this Agreement and/or other appropriate certificates
with the in accordance with the California Statute and the Nevada Statute
with the effect provided therein and in Article 1 of this Agreement; (h)
such counsel knows of no suit or proceeding pending or threatened against
or affecting ITEC or any of its Subsidiaries which is reasonably likely to
materially adversely affect the financial condition,
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business or operations of ITEC and its Subsidiaries taken as a whole; (i)
and a favorable opinion as to such other matters incident to the matters
herein contemplated as CSI and its counsel may reasonably request,
including the validity of all proceedings taken by ITEC. CSI shall agree to
waive receipt of such opinion of counsel until December 15, 1997.
5.1.3 RESERVED
5.1.4 CSI REPORTS. Within 10 business days following the execution of
this Agreement, CSI shall deliver to ITEC the CSI Reports. Subsequent to
the Effective Time, the CSI Reports shall be updated through December 31,
1997 and shall be delivered to ITEC on such date.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ITEC AND ITEC SUB. The
obligations of ITEC Sub to effect the Merger, and of ITEC to deliver the shares
of ITEC Common Stock issuable pursuant to the Merger, shall be subject, at their
option, to the following conditions:
5.2.1 REPRESENTATIONS, COVENANTS, CERTIFICATION. (a) The
representations and warranties of CSI herein contained shall in all
material respects be true as of the date of this Agreement and as of the
Effective Time with the same affect as though made at the Effective Time;
(b) CSI shall in all material respects have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Effective Time; (c) there shall have been
no material adverse change in CSI's business, assets, financial condition
or prospects; and (d) CSI shall have delivered to ITEC a certificate, dated
the Effective Time and signed on its behalf by its President or a Vice
President, to both such effects.
5.2.2 OPINION OF COUNSEL FOR CSI. ITEC and ITEC Sub shall have
received from Wenthur & Chachas, counsel for CSI (or, if CSI utilizes other
counsel in connection with any suit or proceeding, from such other counsel
with respect thereto), an opinion (subject to reasonable exceptions,
limitations, qualifications and assumptions), dated the Effective Time, in
form and substance reasonably satisfactory to ITEC, to the effect that (a)
CSI is a corporation duly organized, validly existing and in good standing
under the laws of the State of California, has corporate power to own all
of its properties and assets and to carry on its business as it is now
being conducted, and has corporate power and authority to enter into this
Agreement, consummate the Merger and to carry out the other transactions
contemplated hereby; (b) this Agreement has been duly authorized, executed
and delivered by CSI and constitutes the valid and binding obligation of
CSI, and all corporate action by it required in order to effect the
transactions contemplated hereby has been taken; (c) except as provided in
Section 2.3 hereof, no order, authorization, consent or approval of, or
registration, declaration or filing with any governmental authority is
required of CSI in connection with the consummation by CSI of the Merger or
by CSI of the other transactions contemplated by this Agreement; (d) the
execution, delivery and performance of this Agreement by CSI and the
consummation of the transactions contemplated hereby will not constitute a
breach or violation of or default under the Articles of Incorporation or
Bylaws of CSI; (e) upon the filing of this Agreement and/or other
appropriate certificates with the Secretary of State of California and with
the Secretary of State of Nevada, the
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Merger shall have been duly consummated in accordance with the
California Statute and the California Statute with the effect provided
therein and in Article 1 of this Agreement; (f) such counsel knows of no
suit or proceeding pending or threatened against or affecting CSI or any
of its Subsidiaries which is reasonably likely to materially adversely
affect the financial condition, business or operations of CSI and its
Subsidiaries taken as a whole; and a favorable opinion as to such other
matters incident to the matters herein contemplated as ITEC and its
counsel may reasonably request, including the validity of all
proceedings taken by CSI. ITEC and ITEC Sub shall agree to waive receipt
of such opinion of counsel until December 31, 1997.
5.2.3 RESERVED
5.2.4 MESSRS. HERBERT, FRENCH AND CALDWELL AS EMPLOYEES. Messrs.
Herbert, French and Caldwell shall enter into employment agreements (on
terms and conditions as set forth in a term sheet which has been delivered
by ITEC to them and otherwise of like tenor as the employment agreements
ITEC's subsidiaries shall enter with its other senior executive officers)
with CSI calling for them to serve as an executive officer of CSI for no
less three years beginning at the Effective Time. Compensation under the
agreements shall be at the fair market value of the services to be
provided, which has been determined to be their current salaries through
December 31, 1997 and thereafter the compensation will based on the mid
range of the AEA Compensation Study or such other amount as agreed to by
ITEC's Compensation Committee and the respective individual(s). Messrs.
Herbert, French and Caldwell are also to receive health benefits under
comparable terms and conditions as other employees in similar positions
within ITEC subsidiaries.
5.2.5 MESSRS. HERBERT, FRENCH AND CALDWELL NON COMPETE AGREEMENTS.
Mr. Herbert will enter into a non-compete agreement for a period that is
three-years beyond the termination of employment, and Messrs. French and
Caldwell will enter into non-complete agreements for a period that is
one-year beyond the termination of employment.
5.2.6 CONVERSION OF NOTES, ACCRUED INTEREST AND OTHER LIABILITIES
Prior to the Effective Time of the Merger, the $100,000 convertible note
payable plus accrued but unpaid interest and any other liabilities due to
Mr. Woo Young Kim will be converted into common stock of CSI.
5.2.7 ITEC REPORTS. Within 10 business days following the execution
of this Agreement, ITEC shall deliver to CSI the ITEC Reports.
5.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY. The obligations
of CSI and ITEC Sub to effect the Merger and the obligation of ITEC to deliver
the shares of ITEC Common Stock issuable pursuant to the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following additional
conditions:
5.3.1 STOCKHOLDERS' APPROVAL. The holders of the shares of capital
stock of CSI and ITEC Sub entitled to vote thereon shall have duly approved
this Agreement and the transactions contemplated hereby, all in accordance
with the requirements of the
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California Statute and the Nevada Statute and the respective
Articles/Certificate of Incorporation and Bylaws of CSI an ITEC Sub.
5.3.2 INJUNCTIONS. No preliminary or permanent injunction or other
order by any United States Federal or state court which prevents the
consummation of the transactions contemplated by this Agreement shall have
been issued.
5.3.3 POOLING OF INTERESTS. CSI shall take all actions reasonably
requested by ITEC, including obtaining agreements from their affiliates
regarding the sale of their shares, to assist ITEC in accounting for the
transaction contemplated by this Agreement as a "pooling of interest."
5.3.4 TAX-FREE REORGANIZATION. ITEC and CSI shall take all actions
necessary to ensure that the transaction described herein shall be
qualified as a tax-free reorganization under Section 368 of the Code.
ITEC and the Shareholders shall execute, and CIS shall file with the
Internal Revenue Service, an election under Code section 1377(a)(2) to
treat 1996-1997 taxable year as if it consisted of two taxable years, the
first of which ends at the Effective Time.
The parties shall deliver the various other documents that are
described elsewhere in the agreement evidencing satisfaction of the
conditions to the Merger, and shall take any other actions expressly
required by this agreement, or reasonably requested by any of them, at or
before the Effective Time in order to consummate the merger.
5.4 CLOSING DATE. The closing of the Merger contemplated by this Agreement
shall, unless another date or place is agreed to in writing by the parties
hereto, take place at the offices of Imaging Technologies Corporation, 11031 Via
Frontera, San Diego, California 92127 (except for the filing of this Agreement
and/or other appropriate certificates with the Secretary of State of California
and the Secretary of State of Nevada, which shall take place in the office of
such respective Secretaries), on (i) the date of the meeting of the shareholders
of CSI to approve the Merger, if all conditions to the Merger have been
satisfied or waived on or before such date, (ii) the business day following the
satisfaction or waiver of all conditions to the Merger if all such conditions
have not been satisfied or waived on or before the date of such meeting of
shareholders, or (iii) the date the Certificate of Merger is filed in the State
of California if the mutual agreement of the parties is to proceed with the
closing after delivery of the CSI Reports, the ITEC Reports, shareholder
approval of ITEC Sub and CSI and Board approval by ITEC, ITEC Sub and CSI.
ARTICLE 6
DEFINITIONS AND MISCELLANEOUS
6.1 DEFINITIONS OF CERTAIN TERMS. As used herein, the following terms
shall have the following meanings:
CALIFORNIA STATUTE: as defined in the fourth paragraph of this
Agreement.
CODE: as defined in the second paragraph of this Agreement.
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CONVERTIBLE DEBENTURES: ITEC Convertible Subordinated Notes.
DISSENTING SHARES: as defined in Section 4.9 hereof.
EFFECTIVE TIME: the time at which this Agreement and/or other
appropriate certificates shall be filed in the office of the Secretary of
State of California in accordance with Sections 1103 and 1108 of the
California Statute.
ERISA: as defined in Section 2.10 hereof.
EXCHANGE AGENT: as defined in section 1.4.2 hereof.
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
MERGER: the merger of CSI into ITEC Sub in accordance with the terms
and conditions of this Agreement.
NEVADA STATUTE: as defined in the fourth paragraph of this Agreement.
CSI COMMON STOCK: shares of Common Stock of CSI.
CSI REPORTS: as defined in Article 2 hereof.
CSI STOCK OPTION PLANS: the Stock Option Plan of CSI.
ITEC COMMON STOCK: shares of Common Stock, $0.005 value, of ITEC.
ITEC 5% PREFERRED STOCK: shares of 5% Convertible Preferred Stock,
$1,000 par value, of ITEC.
ITEC SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK: shares Series C
Redeemable Convertible Preferred Stock, $1,000 par value, $10,000
liquidation value of ITEC.
ITEC REPORTS: as defined in Article 3 hereof.
ITEC SUB COMMON STOCK: shares of Common Stock, $0.001 par value, of
ITEC Sub.
SATISFACTORY AFFILIATE AGREEMENT: as defined in Section 4.6 hereof.
COMMISSION: the Securities and Exchange Commission, or any
governmental agency succeeding to its functions.
SECURITIES ACT: Securities Act of 1933, as amended.
SUBSIDIARY: any corporation, association, or other business entity a
majority (by number of votes) of the shares of capital stock (or other
voting interests) of which is owned by CSI, ITEC or their respective
Subsidiaries.
SURVIVING CORPORATION: as defined in Section 1.1 hereof.
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6.2 TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Merger contemplated
herein may be abandoned (a) by the mutual written consent of ITEC, ITEC Sub and
CSI, (b) by either ITEC Sub or CSI if the Effective Time has not occurred prior
to January 31, 1998 (provided that the right to terminate this Agreement under
this Section 6.2 shall not be available to any party (ITEC and ITEC Sub being
considered for this purpose a single party) whose failure to fulfill any
obligation under this Agreement has been the sole cause of or has alone resulted
in the failure of the Effective Time to occur on or before such date), or (c) by
either ITEC Sub or CSI, as the case may be, if any of the conditions specified
herein with respect to its obligations has not been met or waived, as of the
date required to be met, or has become impossible to satisfy. In the event of
such termination and abandonment under any of clauses (a) through (c) no party
hereto shall have any liability or further obligations to any other party to
this Agreement, except as provided in Section 6.5 and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
6.3 AMENDMENTS AND SUPPLEMENTS. At any time before or after approval and
adoption of this Agreement by the respective shareholders of CSI and ITEC Sub
and prior to the Effective Time, this Agreement may be amended or supplemented
by (and only by) a written instrument signed by CSI, ITEC and ITEC Sub and
approved by their respective Boards of Directors, except that, after the
shareholders of CSI have approved this Agreement, there shall be no amendment
which changes the ratio at which CSI Common Stock is to be converted into ITEC
securities as provided in Article 1, without the further approval of such
shareholders.
6.4 EXTENSIONS AND WAIVERS. At any time prior to the Effective Time, the
parties hereto, by act or order by their respective Boards of Directors, may (i)
extend the time for the performance of any of the obligations or other acts of
the parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, and
(iii) waive compliance with any of the agreements or conditions contained herein
except the conditions set forth in Section 5.3.1 hereof. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed on behalf of such party by a duly
authorized officer.
6.5 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS. Except for
the obligations of the parties contained in Sections 4.2, 4.3, 4.4, 4.6, 4.7 and
4.9 hereof, the respective representations and warranties of CSI, ITEC and ITEC
Sub contained in Articles 2 and 3 and their respective agreements contained in
Article 4 shall expire with, and be terminated by, the Merger, and none of CSI,
ITEC and ITEC Sub shall have any liability whatsoever with respect to such
representations, warranties or agreements after the Effective Time. The
obligations of the parties contained in Sections 4.2 and 4.8 shall survive
termination of this Agreement.
6.6 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, and
costs and expenses appropriately characterized as joint expenses shall be paid
in equal shares by CSI and ITEC.
6.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California.
21
<PAGE>
6.8 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered by hand or mailed by registered
or certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice) and shall be deemed given on the date on which so hand-delivered or on
the third business day following the date on which so mailed:
To ITEC or ITEC Sub: 1031 Via Frontera
San Diego, California 92127
Attention: Brian Bonar
To CSI: 120 Birmingham Drive, Suite 210
Cardiff By The Sea, California 92007
Attention: Hiram French and Franz Herbert
With copy to:
Wenthur & Chachas
4180 La Jolla Village Drive
La Jolla, California 92037
6.9 EQUITABLE REMEDIES. ITEC and CSI acknowledge and agree that the legal
remedies available to ITEC and CSI in the event ITEC or CSI violate the
covenants and agreements made in this Agreement would be inadequate and that
ITEC or CSI would be entitled, without posting any bond or other security, to
temporary, preliminary and permanent injunctive relief, specific performance and
other equitable remedies in the event of such a violation, in addition to any
other remedies which ITEC or CSI may have at law or in equity.
6.10 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provision of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad (but fully as broad) as is enforceable.
6.11 ENTIRE AGREEMENT, ASSIGNABILITY, ETC. This Agreement (i) constitutes
the entire agreement, and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof (including without limitation the letter of
intent), (ii) is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder, and (iii) shall not be assignable by
operation of law or otherwise.
22
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND
PLAN OF REORGANIZATION
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
IMAGING TECHNOLOGIES CORPORATION
Attest:
/s/ Ralph R. Barry By /s/ Brian Bonar
- ------------------------------- ------------------------------------
Title: Secretary Brian Bonar, President and
Chief Operating Officer
23
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND
PLAN OF REORGANIZATION
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
COLOR SOLUTIONS, INC.
Attest:
/s/ Franz Herbert By /s/ Hiram French
- ------------------------------- ------------------------------------
Title: Secretary Hiram French, President
By /s/ Franz Herbert
------------------------------------
Franz Herbert, Chief Technical Officer
By /s/ Dan Caldwell
------------------------------------
Dan Caldwell
Vice President
24
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND
PLAN OF REORGANIZATION
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
ITEC SUB
Attest:
/s/ Ralph R. Barry By /s/ Brian Bonar
- ------------------------------- ------------------------------------
Title: Secretary Brian Bonar, President
25
<PAGE>
FORM OF OFFICERS' CERTIFICATE OF APPROVAL
OF
AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION
OF
ITEC SUB, INC. (A NEVADA CORPORATION)
The undersigned certify that:
1. They hold the corporate office at ITEC Sub, Inc., a Nevada corporation
(the "Corporation") designated under their signatures below.
2. The Agreement and Plan of Merger and Plan of Reorganization (the
"Agreement of Merger"), to which this certificate is attached was duly approved
by the Board of Directors of the Corporation on November 30, 1997.
3. The Corporation has one (1) class of stock, common stock ("Common
Stock"). The total number of shares of Common Stock presently outstanding is
1,000,000 shares. The principal terms of the Agreement of Merger to which this
certificate is attached were approved by the vote of all the issued and
outstanding Common Stock of the Corporation.
4. No vote of the shareholders of the parent of the Corporation was
required.
We further declare under the penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: November 30, 1997 /s/ Brian Bonar
----------------------------------------
Brian Bonar
President
Date: November 30, 1997 /s/ Ralph R. Barry
----------------------------------------
Ralph R. Barry
Vice President and Secretary
<PAGE>
ITEC SUB INC.
CORPORATE RESOLUTION
RESOLVED, that on November 30, 1997 the Board of Directors of ITEC Sub, Inc., a
Nevada corporation (the "Company") appointed the following to serve at the
discretion of the Board as officers of the Company until such time as they may
be replaced:
Brian Bonar, President
Ralph R. Barry, Vice President and Secretary
RESOLVED, that the Board ratified its previous authorization for the Agreement
and Plan of Merger and Plan of Reorganization dated November 30, 1997.
The Board hereby directs and authorizes the Officers of the Company, jointly or
individually, to execute any documents necessary to complete the merger.
ITEC SUB, INC.
/s/ Ralph R. Barry
Secretary
<PAGE>
FORM OF OFFICERS' CERTIFICATE OF APPROVAL
OF
AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION
OF
COLOR SOLUTIONS, INC. (A CALIFORNIA CORPORATION)
Hiram T. French and Franz H. Herbert certify that:
1. They are President and Secretary, respectively, of Color Solutions,
Inc., a California corporation (the "Corporation").
2. The Agreement and Plan of Merger and Plan of Reorganization (the
"Agreement of Merger"), to which this certificate is attached was duly
approved by the Board of Directors of the Corporation on November 30, 1997.
3. The Corporation has one (1) class of stock, common stock ("Common
Stock"). The total number of shares of Common Stock presently outstanding
is 3,030 shares. The principal terms of the Agreement of Merger to which
this certificate is attached were approved by the vote of all the issued
and outstanding Common Stock of the Corporation.
We further declare under the penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Date: November 30, 1997 /s/ Hiram T. French
----------------------------------------
Hiram T. French, President
Date: November 30, 1997 /s/ Franz H. Herbert
----------------------------------------
Franz H. Herbert, Secretary
<PAGE>
COLOR SOLUTIONS, INC.
CORPORATE RESOLUTION
RESOLVED, that the Board of Directors of Color Solutions, Inc., a California
corporation, on November 30, 1997 ratified its previous authorization for the
Agreement and Plan of Merger and Plan of Reorganization dated November 30, 1997.
The Board hereby directs and authorizes the Officers of the Company, jointly
or individually, to execute any documents necessary to complete the merger.
COLOR SOLUTIONS, INC.
/s/ Franz H. Herbert
Secretary
<PAGE>
EXHIBIT 21 - LIST OF SUBSIDIARIES OF THE COMPANY
1. Prima International, a California corporation and a wholly-owned subsidiary
of ITEC.
2. Laser Printer Accessories Corporation, a Delaware corporation and a
wholly-owned subsidiary of ITEC (Inactive).
3. Personal Computer Products, Inc., doing business as PCPI Technologies, a
California corporation and a wholly-owned subsidiary of ITEC.
4. Co-Processors, Inc., a California corporation and a wholly-owned subsidiary
of ITEC (Inactive).
5. NewGen Imaging Systems, Inc., a California corporation and a wholly-owned
subsidiary of ITEC.
6. Color Solutions, Inc., a California corporation and a wholly-owned
subsidiary of ITEC.
7. McMican Corporation, a California corporation and a wholly-owned subsidiary
of ITEC.
8. AMT Accel UK Ltd., located in ITEC House, Unit 9 Milbanke Court, Milbanke
Way, Bracknell, Berkshire RG12 1RP.
9. ITEC Europe Ltd., is located in ITEC House, Unit 9 Milbanke Court, Milbanke
Way, Bracknell, Berkshire RG12 1RP.
45
<PAGE>
EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors, Imaging Technologies Corporation
We hereby consent to the incorporation by reference in each of the
Registration Statements on Form S-8 (No.'s 2-93993, 33-25980, 33-41396,
33-57372, 33-86262, 33-86376 333-00871, 333-00873 and 333-00879) of Imaging
Technologies Corporation of our report dated October 5, 1998 appearing in the
June 30, 1998 Annual Report, of this Form 10-K.
BOROS & FARRINGTON APC
SAN DIEGO, CALIFORNIA
October 13, 1998
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