0000910680-01-500543.txt : 20011019
0000910680-01-500543.hdr.sgml : 20011019
ACCESSION NUMBER: 0000910680-01-500543
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20011012
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: IMAGING TECHNOLOGIES CORP/CA
CENTRAL INDEX KEY: 0000725394
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 330021693
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-12641
FILM NUMBER: 1758465
BUSINESS ADDRESS:
STREET 1: 15175 INNOVATION DRIVE
CITY: SAN DIEGO
STATE: CA
ZIP: 92128
BUSINESS PHONE: 6196131300
FORMER COMPANY:
FORMER CONFORMED NAME: PERSONAL COMPUTER PRODUCTS INC
DATE OF NAME CHANGE: 19920703
10-K
1
d753108_1.txt
FORM 10K
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X|ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
COMMISSION FILE NO. 0-12641
================================================================================
[ITEC LOGO]
IMAGING TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0021693
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
15175 Innovation Drive
San Diego, California 92128
(858) 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. Yes |X| No |_|
At October 1, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $7,446,119 based on the last
trade price as reported on the NASD Electronic Bulletin Board. 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 1, 2001, there were 173,165,565 shares of the registrant's Common
Stock, $0.005 par value, issued and outstanding.
1
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 judgment 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), Prima, Inc., a
California corporation, McMican Corporation, a California corporation, NewGen
Imaging Systems, Inc., a California corporation (NewGen), Color Solutions, Inc,
a California corporation (CSI), ITEC Europe, Ltd., formed under the laws of the
United Kingdom, (ITEC Europe), DealSeekers.com, Inc. , a Delaware corporation
(71.4% owned), and EduAdvantage.com, Inc., a California Corporation.
PART I
================================================================================
ITEM 1.
BUSINESS
--------
Imaging Technologies Corporation (OTCBB: ITEC) ("ITEC" or "the
Company") 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 15175
Innovation Drive, San Diego, CA 92128. The Company's main phone number is (858)
613-1300.
ITEC distributes high-quality digital imaging solutions and color
management software products for use in graphics, publishing, digital
photography, and other business and technical markets. In the 1980's, ITEC began
the development of core technologies related to the design and development of
controllers for non-impact printers and multifunction peripheral devices, such
as copiers, scanners, and facsimile machines. During the past few years, the
Company has expanded its product offerings to software to improve the accuracy
of color reproduction. However, the Company has suspended the development and
manufacture of its own, branded printers and controllers.
ITEC's ColorBlind(R) color management software is a suite of
applications, utilities and tools designed to create, edit, and apply industry
standard International Color Consortium ("ICC") profiles that produce accurate
color rendering across a wide range of peripheral devices.
MARKET OVERVIEW
---------------
ITEC's principal markets encompass desktop digital imaging and
printing. The Company's primary market segment is image management to enhance
the function of printers and/or digital copiers. The Company provides a variety
of technical solutions and products to meet the changing needs of this market,
including printers, plotters, copiers, and software.
Various underlying industries may have a direct impact on ITEC's market
potential. For example, according to the Gartner Group, in 1999 5.4 million of
the 103 million households in the United States currently had a digital camera
with an estimated 12.7 million U.S. households planning on having a digital
camera by the end of that year. Worldwide digital camera shipments exceeded 6.5
million units in 1999, and will increase dramatically to 41.6 million by 2004,
according to International Data Corp.
Changes in the technology of document creation, management, production,
and transmittal (including the Internet) have been transforming the imaging
market. The greater bandwidth now available to even small desktop computers has
facilitated the movement of color images; this has created an increase in the
demand for cross platform color reproduction.
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 printing and document management. In the last few years,
the market has been reshaped from one dominated by dedicated printers and
scanners at the workstation, to an emphasis on document workflow using
network-shared imaging products than enable remote document delivery and
distribution.
2
The direct-to-plate and direct-to-print trends in the printing industry
have created more demand for digital color proofing due to the fact that
conventional proofing methods cannot be used in those environments.
The market growth and acceptance of the digital camera and the improved
resolution of these cameras have increased the demand for color management and
accurate color printing.
Accordingly, color integrity is an important underlying requirement in
the imaging process. The widespread use of color applications at the desktop,
demand for higher quality color reproduction, expanded use of the Internet for
document dissemination and e-commerce, growth of office networks, and the
increased acceptance and use of digital photography are some of the factors that
influence our markets.
ITEC is working to deliver solutions that meet current and future
demands of the imaging markets.
BUSINESS STRATEGY
-----------------
The Company's objective is to be a global market leader in digital
imaging by delivering higher-quality, easy-to-use products and technology. ITEC
is focused on continuing to provide advanced integrated digital imaging
solutions.
COLOR MANAGEMENT SOFTWARE
Accurate color reproduction is one of the largest single challenges
facing the imaging industry. Customers demand systems that are easy to use,
predictable and consistent. The fundamental challenge is the control of "color
space." Color space for printed materials is different from the color space for
devices such as cameras, scanners and computer monitors. A color management
system is needed so users can convert their files for use with different
devices. The varying characteristics of each device are captured in a device
profile. The International Color Consortium ("ICC") has established a standard
for the format for these profiles.
ITEC's ColorBlind Color management software is a pre-packaged suite of
applications, utilities, and tools that allow users to precisely create ICC
profiles for each device in the color workflow including scanners, monitors,
digital cameras, printers, and other specialized digital color input and output
devices. Once profiled, ColorBlind balances these profiles to produce accurate,
consistent, and reliable color rendering from input to output.
In order to advance "ColorBlind Aware" as an industry standard, ITEC
actively encourages printer, scanner, and monitor manufacturers to integrate
ColorBlind into product designs. ColorBlind software is sold as a stand-alone
application or licensed to OEM's for resale to be bundled with peripheral
devices.
ITEC has launched an Internet site, COLOR.COM, as a resource center to
provide information on the highest quality correct color. This site allows
consumers to purchase ITEC products, including ColorBlind software. This ITEC
web site also serves as a resource center for color imaging, with information
including white papers on color imaging and management, links to color
consultants and experts, and products.
PRINTERS, PLOTTERS, COPIERS AND ACCESSORIES
ITEC sells printer, plotters, copiers, and other imaging products to
end-users and distributors. These product lines have been developed and
manufactured by other companies. The products provide high performance, enhanced
image quality, and advanced page processing. The Company's product strategy is
to provide value-added imaging products that meet the more exacting requirements
of specialized segments of the market.
ITEC sells its products to end-users and to a distribution channel of
value-added resellers (VARs), retail vendors, and systems integrators.
E-COMMERCE
ITEC intends to expand its channels of distribution on the Internet.
The Company began this initiative in late 2000 when it purchased
EduAdvantage.com (including its Softw4U.com operations) in order to have the
necessary technical and support infrastructure. EduAdvantage.com sells computer
software and hardware products that are deeply discounted by the manufacturers
to be sold only to students and teachers. In addition, EduAdvantage.com sells
computers and software to any commercial buyer via its Soft4U Website. The
Company plans to sell printers and associated supplies through its
Dealseekers.com site. Dealseekers may be expanded to include manufacturers'
special offered products such as refurbished and /or end of life products. The
Company plans to utilize its COLOR.COM website as an Internet reseller of color
management software, instruments, and training books.
3
COMPETITION
-----------
The markets for the Company's products are highly competitive and
rapidly changing. The Company's ability to compete in its markets depends on a
number of factors, 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.
OPERATIONS
----------
ITEC's consolidated corporate headquarters facility houses all of
ITEC's U.S. operations. The Company's 21,000 square foot headquarters facilities
house all of the Company's engineering, sales and marketing, customer support,
accounting, production, and warehousing departments. In addition, ITEC's
DealSeekers.com and Color.com Internet e-Commerce operations are managed from
this location.
ITEC has organized the company into two groups: (1) imaging solutions,
including software products and accessories; and (2) e-commerce.
IMAGING PRODUCTS
The imaging products group provides a range of digital color and
monochrome printer products for publishing markets; and advanced, multi-function
office equipment, including copiers.
The Company markets products direct to major accounts, and to a
distribution channel of value-added resellers (VARS) and systems integrators.
The Company sells to dealers and distributors in the United States, Canada,
Europe, Latin America, and Asia. The Company expects export sales to continue to
represent a significant portion of its sales.
ITEC supports its distributor network and end-user customers through
centralized distribution and operations center at the Company's San Diego
headquarters.
SOFTWARE PRODUCTS
ITEC's software products group produces ColorBlind Color Management
software. ColorBlind is an award-winning suite of applications that produce
accurate color rendering across a wide range of peripheral devices.
ColorBlind software is sold as a pre-packaged, off-the shelf
application. Additionally, the software is licensed to certain OEM customers who
may add ColorBlind features and functions to existing peripheral products such
as printers, plotters, and monitors.
ITEC has expanded its operations internationally by establishing
product development and ColorBlind software distribution contracts in China and
Japan. Additionally, the Company has distribution agreements in Germany,
England, Australia, South Korea, and Singapore.
ITEC has begun to introduce new versions of its ColorBlind family of
products to provide full support to the latest Apple(R) Macintosh(R)
technologies, including the OS9 operating system for the G4 PowerMac(R), as well
as support for USB devices.
E-COMMERCE
ITEC's e-commerce group consists of EDUADVANTAGE.COM, INC., a wholly
owned subsidiary of ITEC, which was acquired in fiscal 2001. EduAdvantage sells
education and productivity software to educational institutions. A second web
site, SOFTWARE4U is operated to sell these products to end-users.
DEALSEEKERS.COM, is expected to be re-launched in the forthcoming
fiscal year. It is intended as an interactive Internet catalog showroom that
features thousands of digital imaging products, including consumable products
(toner, ink, and paper) for printers and copiers. The site will partner with
manufacturers and other market makers, offering them a single source for the
efficient and orderly liquidation of excess and previous-version inventory. The
printer consumables market represents an estimated $450 billion a year industry.
MANUFACTURING, PRODUCTION, AND SOURCES OF SUPPLY
------------------------------------------------
ITEC has outsourced nearly all of its manufacturing. In June 2001, the
Company suspended manufacturing of ITEC-branded products. The Company will
continue to manufacture its software products in-house and through selected
outside vendors. Also see "Risks and Uncertainties."
4
RESEARCH AND DEVELOPMENT
------------------------
The markets for the Company's products are characterized by rapidly
evolving technology, frequent new product introductions, and significant price
competition. Accordingly, the Company monitors new technology developments and
coordinates with suppliers, distributors and dealers to enhance existing
products and lower costs. Advances in technology require ongoing investment.
Also see "Risks and Uncertainties."
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. The Company currently holds no patents. Technology
products exist in a rapidly changing business environment. Consequently, 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 employees and its contractual relationships.
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.
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. The
Company relies on a combination of trade secret, copyright and trademark
protection, and non-disclosure agreements to protect its proprietary rights.
Also see "Risks and Uncertainties."
PERSONNEL
---------
ITEC employed a total of 52 individuals worldwide as of June 30, 2001.
Of this number, 30 were involved in sales, marketing, corporate administration
and finance, and 22 were in engineering, research and development, and technical
support. There is no union representation for any of ITEC's employees.
RISKS AND UNCERTAINTIES
-----------------------
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO
CONTINUE OUR OPERATIONS. Our business has not been profitable in the past and it
may not be profitable in the future. We may incur losses on a quarterly or
annual basis for a number of reasons, some within and others outside our
control. See "Potential Fluctuation in Our Quarterly Performance." The growth of
our business will require the commitment of substantial capital resources. If
funds are not available from operations, we will need additional funds. We 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 we need them.
Even if funds are available, the terms under which the funds are available to us
may not be acceptable to us. Insufficient funds may require us to delay, reduce
or eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve
our working capital position. The report of our independent auditors
accompanying the Company's June 30, 2001 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 our working capital and net worth. The Company plans to overcome the
circumstances that impact our ability to remain a going concern through a
combination of increased revenues and decreased costs, with interim cash flow
deficiencies being addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A
NEGATIVE IMPACT ON OUR BUSINESS. Our quarterly operating results can fluctuate
significantly depending on a number of factors, any one of which could have a
negative impact on our results of operations. The factors include: the timing of
product announcements and subsequent introductions of new or enhanced products
by us and by our competitors, the availability and cost of products and/or
components, the timing and mix of shipments of our products, the market
acceptance of our new products, the availability of leasing or other purchase
financing for our customers, seasonality, currency fluctuations, changes in our
prices and in our
5
competitors' prices, price protection offered to distributors and OEMs for
product price reductions, the timing of expenditures for staffing and related
support costs, the extent and success of advertising, research and development
expenditures, and changes in general economic conditions.
We may experience significant quarterly fluctuations in revenues and
operating expenses as we introduce new products. In addition, our component
purchases, production and spending levels are based upon our forecast of future
demand for our products. Accordingly, any inaccuracy in our forecasts could
adversely affect our financial condition and results of operations. Demand for
our products could be adversely affected by a slowdown in the overall demand for
computer systems, printer products or digitally printed images. Our failure to
complete shipments during a quarter could have a material adverse effect on our
results of operations for that quarter. Quarterly results are not necessarily
indicative of future performance for any particular period.
SINCE OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES
THAN WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES. The
markets for our products are highly competitive and rapidly changing. Some of
our current and prospective competitors have significantly greater financial,
technical, manufacturing and marketing resources than we do. Our ability to
compete in our markets depends on a number of factors, some within and others
outside our control. These factors include: the frequency and success of product
introductions by us and by our competitors, the selling prices of our products
and of our competitors' products, the performance of our products and of our
competitors' products, product distribution by us and by our competitors, our
marketing ability and the marketing ability of our competitors, and the quality
of customer support offered by us and by our competitors.
A key element of our strategy is to provide competitively priced,
quality products. We cannot be certain that our products will continue to be
competitively priced. We have reduced prices on certain of our 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 reduce our gross margins and
may adversely affect our financial condition and results of operations.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY
MANNER, WE MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS. The markets for our products are
characterized by rapidly evolving technology, frequent new product introductions
and significant price competition. Consequently, short product life cycles and
reductions in product selling prices due to competitive pressures over the life
of a product are common. Our future success will depend on our ability to
continue to develop new versions of our ColorBlind software, and to acquire
competitive products from other manufacturers. We monitor new technology
developments and coordinate with suppliers, distributors and dealers to enhance
our products and to lower costs. If we are unable to develop and acquire new,
competitive products in a timely manner, our financial condition and results of
operations will be adversely affected.
IF THE MARKET'S ACCEPTANCE OF OUR PRODUCTS CEASES TO GROW, WE MAY NOT
GENERATE SUFFICIENT REVENUES TO CONTINUE OUR OPERATIONS. The markets for our
products are relatively new and are still developing. We believe that there has
been growing market acceptance for color printers, color management software and
supplies. We cannot be certain, however, that these markets will continue to
grow. Other technologies are constantly evolving and improving. We cannot be
certain that products based on these other technologies will not have a material
adverse effect on the demand for our products. If our products are not accepted
by the market, we will not generate sufficient revenues to continue our
operations.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO
EFFECTIVELY INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY
AFFECT OUR OVERALL FINANCIAL PERFORMANCE. In order to grow our business, we may
acquire businesses that we believe are complementary. To successfully implement
this strategy, we must identify suitable acquisition candidates, acquire these
candidates on acceptable terms, integrate their operations and technology
successfully with ours, retain existing customers and maintain the goodwill of
the acquired business. We may fail in our efforts to implement one or more of
these tasks. Moreover, in pursuing acquisition opportunities, we 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 we do. Competition for these acquisition targets likely could also result
in increased prices of acquisition targets and a diminished pool of companies
available for acquisition. Our overall financial performance will be materially
and adversely affected if we are unable to manage internal or acquisition-based
growth effectively. Acquisitions involve a number of risks, including:
integrating acquired products and technologies in a timely manner, integrating
businesses and employees
6
with our business, managing geographically-dispersed operations, reductions in
our 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, our inability to maintain
customers or goodwill of an acquired business, the need to divest unwanted
assets or products, and the possible failure to retain key acquired personnel.
Client satisfaction or performance problems with an acquired business
could also have a material adverse effect on our reputation, and any acquired
business could significantly under perform relative to our expectations. We
cannot be certain that we will be able to integrate acquired businesses,
products or technologies successfully or in a timely manner in accordance with
our strategic objectives, which could have a material adverse effect on our
overall financial performance.
In addition, if we issue equity securities as consideration for any
future acquisitions, existing stockholders will experience ownership dilution
and these equity securities may have rights, preferences or privileges superior
to those of our common stock.
IF WE ARE FOUND TO BE INFRINGING ON A COMPETITOR'S INTELLECTUAL
PROPERTY RIGHTS OR IF WE ARE REQUIRED TO DEFEND AGAINST A CLAIM OF INFRINGEMENT,
WE MAY BE REQUIRED TO REDESIGN OUR PRODUCTS OR DEFEND A LEGAL ACTION AT
SUBSTANTIAL COSTS TO US. We currently hold no patents. Our 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 our software, hardware designs or the integration of the
two. We protect our software source code as trade secrets and make our
proprietary source code available to OEM customers only under limited
circumstances and specific security and confidentiality constraints.
Competitors may assert that we infringe their patent rights. If we fail
to establish that we have not violated the asserted rights, we could be
prohibited from marketing the products that incorporate the technology and we
could be liable for damages. We could also incur substantial costs to redesign
our products or to defend any legal action taken against us. We have obtained
U.S. registration for several of our trade names or trademarks, including: PCPI,
NewGen, ColorBlind, LaserImage, ColorImage, ImageScript and ImageFont. These
trade names are used to distinguish our products in the marketplace.
IF INTERNATIONAL FINANCIAL CONDITIONS DETERIORATE, OUR CONTINUED
OPERATIONS AND OVERALL FINANCIAL PERFORMANCE WILL BE NEGATIVELY IMPACTED. We
conduct business globally. Accordingly, our future results could be adversely
affected by a variety of uncontrollable and changing factors including: foreign
currency exchange fluctuations, regulatory, political or economic conditions in
a specific country or region, the imposition of governmental controls, export
license requirements, restrictions on the export of critical technology, trade
restrictions, changes in tariffs, government spending patterns, natural
disasters, difficulties in staffing and managing international operations; and
difficulties in collecting accounts receivable.
In addition, the laws of certain countries do not protect our products
and intellectual property rights to the same extent as the laws of the United
States.
We intend to pursue international markets as key avenues for growth and
to increase the percentage of sales generated in international markets. In our
2001, 2000, and 1999 fiscal years, sales outside the United States represented
approximately 22%, 2%, and 56% of our net sales, respectively. We expect sales
outside the United States to continue to represent a significant portion of our
sales. As we continue to expand our international sales and operations, our
business and overall financial performance may be adversely affected by the
factors stated above.
IF ALL OF THE LAWSUITS CURRENTLY FILED WERE DECIDED AGAINST US AND/OR
ALL THE JUDGMENTS CURRENTLY OBTAINED AGAINST US WERE TO BE IMMEDIATELY
COLLECTED, WE WOULD HAVE TO CEASE OUR OPERATIONS. On or about October 7, 1999,
the law firms of Weiss & Yourman and Stull, Stull & Brody made a public
announcement that they had filed a lawsuit against us and certain current and
past officers and/or directors, alleging violation of federal securities laws
during the period of April 21, 1998 through October 9, 1998. On or about
November 17, 1999, the lawsuit, filed in the name of Nahid Nazarian Behfarin, on
her own behalf and others purported to be similarly situated, was served on us.
A motion to dismiss the lawsuit was granted on February 16, 2001 on our behalf
and those individual defendants that have been served. However, on or about
March 19, 2001, an amended complaint was filed by Nahid Nazarian Behfarin, Peter
Cook, Stephen Domagala and Michael S. Taylor, on behalf of themselves and
7
others similarly situated. On or about March 20, 2001, we once again filed a
motion to dismiss the case along with certain other individual defendants. The
motion was denied and an answer to the complaint has been filed on behalf of the
company and certain individual defendants. We believe these claims are without
merit and we intend to vigorously defend against them on our behalf as well as
on behalf of the other defendants. The defense of this action has been tendered
to our insurance carriers.
Throughout fiscal 1999, 2000 and 2001, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Sevral of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars. Should
we be required to pay the full amount demanded in each of these claims and
lawsuits, we may have to cease our operations. However, to date, the superior
security interest held by Imperial Bank has prevented nearly all of these trade
creditors from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING
CAPITAL AND A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING,
WE MAY BE FORCED TO DISCONTINUE OPERATIONS. For several recent periods, up
through the present, we had a net loss, negative working capital and a decline
in net worth, which raises substantial doubt about our ability to continue as a
going concern. Our losses have resulted primarily from an inability to achieve
revenue targets due to insufficient working capital. Our ability to continue
operations will depend on positive cash flow, if any, from future operations and
on our ability to raise additional funds through equity or debt financing.
Although we have reduced our work force and suspended some of our operations, if
we are unable to achieve the necessary product sales or raise or obtain needed
funding, we may be forced to discontinue operations.
IF OUR WORLDWIDE DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR
PRODUCTS, OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED. Our products
are marketed and sold through a distribution channel of value added resellers,
manufacturers' representatives, retail vendors, and systems integrators. We have
a network of dealers and distributors in the United States and Canada, in the
European Community and on the European Continent, as well as a growing number of
resellers in Africa, Asia, the Middle East, Latin America, and Australia. We
support our worldwide distribution network and end-user customers through
operations headquartered in San Diego. As of October 1, 2001, we directly
employed 18 individuals involved in marketing and sales activities.
A portion of our sales are made through distributors, which may carry
competing product lines. These distributors could reduce or discontinue sales of
our products, which could adversely affect us. These independent distributors
may not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are 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 our markets.
AS A COMPANY IN THE TECHNOLOGY INDUSTRY AND DUE TO THE VOLATILITY OF
THE STOCK MARKETS GENERALLY, OUR STOCK PRICE COULD FLUCTUATE SIGNIFICANTLY IN
THE FUTURE. The market price of our common stock historically has fluctuated
significantly. Our stock price could fluctuate significantly in the future based
upon any number of factors such as: general stock market trends, announcements
of developments related to our business, fluctuations in our operating results,
a shortfall in our revenues or earnings compared to the estimates of securities
analysts, announcements of technological innovations, new products or
enhancements by us or our competitors, general conditions in the markets we
serve, general conditions in the worldwide economy, developments in patents or
other intellectual property rights, and developments in our relationships with
our customers and suppliers.
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. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
IF AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE
MAY NOT BE ABLE TO CARRY OUT OUR BUSINESS PLAN. On August 20, 1999, at the
request of Imperial Bank, our primary lender, the Superior Court, San Diego
appointed an operational receiver to us. On August 23, 1999, the operational
65receiver took control of our day-to-day operations. On June 21, 2000, the
Superior Court, San Diego issued an order dismissing the operational receiver as
a part of a settlement of litigation with Imperial Bank
8
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. However, in the future,
without additional funding sufficient to satisfy Imperial Bank and our other
creditors, as well as providing for our working capital, there can be no
assurances that an operational receiver may not be reinstated. If an operational
receiver is reinstated, we will not be able to expand our products nor will we
have complete control over sales policies or the allocation of funds.
The penalty for noncompliance of the Settlement Agreement is a
stipulated judgment that allows Imperial Bank to immediately reinstate the
operational receiver and begin liquidation proceedings against us. We are
currently meeting the monthly amount of $150,000 as stipulated by the Settlement
Agreement with Imperial Bank. However, the monthly payments have been reduced to
$100,000 through January of 2002.
THE DELISTING OF OUR COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET HAS
MADE IT MORE DIFFICULT TO RAISE FINANCING, AND THERE IS LESS LIQUIDITY FOR OUR
COMMON STOCK AS A RESULT. The Nasdaq SmallCap Market and Nasdaq Marketplace
Rules require an issuer to evidence a minimum of $2,000,000 in net tangible
assets, a $35,000,000 market capitalization or $500,000 in net income in the
latest fiscal year or in two of the last three fiscal years, and a $1.00 per
share bid price, respectively. On October 21, 1999, Nasdaq notified us that we
no longer complied with the bid price and net tangible assets/market
capitalization/net income requirements for continued listing on The Nasdaq
SmallCap Market. At a hearing on December 2, 1999, a Nasdaq Listing
Qualifications Panel also raised public interest concerns relating to our
financial viability. While the Panel acknowledged that we were in technical
compliance with the bid price and market capitalization requirements, the Panel
was of the opinion that the continued listing of our common stock on The Nasdaq
Stock Market was no longer appropriate. This conclusion was based on the Panel's
concerns regarding our future viability. Our common stock was delisted from The
Nasdaq Stock Market effective with the close of business on March 1, 2000. As a
result of being delisted from The Nasdaq SmallCap Market, stockholders may find
it more difficult to sell our common stock. This lack of liquidity also may make
it more difficult for us to raise capital in the future.
Trading of our common stock is now being conducted over-the-counter
through the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock does constitute a penny stock
because our common stock has a market price less than $5.00 per share, our
common stock is no longer quoted on Nasdaq and our net tangible assets do not
exceed $2,000,000. As our common stock falls within the definition of penny
stock, these regulations require the delivery, prior to any transaction
involving our common stock, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Furthermore, the ability of
broker/dealers to sell our common stock and the ability of stockholders to sell
our common stock in the secondary market would be limited. As a result, the
market liquidity for our common stock would be severely and adversely affected.
We can provide no assurance that trading in our common stock will not be subject
to these or other regulations in the future, which would negatively affect the
market for our common stock.
ITEM 2.
PROPERTIES
----------
ITEC owns no real property. The Company leases approximately 21,000
square feet of space in a facility located at 15175 Innovation Drive, San Diego,
California 92128, at a monthly lease rate of approximately $31,000. This
facility houses corporate management, marketing, sales, engineering, and support
offices. The lease expires in October 2003.
9
ITEM 3.
LEGAL PROCEEDINGS
-----------------
On or about October 7, 1999, the law firms of Weiss & Yourman and
Stull, Stull & Brody made a public announcement that they had filed a lawsuit
against us and certain current and past officers and/or directors, alleging
violation of federal securities laws during the period of April 21, 1998 through
October 9, 1998. On or about November 17, 1999, the lawsuit, filed in the name
of Nahid Nazarian Behfarin, on her own behalf and others purported to be
similarly situated, was served on us. A motion to dismiss the lawsuit was
granted on February 16, 2001 on our behalf and those individual defendants that
have been served. However, on or about March 19, 2001, an amended complaint was
filed by Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and Michael S.
Taylor, on behalf of themselves and others similarly situated. On or about March
20, 2001, we once again filed a motion to dismiss the case along with certain
other individual defendants. The motion was denied and an answer to the
complaint has been filed on behalf of the company and certain individual
defendants. We believe these claims are without merit and we intend to
vigorously defend against them on our behalf as well as on behalf of the other
defendants. The defense of this action has been tendered to our insurance
carriers.
Throughout fiscal 1999, 2000 and 2001, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Several of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars.
Furthermore, from time to time, the Company may be involved in
litigation relating to claims arising out of its operations in the normal course
of business.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
10
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 NASD Electronic Bulletin Board under the 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
SmallCap Market or the 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.
High Low
------------------------------ ----------- ------------
Year ended June 30, 1999
First quarter $ 3.88 $ 1.69
Second quarter 2.06 0.25
Third quarter 5.22 0.28
Fourth quarter 2.28 0.59
Year ended June 30, 2000
First quarter $ 1.63 $ 0.28
Second quarter 2.13 0.09
Third quarter 3.22 0.36
Fourth quarter 0.97 0.19
Year ended June 30, 2001
First quarter $ 0.92 $ 0.05
Second quarter 0.30 0.05
Third quarter 0.38 0.05
Fourth quarter 0.13 0.06
------------------------------ ----------- ------------
The number of holders of record of the Company's Common Stock, $.005
par value, was approximately 45,000 at June 30, 2001.
DIVIDENDS
The Company has never declared nor paid any cash dividends on its
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 its
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, commencing on October 15, 1986. ITEC
has never declared nor paid any cash dividends on the 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 2001 were $309,000.
The Company does not anticipate paying dividend on the 5% Convertible
Preferred Stock in the near future. However, 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.
11
ITEM 6.
SELECTED FINANCIAL DATA
-----------------------
The consolidated statement of operations data with respect to the five
years ended June 30, 2001, and the consolidated balance sheet data for those
five years at June 30, 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 below, 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:
-----------------------------
IN THOUSANDS (EXCEPT PER SHARE DATA)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
NET REVENUES
Sales of products $ 2,897 $ 1,634 $ 16,417 $ 30,740 $ 26,081
Engineering Fees - - - 2,327 5,860
License fees and royalties 555 788 730 1,350 296
-------- -------- --------- --------- ---------
Net total revenues
3,452 2,422 17,147 34,417 32,237
-------- -------- --------- --------- ---------
COSTS AND EXPENSES
Cost of products sold 2,742 5,197 18,015 22,536 17,022
Selling, general, and administrative 8,720 7,780 13,707 10,269 10,460
Research and development 250 1,929 2,033 2,475 4,243
Special charges - - 5,181 8,941 -
-------- -------- --------- --------- ---------
INCOME (LOSS) FROM
OPERATIONS (8,260) (12,484) (21,789) (9,804) 512
-------- -------- --------- --------- ---------
NET LOSS (9,889) (14,198) (25,129) (10,163) 723
======= ======== ======== ======= =========
LOSS PER COMMON SHARE
Basic $ (0.08) $ (0.20) $ (1.88) $ (0.90) $ 0.07
Diluted $ (0.08) $ (0.20) $ (1.88) $ (0.90) $ 0.06
BALANCE SHEET DATA:
-------------------
IN THOUSANDS
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Cash $ 35 $ 291 $ 75 $ 3,023 $ 255
Working Capital (16,110) (14,532) (16,519) 315 4,818
Total assets 1,212 1,683 7,250 20,961 14,075
Long-term obligations - - - 1,828 228
Preferred stock 420 420 6,875 420 420
Total shareholders' deficit (16,110) (13,854) (12,432) 4,604 7,877
12
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Imaging Technologies Corporation develops and distributes imaging
software and distributes high-quality digital imaging products. The Company
sells a range of printer and imaging products for use in graphics and
publishing, digital photography, and other niche business and technical markets.
The Company's core technologies are related the design and development of
software products that improve the accuracy of color reproduction.
As of the end of fiscal 2001, the Company's business continues to
experience operational and liquidity challenges. Accordingly, year-to-year
financial comparisons may be of limited usefulness now and for the next several
quarters due to anticipated changes in the Company's business as these changes
relate to potential acquisitions of new businesses, changes in product lines,
and the potential for discontinuing certain components of the business.
The Company's current strategy is: (1) to commercialize its own
technology, which is embodies in its ColorBlind Color Management software, (2)
to market imaging products, including printers, copiers, and consumables (toner,
ink, etc.) from other manufacturers to its customers, and (3) to develop
e-commerce sites in order to sell imaging products to resellers and other
imaging professionals.
To successfully execute 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, 2001 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. The Company plans to overcome
the circumstances that impact our ability to remain a going concern through a
combination of achieving profitability, raising additional debt and equity
financing, and renegotiating existing obligations.
Since the removal of the court appointed operational receiver in June
2000, the Company has been able to reestablish relationships with some past
customers and distributors and to establish relationships with new customers.
Additionally, the Company has been working to reduce costs though the reduction
in staff and the suspension of certain research and development programs, such
as the design and manufacture of controller boards and printers. The Company
began a program to reduce its debt through debt to equity conversions.
Management continues to pursue the acquisition of businesses that will grow the
Company's business.
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, including any
potential mergers or acquisitions. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company. Also see
"Liquidity and Capital Resources." and "Item 1. Business - Risks and
Uncertainties - Future Capital Needs."
RESTRUCTURING AND NEW BUSINESS UNITS
During fiscal 1999, the Company began the development of an e-commerce
web site designed to offer computer and imaging hardware, software, and
consumables. The Internet address is www.dealseekers.com. These operations are
still in the development stage.
From August 20, 1999 until June 21, 2000, the Company had been under
the control of an operational receiver appointed by the Court pursuant to
litigation between the Company and Imperial Bank. The litigation has been
dismissed, and Company management has reassumed control. Accordingly, Company
management did not have operational control for nearly all of fiscal 2000.
In July 2001, the Company suspended its printer controller development
and manufacturing operations in favor of selling products from other companies
to its customers.
ACQUISITION AND SALE OF BUSINESS UNITS
In December 2000, the Company acquired all of the shares of
EduAdvantage.com, Inc., an internet sales organization that sells computer
hardware and software products to educational institutions and other customers
via its websites: www.eduadvantage.com and www.soft4u.com. During fiscal 2001,
the
13
Company began integrating EduAdvantage operations. However, these operations
have not been profitable and management is evaluating the future of this
business unit.
Also, in December 2001, the Company entered into an agreement to
acquire a majority interest in Quality Photographic Imaging, Inc. (OTCBB-QPIX)
("QPI"). The management of QPI has announced its intention to withdraw its
recommendation to its shareholders that they approve the transaction. As of the
date of this report, the acquisition agreement has not been approved by QPI
shareholders.
SPECIAL CHARGES
In fiscal 1999, the Company took a charge for uncollectible receivables
of $2,233 thousand. The charge resulted primarily because, in management's
opinion, certain distributors and other customers took advantage of the
Company's poor financial condition and the presence of the operational receiver
to refuse payment on various grounds including charge backs and product
performance.
In fiscal 1999, the Company incurred additional charges relating to its
restructuring plan including $1,367 thousand relating to personnel reduction
costs, $1,207 thousand relating to the write-down of inventory, licenses, and
other assets that are not central to the Company's core business; and $374
thousand relating to the consolidation of facilities.
All of the above restructuring charges were paid in the period in which
the charges were recorded. Management expects that the restructuring and
consolidation of operations would result in personnel savings of approximately
$1.1 million and facility savings of approximately $300 thousand.
RESULTS OF OPERATIONS
---------------------
NET REVENUES
Revenues were $3.5 million, $2.4 million, and $17.1 million for the
fiscal years ended June 30, 2001, 2000, and 1999, respectively. Sales of product
were $2.9 million, $1.6 million, and $16.4 million for the fiscal years ended
June 30, 2001, 2000, and 1999, respectively. The increase in product sales in
fiscal 2001 from the previous year was due to renewed management control of its
sales operations. The decrease in product sales in fiscal 2000 from 1999 was due
primarily to a lack of working capital to fund inventory and sales and marketing
operations.
License fees and royalties were $555,000, $788,000, and $730,000 for
the fiscal years ended June 30, 2001, 2000, and 1999, respectively. Variances
from year-to-year are due primarily to changes in shipments by OEM customers'
products based on ITEC technology. Since the Company has elected to suspend its
controller technology development efforts, future license fees and royalties are
expected to be associated with the Company's ColorBlind software technology.
COST OF PRODUCTS SOLD
Cost of products sold were $2.7 million or 95% of product sales, $5.2
million or 318% of product sales, and $10 million or 110% of product sales, for
the fiscal years ended June 30, 2001, 2000, and 1999, respectively. The increase
in profitability in fiscal 2001 compared to fiscal 2000 was due primarily to
changes in the mix of products sold by the Company, which had the effect of
increasing overall profit margins. However, competitive market conditions
continue to require deep discounting of sales prices to customers. The decrease
in profitability in fiscal 2000 compared to fiscal 1999 was due primarily to
sales policies during fiscal 2000 mandated by the operational receiver, which
resulted in sales made at liquidation prices. The Company has been able to
maintain reasonable profit margins on sales of products. However, software
products provide significantly higher profit margins than hardware products such
as printers, plotters, and copiers.
In the years ended June 30, 2000 and 1999, the company amortized $2.9
million and $4.0 million, respectively of amortized software. There was no such
amortization in the year ended June 30, 2001.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $8.7 million or 253%
of total revenues, $7.8 million or 305% of total revenues, and $13.7 million or
79% of total revenues for the fiscal years ended June 30, 2001, 2000, and 1999,
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, advertising, and other marketing related expenses. The increase in
selling, general and administrative expenses in the year ended June 30, 2001
compared to the year-earlier period was due primarily to increased costs
associated with financing the Company, larger write-offs for bad debt, and
penalties associated with servicing the Company's debt.
14
Expenses as a percentage of total revenues decreased due primarily to increased
sales. The decrease to total expenses and increase in percentage of total
revenues in fiscal 2000 compared for fiscal 1999 was due primarily to the
management of the court-appointed operational receiver who controlled the
operations of the Company for nearly all of fiscal 2000. During this period, the
Company vastly cut its overall activities, including manufacturing, engineering,
and sales and marketing.
RESEARCH AND DEVELOPMENT
Research and development was $250 thousand for the year ended June 30,
2000 compared to costs of $2.1 million in the year-earlier period. Research and
development was $2.2 million in fiscal 1999. There were no engineering fees for
the year ended June 30, 2001; and such fees for the two prior fiscal years were
minimal due to a change in corporate strategy from a focus on engineering fees
and royalties to that of product sales. In fiscal 2001 the Company substantially
reduced its research and development activities and, in July 2001, suspended its
printer controller development and manufacturing operations.
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 January 1999, the Company completed a private placement of 1,200
units, each unit consisting of one share of series D convertible preferred stock
and 2,000 warrants exercisable into shares of the Company's common stock. The
Company raised $1.8 million, less fees and expenses incurred in connection with
the private placement.
In February 1999, the Company completed a private placement of 1,250
units, each unit consisting of one share of series E preferred stock and 5,000
warrants into shares of common stock. The terms of the series E preferred stock
were identical to the terms of the series D preferred stock. In connection with
this private placement, the Company raised $3.7 million in cash and retired $1
million of debt, which was exchanged, for series E preferred stock.
On August 20, 1999, at the request of Imperial Bank, the primary lender
to the Company, the Court appointed an operational receiver for the Company. On
August 23, 1999, the operational receiver took control of the day-to-day
operations of the Company. On June 21, 2000, the Court dismissed the litigation
between the Company and Imperial Bank and relieved the operational receiver of
his responsibilities, thereby returning control of the Company to its
management.
On July 12, 2000, the Company announced it had signed an agreement for
a financing facility providing commitments to purchase up to $36 million of its
common shares over the next two years after the effective date of the
registration statement, September 25, 2000. As of October 2000, the Company had
received $750,000 in funding pursuant to the agreement.
In December 2000, the Company entered into a Convertible Note Purchase
Agreement for $850,000, bearing an annual interest rate of 8%, due December
2003. The Note is convertible into the Company's common stock. As of October 10,
2001, $675,000 had been converted into common stock.
In July 2001, the Company entered into a Convertible Note Purchase
Agreement for $1,000,000, bearing an annual interest rate of 8%, due July 2004.
The Note is convertible into the Company's common stock. No conversions have
been made as of October 10, 2001.
In September 2001, the Company entered into a Convertible Note Purchase
Agreement for $300,000, bearing an interest rate of 8%, due September 2004. The
Note is convertible into the Company's common stock. No conversions have been
made as of October 10, 2001.
The Company continues to pursue additional financings to fund its
operations and growth. 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. Also see "Item 1. Business--Risks and Uncertainties--Future
Capital Needs."
As of June 30, 2001, the Company had negative working capital of
approximately $16.1 million, a decrease of $1.6 million from June 30, 2000. The
decrease is primarily due to the effect of operating losses and the difficulty
in obtaining sufficient long-term debt and equity financing.
15
Net cash used in operating activities was $5.8 million in fiscal
compared to $6.7 million during fiscal 2000. In fiscal 1999, the Company used
approximately the same operating cash during the year ended June 30, 1998.
Net cash used in investing activities was $171 thousand in fiscal 2001
compared to $23 thousand in fiscal 2000, an increase of $148 thousand. The
increase is due to capital expenditures. Net cash from investing activities
decreased $3.4 million in fiscal 2000 compared to fiscal 1999 due primarily to
the absence of 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, 2001, was approximately $309,000.
The Company's capital requirements depend on numerous factors,
including market acceptance of the Company's products, 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
reduces its debt and increases its sales and marketing efforts. The report of
the Company's independent auditors accompanying the Company's June 30, 2001
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.
The Company plans to overcome the circumstances that impact its ability
to remain a going concern through a combination of increased revenues and
decreased costs, with interim cash flow deficiencies being addressed through
additional equity financing.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
16
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of independent accountants 18
Consolidated balance sheets as of June 30, 2001 and 2000 19
Consolidated statements of operations for the years ended
June 30, 2001, 2000, and 1999 20
Consolidated statements of shareholders' equity for the years ended
June 30, 2001, 2000, and 1999 21
Consolidated statements of cash flows for the years ended
June 30, 2001, 2000, and 1999 22
Notes to consolidated financial statements 23
17
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, 2001, and 2000 and the related
consolidated statements of operations, shareholders' net capital deficiency, and
cash flows for each of the three years in the period ended June 30, 2001. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 2001 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 10, 2001
18
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
2001 2000
Current assets
Cash $ 35 $ 291
Accounts receivable 58 175
Inventories 50 203
Prepaid expenses and other 259 333
----------- -----------
Total current assets 402 1,002
Goodwill, net 569 -
Property and equipment, net 241 531
Other 150
----------- -----------
$ 1,212 $ 1,683
=========== ===========
LIABILITIES AND SHAREHOLDERS' NET CAPITAL DEFICIENCY
Current liabilities
Borrowings under bank notes payable 4,318 $ 5,765
Short-term debt 3,379 2,563
Accounts payable 6,450 5,378
Accrued expenses 3,175 1,828
----------- -----------
Total current liabilities 17,322 15,534
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' net capital deficiency
Series A preferred stock, $1,000 par value, 7,500 shares
authorized, 420.5 shares issued and outstanding 420 420
Common stock, $0.005 par value, 200,000,000 shares
Authorized; 170,901,065 shares issued and outstanding 864 507
Common stock warrants 475 -
Paid-in capital 69,472 62,675
Shareholder loans (105) (105)
Accumulated deficit (87,236) (77,348)
----------- -----------
Total shareholders' net capital deficiency (16,110) (13,851)
----------- -----------
$ 1,212 $ 1,683
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2001 2000 1999
Revenues
Sales of products $ 2,897 $ 1,634 $ 16,417
Licenses and royalties 555 788 730
--------- --------- ----------
3,452 2,422 17,147
--------- --------- ----------
Costs and expenses
Cost of products sold 2,742 5,197 18,015
Selling, general, and administrative 8,720 7,780 13,707
Research and development 250 1,929 2,033
Special charges
Charge for uncollectible receivables - - 2,233
Restructuring costs - - 2,948
--------- --------- ----------
11,712 14,906 38,936
--------- --------- ----------
Loss from operations (8,260) (12,484) (21,789)
--------- --------- ----------
Other income (expense):
Interest and finance costs, net (1,628) (1,853) (1,989)
Other - 139 -
--------- --------- ----------
(1,628) (1,714) (1,989)
--------- --------- ----------
Loss before income taxes (9,888) (14,198) (23,778)
Income tax benefit (expense) - - (264)
--------- --------- ----------
Net loss (9,888) (14,198) (24,042)
Preferred stock dividends (21) (21) (4,055)
--------- --------- ----------
Net loss attributed to common shares
Before loss from discontinued operations (9,909) (14,219) (28,097)
Loss from discontinued operations - - (1,087)
--------- --------- ----------
Net Loss $ (9,909) $ (14,219) $ (29,184)
========= ========= ==========
Earnings (loss) per common share
Continuing operations - basic and diluted $ (0.08) $ (0.20) $ (1.81)
Discontinued operations - basic and diluted - - (0.07)
--------- --------- ----------
Total $ (0.08) $ (0.20) $ (1.88)
========= ========= ==========
Weighted average common shares 131,488 70,269 15,498
========= ========= ==========
Weighted average common shares - assuming dilution 131,488 70,269 15,498
========= ========= ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' NET CAPITAL DEFICIENCY
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A SERIES C SERIES D&E COMMON ACCUM.
PREFERRED PREFERRED PREFERRED STOCK COMMON PAID-IN ------
STOCK STOCK STOCK WARRANTS STOCK CAPITAL LOANS DEFICIT TOTAL
BALANCE, JUNE 30, 1998 $420 $2,360 - - $62 $35,859 $(110) $(33,987) $4,604
Redemption of preferred stock - (2,360) - - - (870) - - (3,230)
Issuance of preferred stock
(900 shares) - - 1,800 - - - - - 1,800
Issuance of preferred stock
(931 shares) - - 4,655 - - - - 4,655
Issuance of common stock
Cash (4,105,800) - - - - 21 1,922 - - 1,943
Services (3,167,500 shares) - - - - 16 1,854 - - 1,870
Conversion of note payable
(2,000,000 shares) - - - - 10 940 - - 950
Exercise of options and warrants - - - - 1 269 - - 270
(270,660 shares)
Stock issuance costs - - - - - (170) - - (170)
Preferred stock dividend - - - - - 4,034 - (4,034) -
Collection of shareholder loans - - - - - - 5 - 5
Net loss - - - - - - - (25,129) (25,129)
--------- ------- -------- --------- -------- ------- -------- -------- --------
BALANCE, JUNE 30, 1999 420 - 6,455 - 110 43,838 (105) (63,150) (12,432)
Conversion of Series D and E
preferred stock
(900 and 931 shares) - - (6,455) - 296 6,159 - - -
Issuance of common stock
Cash (15,686,366) - - - - 78 7,898 - - 7,976
Services (2,445,221 shares) - - - - 12 2,040 - - 2,052
Conversion of liabilities
(2,259,836 shares) - - - - 11 2,740 - - 2,751
Net loss - - - - - - - (14,198) (14,198)
--------- ------- -------- --------- -------- ------- -------- -------- --------
BALANCE, JUNE 30, 2000 420 - - - 507 62,675 (105) (77,348) (13,851)
Issuance of common stock
Cash (43,718,203 shares) - - - - 219 4,992 - - 5,211
Business acquisition
(3,750,000 shares) - - - - 19 254 - - 273
Software purchase
(1,200,000 shares) - - - - 6 219 - - 225
Services (4,386,666 shares) - - - - 22 351 - - 373
Conversion of liabilities
(18,275,149 shares) - - - - 91 584 - - 675
Issuance of warrants - - - 508 - - - - 508
Exercise of warrants - - - (33) - 33 - - -
Beneficial conversion on notes - - - - - 364 - - 364
Net loss - - - - - - - (9,888) (9,888)
--------- ------- -------- --------- -------- ------- -------- -------- --------
BALANCE, JUNE 30, 2001 $ 420 $ - $ - $ 475 $ 864 $69,472 $ (105) $(87,236) $(16,110)
========= ====== ======= ========= ======== ======= ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2001 2000 1999
---- ---- ----
Cash flows from operating activities
Net loss $ (9,888) $ (14,198) $ (25,129)
Adjustments to reconcile net loss to net
cash from operating activities
Non-cash special charges -- -- 3,440
Depreciation and amortization 806 478 761
Amortization of capitalized software -- 2,851 3,951
Stock issued for services 373 2,052 1,870
Cost attributed to warrants 508 -- --
Interest from beneficial conversion feature 364 -- --
Provision for income taxes -- -- 250
Changes in operating assets and liabilities
Accounts receivable 117 1,784 (59)
Inventories 153 349 5,197
Prepaid expenses and other 303 344 626
Accounts payable and accrued expenses 1,924 (347) 2,043
---------- ---------- ----------
Net cash from operating activities (5,340) (6,687) (7,050)
---------- ---------- ----------
Cash flows from investing activities
Prepaid licenses -- -- (34)
Capitalized software -- -- (3,147)
Capital expenditures (171) (23) (222)
---------- ---------- ----------
Net cash from investing activities (171) (23) (3,403)
---------- ---------- ----------
Cash flows from financing activities
Net borrowings under bank notes payable (1,447) (704) (1,234)
Issuance of other notes payable 1,491 -- 5,860
Net proceeds from issuance of common stock 5,211 7,976 2,213
Net proceeds from issuance of preferred stock -- -- 5,190
Stock issuance costs -- -- (170)
Redemption of preferred stock -- -- (3,230)
Collection of shareholder loans -- -- 5
Repayment of notes payable -- (346) (1,129)
---------- ---------- ----------
Net cash from financing activities 2,255 6,926 7,505
---------- ---------- ----------
Net increase (decrease) in cash (256) 216 (2,948)
Cash, beginning of year 291 75 3,023
---------- ---------- ----------
Cash, end of year $ 35 $ 291 $ 75
========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 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") design,
develop, and sell high-quality digital imaging solutions and color management
software products for use in graphics, publishing, digital photography, and
other business and technical markets.
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of ITEC and its
active subsidiaries, Eduadvantage.com, Inc., NewGen Imaging Systems, Inc.
("NewGen"), 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, 2001, and for the year
then ended, the Company has experienced a net loss and has deficiencies in
working capital and net worth that raise substantial doubt about its ability to
continue as a going concern.
On August 20, 1999, at the request of Imperial Bank, the Company's primary
lender, the Superior Court of San Diego appointed an operational receiver who
took control of the Company's day-to-day operations on August 23, 1999. On June
21, 2000, in connection with a settlement agreement reached with Imperial Bank,
the Superior Court of San Diego issued an order dismissing the operational
receiver.
On October 21, 1999, Nasdaq notified the Company that it no longer complied with
the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The Nasdaq SmallCap Market. At a hearing
on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public
interest concerns relating to the Company's financial viability. The Company's
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, stockholders may find it more difficult to sell common stock.
This lack of liquidity also may make it more difficult to raise capital in the
future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Securities and Exchange Commission adopted regulations that generally define
a "penny stock" as any equity security that has a market price of less than
$5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of shareholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
The Company must obtain additional funds to provide adequate working capital and
finance operations. However, there can be no assurance 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 including compliance with the Imperial Bank
settlement agreement. 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, including any potential mergers or
acquisitions.
23
The Company's inability to fund its capital requirements would have a material
adverse effect on the Company. 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. 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 is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales to
and through distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. When the revenue recognition criteria required for distributor
and reseller arrangements are not met, revenue is recognized as payments are
received. Provisions are recorded for returns and bad debts. The Company's
software arrangements do not contain multiple elements, and the Company does not
offer post contract support.
ADVERTISING COSTS
-----------------
The Company expenses advertising and promotion costs as incurred. During fiscal
2001, 2000, and 1999, the Company incurred advertising and promotion costs of
approximately $224, $243, and $660 thousand, respectively.
RESEARCH AND DEVELOPMENT
------------------------
Research and development costs are charged to expense as incurred.
CAPITALIZED SOFTWARE AND DEVELOPMENT COSTS
------------------------------------------
During fiscal 1999 the Company 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
were related to software contained in laser printer controllers. Costs incurred
prior to the establishment of technological feasibility, or subsequent to the
release to customers, were expensed as incurred. Capitalized software costs were
amortized on a product-by-product basis. The annual amortization was 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 began when the product was
available for general release to customers. Due to the financial difficulties
discussed above, the Company has been unable to meet its sales goals regarding
these products and management cannot provide any assurance that the Company can
obtain the resources necessary to achieve future sales goals. Accordingly, the
unamortized balance of capitalized software costs was charged to expense in
fiscal 2000.
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
24
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.
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"), 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 9.
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.
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
--------------------------------
Effective October 1, 2000, the Company adopted Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB No. 101"), which
summarizes the SEC's interpretation of applying generally accepted accounting
principles to revenue recognition in the financial statements. The adoption of
SAB No. 101 did not have a material impact on the Company's consolidated
financial position or the results of operations.
RECLASSIFICATIONS
-----------------
Certain prior year financial statement classifications have been reclassified to
conform with the current year's presentation.
NOTE 2. SPECIAL CHARGES
------------------------
CHARGE FOR UNCOLLECTIBLE RECEIVABLES
------------------------------------
In fiscal 1999, the Company took a charge for uncollectible receivables of
$2,233 thousand. The charge resulted primarily because, in management's opinion,
certain distributors and other customers took advantage of the Company's poor
financial condition and the presence of the operational receiver to refuse
payment on various grounds including charge backs and product performance.
RESTRUCTURING OF OPERATIONS
---------------------------
In fiscal 1999, the Company incurred additional charges relating to its
restructuring plan including $1,367 thousand relating to personnel reduction
costs, $1,207 thousand relating to the write-down of inventory, licenses, and
other assets that are not central to the Company's core business; and $374
thousand relating to the consolidation of facilities.
25
All of the above restructuring charges were paid in the period in which the
charges were recorded. Management expects that the restructuring and
consolidation of operations would result in personnel savings of approximately
$1.1 million and facility savings of approximately $300 thousand.
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
-----------------------------------------------------------
The following summarizes certain financial statement captions at June 30:
2001 2000
Accounts receivable
Trade $ 375 $ 334
Less allowance for doubtful accounts (317) (159)
----------- -----------
$ 58 $ 175
=========== ===========
Change in allowance for doubtful accounts
Balance, beginning of year $ 159 $ 2,252
Provision for bad debts 266 404
Write-off of bad debts (108) (2,497)
----------- -----------
Balance, end of year $ 317 159
=========== ===========
Inventories
Materials and supplies $ 10 $ 87
Finished goods 40 116
----------- -----------
$ 50 $ 203
=========== ===========
Property and equipment
Computers and other equipment $ 915 $ 2,366
Office furniture and fixtures 57 510
Leasehold improvements - 141
----------- -----------
972 3,017
Less accumulated depreciation and amortization (731) (2,486)
----------- -----------
$ 241 $ 531
=========== ===========
Accrued liabilities
Compensation and employee benefits $ 977 $ 631
Interest 1,998 1,016
Other 200 181
----------- -----------
$ 3,175 $ 1,828
============ ============
26
NOTE 4. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
----------------------------------------------
2001 2000 1999
Non-cash financing activities
Conversion of preferred stock into common stock $ - $ 6,455 $ -
Conversion of notes payable into preferred stock - - 1,000
Conversion of notes payable into common stock 675 2,101 950
Conversion of accounts payable and accrued
liabilities into preferred stock - 650 265
Stock issued for purchase of software 225 - -
Net assets acquired in business combinations
Prepaid and other 79 - -
Property and equipment 3 - -
Goodwill 686 - -
Accounts payable and accrued liabilities (495) - -
Supplemental disclosure of cash flow information
Cash paid during the year for interest 283 1,455 1,371
Cash paid during the year for income taxes - 5 23
NOTE 5. SHORT-TERM DEBT
-----------------------
PAYABLE TO BANKS
----------------
On June 6, 2000, the Company entered into a settlement agreement with Imperial
Bank ("Imperial"). Under this agreement, the Company shall pay $150,000 per
month until the balance is paid in full. Payments have been reduced to $100,000
per month through January 2002. Due to the uncertainty regarding the Company's
ability to meet its obligations under this agreement as discussed above under
going concern considerations, the debt has been classified as current. The debt
shall not bear interest as long as the Company is making timely payments. The
debt is collateralized by substantially all assets of the Company.
The Company owes Export-Import Bank ("Ex-Im") $1,680,000 plus interest under a
Working Capital Guarantee Facility whereby Imperial made a demand upon Ex-Im who
responded by making a claim payment to Imperial. Ex-Im has made a demand for
immediate payment.
The weighted average interest rate on short-term borrowings outstanding at June
30, 2001 and 2000 was 11.1% and 12.3%, respectively.
NOTES PAYABLE
-------------
The following summarizes short-term notes payable at June 30:
2001 2000
Payable to suppliers, 10% $ 41 $ -
Advances from stockholders, non interest bearing 750 150
Advances from stockholders, 10% 913 913
Payable to stockholders, 8%, convertible into common stock at an price
Average price of 70% of fair market value 175 -
Payable to a former director, 16% 1,500 1,500
--------- ---------
$ 3,379 $ 2,563
========= =========
8% CONVERTIBLE NOTES PAYABLE
----------------------------
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the Company sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850,000
bearing interest at the rate of eight percent (8%) per annum, due December 12,
2003, each convertible into shares of the Company's common stock. Interest shall
be payable, at the option of the purchasers, in cash or shares of common stock.
At any time after the issuance of the notes, each note is convertible into such
number of shares of common stock as is determined by dividing (a) that portion
of the outstanding principal balance of the note as of the date of conversion by
(b) the lesser of (x) an amount equal to seventy percent (70%) of the average
closing bid prices for the three (3) trading days prior to December 12, 2000 and
(y) an amount equal to seventy percent (70%) of the average closing bid prices
for the three (3) trading days having the lowest closing bid prices during the
thirty (30) trading days prior to the conversion date. The Company has
recognized interest expense of $364,000 relating to the beneficial conversion
feature of the
27
above notes. Additionally, the Company issued a warrant to each of the
purchasers to purchase 10,040,160 shares of the Company's common stock at an
exercise price equal to $.075 per share. The purchasers may exercise the
warrants through December 12, 2005. During fiscal 2001, notes payable of
$675,000 were converted into the Company's common stock.
NOTE 6. 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 2001, 2000, or 1999. As of June 30, 2001,
the accumulated dividend in arrears was approximately $309,000 thousand on the
Series A.
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 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.
SERIES D CONVERTIBLE PREFERRED STOCK
------------------------------------
On January 13, 1999, the Company entered into a Securities Purchase Agreement
(the "Series D Agreement") with certain investors contemplating a potential
funding of up to $2.4 million (the "Series D Funding"). The Series D Funding
provides for the private placement by the Company of up to 1,200 units (the
"Units"), each Unit consisting of (i) one share of Series D Convertible
Preferred Stock (the "Series D Stock") and (ii) 2,000 warrants (the "Series D
Warrants" and, collectively, with the Series D Stock, the "Series D Securities")
exercisable for shares of Common Stock. Pursuant to the Series D Agreement, the
Company issued 900 units during fiscal 1999 for consideration totaling
$1,800,000. The Series D Stock is convertible into shares of the Company's
Common Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of
the closing bid price per share of Common Stock on the Nasdaq SmallCap Market
(the "Series D Closing Price") for the three trading days having the lowest
closing price during the 30 trading days prior to the date on which the investor
gives to the Company a notice of conversion of Series D Stock; except that all
Series D Stock converted prior to February 26, 1999 would be converted at $.50.
However, each of the investors has agreed that in no event shall it be permitted
to convert any shares of Series D Stock in excess of the number of such shares
upon the conversion of which, the sum of (i) the number of
28
shares of Common Stock owned by such investor (other than shares of Common Stock
issuable upon conversion of Series D Stock or upon exercise of Series D
Warrants) plus (ii) the number of shares of Common Stock issuable upon
conversion of such shares of Series D Preferred Stock or exercise of Series D
Warrants, would be equal to or exceed 9.999 percent of the number of shares of
Common Stock then issued and outstanding, including the shares that would be
issuable upon conversion of the Series D Stock or exercise of Series D Warrants
held by such investor. Each investor in Series D Stock shall have the right to
vote, except as otherwise required by Delaware law, on all matters on which
holders of Common Stock have the right to vote on with each such investor having
the right to cast one vote for each whole share of Common Stock into which each
share of the Series D Preferred Stock held by such investor is convertible
immediately prior to the record date for the determination of stockholders
entitled to vote; provided, however, that in no event shall a holder be entitled
to vote more than 9.999 percent of the number of shares entitled to be voted on
any matter. Series D Warrants are immediately exercisable upon issuance at an
exercise price of $.875 per share and expire five years after the date of their
issuance. In fiscal 2000, the issued and outstanding shares of Series D Stock
was converted into 19,812,410 shares of common stock.
SERIES E CONVERTIBLE PREFERRED STOCK
------------------------------------
In fiscal 1999, the Company entered into a Securities Purchase Agreement (the
"Series E Agreement") and an Exchange Agreement (the "Exchange Agreement")
(together the "Series E Funding") with certain investors (including one of whom
is a director of the Company) that provided funding and exchange of indebtedness
of $4,655,000. The Series E Funding provided for the private placement by the
Company of up to 1,250 units (the "Units"), each Unit consisting of (i) one
share of Series E Convertible Preferred Stock (the "Series E Stock") and (ii)
5,000 warrants (the "Series E Warrants" and, collectively, with the Series E
Stock, the "Series E Securities") exercisable for shares of Common Stock. The
Series E Stock is convertible into shares of the Company's Common Stock at the
lesser of (A) $.50 and (B) an amount equal to 70 percent of the closing bid
price per share of Common Stock on the Nasdaq SmallCap Market (the "Series E
Closing Price") for the three trading days having the lowest closing price
during the 30 trading days prior to the date on which the applicable investor
gives to the Company notice of conversion of Series E Stock; except that all
Series E Stock converted prior to February 26, 1999 would be converted at $.50.
Each investor in Series E Stock shall have the right to vote, except as
otherwise required by Delaware law, on all matters on which holders of Common
Stock have the right to vote on with each such investor having the right to cast
one vote for each whole share of Common Stock into which each share of the
Series E Preferred Stock held by such investor is convertible immediately prior
to the record date for the determination of stockholders entitled to vote. The
Series E Warrants are immediately exercisable upon issuance at an exercise price
of $.875 per share and expire five years after their date of issuance. In fiscal
2000, the issued and outstanding shares of Series E Stock was converted into
33,841,035 shares of common stock.
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
---------------------------------------
On July 5, 2000, the Company entered into a Private Equity Line of Credit
Agreement with Impany Investment Limited ("Impany"). Pursuant to this agreement,
the Company has the right, subject to certain conditions, to sell up to
$36,000,000 of common stock over the next two years to Impany, which Impany may
resell to the public under a registration statement filed with the SEC in
September 2000. Beginning on the date the registration statement is declared
effective by the SEC, and continuing for two years thereafter, the Company may
in its sole discretion sell, or put, shares of our common stock to Impany. From
time to time during the two-year term, the Company may make 18 monthly draw
downs, by giving notice and requiring Impany to purchase shares of our common
stock, for the draw down amount. Impany's purchase price will be based upon the
average of the three lowest closing bid prices of the common stock over the
period of five (5) trading days during which the purchase price of the common
stock is determined with respect to the put date, which period shall begin two
(2) trading days prior to the put date and end two (2) trading days following
the put date. During fiscal 2001, the Company sold $750,000 of common stock
under this agreement. Funding under this agreement is not currently available to
the Company.
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 vesting period
is generally 48 months. However, during fiscal 2000 the Board has accelerated
vesting in order to induce the exercise of warrants and thereby raise needed
capital. Accordingly, all outstanding warrants have been treated as exercisable
at June 30, 2001.
29
In August 2000, the Company issued "retention" warrants to employees that allow
the purchase of up to 3,321,000 shares of common stock at a purchase price of
$.01 per share. These warrants become exercisable in January 2001 for those
employees who have remained employed by the Company through that period. The
value of these warrants was estimated at $175,000 using the Black-Scholes option
pricing model.
In August 2000, the Company issued warrants to officers and key employees that
allow the purchase of 2,136,000 shares of common stock at a purchase price of
$0.30 per share. These warrants are exercisable immediately. The value of these
warrants was estimated at $65,000 using the Black-Scholes option pricing model.
In December 2000 in connection with the issuance of a convertible note payable,
the Company issued warrants to purchase 10,040,000 shares of the Company's
common stock at an exercise price equal to $.075 per share. The purchasers may
exercise the warrants through December 12, 2005. The value of these warrants was
estimated at $123,000 using the Black-Scholes option pricing model.
In connection with the Private Equity Line of Credit Agreement, the Company
issued a warrant on July 5, 2000 to Impany to purchase up to 2,000,000 shares of
its common stock at an exercise price equal to $.57 per share. Impany may
exercise the warrant through January 5, 2003. The value of these warrants was
estimated at $145,000 using the Black-Scholes option pricing model.
The following is a summary of the warrant activity:
UNDERLYING
PRICE PER SHARE COMMON SHARES
June 30, 1998 $1.00 - $7.50 4,484
Granted $1.13 - $4.00 2,185
Exercised $1.00 - $1.00 (271)
Canceled $1.90 - $7.50 (658)
----
June 30, 1999 $1.00 - $7.50 5,740
Granted $0.40 - $0.91 8,773
Exercised $0.87 - $2.03 (3,570)
Canceled $1.00 - $6.25 (585)
----
June 30, 2000 $0.41 - $7.50 10,358
Granted $0.01 - $0.59 17,497
Exercised $0.01 - $0.40 (6,359)
Canceled $1.00 - $7.50 (677)
----
June 30, 2001 $0.01 - $6.25 20,819
======
Exercisable at June 30, 2001 $0.01 - $6.25 20,819
======
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, 1999, 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.
30
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:
1994, 1988 AND 1997 PLANS OTHER OPTIONS
PRICE UNDERLYING PRICE UNDERLYING
PER COMMON SHARES PER COMMON SHARES
SHARE SHARE
JUNE 30, 1998 $1.00 - $8.45 396 $1.00 195
Granted $0.91 - $1.90 619 - -
Exercised -
Canceled $1.06 - $6.90 (195) $1.00 (2)
---- --
JUNE 30, 1999 $0.91 - $8.45 820 $1.00 193
Granted $0.14 - $0.34 1,340
Exercised $0.14 - $1.19 (1,265) $1.00 (138)
Canceled $0.91 - $8.45 (660) $1.00 (55)
---- ---
JUNE 30, 2000 $0.91 - $8.45 235 -
Granted $0.14 - $0.34 - -
Exercised $0.14 - $1.19 - -
Canceled $0.91 - $8.45 (73) -
---- ---
JUNE 30, 2001 $0.34 - $7.50 162 -
===== ===
EXERCISABLE AT JUNE 30, 2001 $0.34 - $7.50 147 -
===== ===
At June 30, 2001, the weighted average price per share of outstanding options
was $1.41 and the weighted average price per share of exercisable options was
$1.27.
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
31
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:
2001 2000 1999
Net income (loss)
As reported $ (9,909) $ (14,219) $ (29,184)
Pro forma (9,909) (16,000) (30,500)
Basic earnings (loss) per share
As reported $ (0.08) $ (0.20) $ (1.88)
Pro forma (0.08) (0.23) (1.96)
The weighted average fair value of the options granted during fiscal years 2000
and 1999 is estimated on the date of grant using the Black-Scholes option
pricing model. No options were granted in fiscal 2001. The weighted average fair
values and weighted average assumptions used in calculating the fair values were
as follows for the years ended June 30:
2001 2000 1999
Fair Value of options granted N/a $ 2.50 $ 2.50
2.50
Risk free interest rate N/a 6% 6%
Expected life (years) N/a 3 3
Expected volatility N/a 95% 95%
Expected dividends N/a - -
NOTE 7. SEGMENT AND GEOGRAPHIC INFORMATION (IN THOUSANDS)
----------------------------------------------------------
During fiscal 2001, the Company managed and internally reported the Company's
business as three reportable segments, principally, (1) imaging products and
accessories, (2) imaging software, and (3) e-commerce. During fiscal 2000 and
1999, it is not practicable to discern revenues and operating results by segment
due to the prior organizational structure and accounting systems.
Segment information for the year ended December 31, 2001is as follows:
IMAGING
PRODUCTS & IMAGING E-COMMERCE
ACCESSORIES SOFTWARE
2001
Revenues $1,973 $559 $920
Operating income (loss) (8,341) 387 (306)
Additional information regarding revenue by products and service groups is not
presented because it is currently impracticable to do so due to various
reorganizations of the Company's accounting systems. A comprehensive accounting
system is being implemented that should enable the Company to report such
information in the future. As of and during the years ended June 30, 2001, 2000,
and 1999 no customer accounted for more than 10% of consolidated accounts
receivable or total consolidated revenues.
Net sales from principal geographic areas were as follows:
2001 2000 1999
Europe $ 82 $ 28 $ 981
Asia 633 23 1,530
Others 34 41 326
--------- --------- ---------
Total export sales 749 92 $ 2,837
Domestic sales 2,703 2,330 14,310
--------- --------- ---------
Total sales 3,452 $2,422 17,147
========= ========= =========
32
Receivables from export sales at December 31, 2001 and 2000 were approximately
$10 and $12 thousand, respectively.
NOTE 8. 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:
2001 2000 1999
Current - State $ - $ - $ (23)
Deferred benefit - - (241)
-------- -------- --------
$ - $ - (264)
======== ======== ========
The components of deferred income taxes are as follows at June 30:
2001 2000 1999
Deferred tax assets
Net operating loss carryforwards $ 30,000 $ 25,000 $ 20,000
Other 500 850 1,369
-------- -------- --------
30,500 25,850 21,369
Valuation allowance (30,500) (25,850) (21,369)
-------- -------- --------
$ - $ - $ -
======== ======== ========
The Company's federal and state net operating loss carryforwards expire in
various years through 2016. The Company has made numerous equity issuances that
could result in limitations on the annual utilization of the Company's net
operating loss carryforwards. The Company has not performed an analysis to
determine the effect of such changes.
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:
2001 2000 1999
Benefit (provision) at federal statutory income tax rate $ 2,808 $ 4,827 $ 8,544
Losses for which no current benefit is available (2,808) (4,827) (8,544)
State income taxes - - (23)
------- ------- -------
$ - $ - $ 23
======= ======= =======
NOTE 9. COMMITMENTS AND CONTINGENCIES
-------------------------------------
LEASE COMMITMENT
----------------
The Company leases its operating facilities under a lease agreement that expires
in October 2003. In addition, the Company leases other facilities and equipment
under short-term leases. Total rental expense was approximately $457 thousand in
fiscal 2001, $606 thousand in fiscal 2000, and $579 thousand in fiscal 1999.
Future minimum lease payments under this long-term non-cancelable operating
lease was as follows:
YEAR ENDING JUNE 30,
2002 $ 327
2003 340
2004 115
--------
$ 782
========
33
LEGAL MATTERS
-------------
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull, Stull &
Brody made a public announcement that they had filed a lawsuit against us and
certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. A motion to dismiss the lawsuit was granted on
February 16, 2001 on our behalf and those individual defendants that have been
served. However, on or about March 19, 2001, an amended complaint was filed by
Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and Michael S. Taylor, on
behalf of themselves and others similarly situated. On or about March 20, 2001,
we once again filed a motion to dismiss the case along with certain other
individual defendants. The motion was denied and an answer to the complaint has
been filed on behalf of the company and certain individual defendants. We
believe these claims are without merit and we intend to vigorously defend
against them on our behalf as well as on behalf of the other defendants. The
defense of this action has been tendered to our insurance carriers.
Throughout fiscal 1999, 2000 and 2001, and through the date of this filing,
approximately fifty trade creditors have made claims and/or filed actions
alleging the failure of us to pay our obligations to them in a total amount
exceeding $3 million. These actions are in various stages of litigation, with
many resulting in judgments being entered against us. Several of those who have
obtained judgments have filed judgment liens on our assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars. The
accompanying financial statements include an accrual of approximately $1,050,000
for judgments, costs, and fees.
Furthermore, from time to time, the Company may be involved in litigation
relating to claims arising out of its operations in the normal course of
business. Although it is not possible to determine the final outcome of these
matters, the resulting liability, if any, could have a material adverse effect
on the Company's operations or financial position.
NOTE 10. 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 $56 thousand in fiscal 2000 and
1999 and $120 thousand in fiscal 1998. Effective July 1, 1998, the annual
consulting fee under the agreement has been reduced to $56 thousand. 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.
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. In fiscal 1999, this loan plus
accrued interest and directors fees totaling $265 thousand were converted into
253 shares of Series E Preferred Stock.
NOTE 11. BUSINESS ACQUISITIONS
-------------------------------
Effective December 1, 2000, the Company acquired all of the outstanding shares
of Eduadvantage.com in exchange for 3,500,000 of the Company's common stock.
Eduadvantage.com is a California corporation that is primarily engaged in a
web-based business. The acquisition has been accounted for as a purchase
transaction. The following summarized the net assets acquired:
Assets
Receivables $ 79
Equipment 3
Goodwill 686
-----
768
Less assumption of liabilities (495)
-----
Net assets acquired $273
=====
The goodwill associated with the above acquisition is being amortized over a
period of three years.
In December 2000, the Company entered into an agreement to acquire a majority
interest in Quality Photographic Imaging, Inc. (OTCBB-QPIX) ("QPI"). The
management of QPI has announced its intention
34
to withdraw its recommendation to its shareholders that they approve the
transaction. As of the date of this report, the acquisition agreement has not
been approved by QPI shareholders.
NOTE 12. DISCONTINUED OPERATIONS
---------------------------------
In fiscal 1999, the Company disposed of its wholly owned subsidiaries Prima,
Inc. and McMican Corporation resulting in a loss of $1,087,000. These
subsidiaries had no significant operating results in fiscal 1999.
NOTE 13. SUBSEQUENT EVENTS
---------------------------
AUTHORIZED SHARES OF COMMON STOCK.
----------------------------------
On September 28, 2001, the Company's shareholders approved a Board proposal to
amend the Certificate of Incorporation to increase the number of shares of
common stock that the Company is authorized to issue from 200,000,000 to
500,000,000 shares.
AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
----------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any stockholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
2001 STOCK OPTION AND STOCK PURCHASE PLANS.
-------------------------------------------
On September 28, 2001, the Company's shareholders approved the 2001 Stock Option
Plan, pursuant to which 5,000,000 shares of common stock (subject to adjustment
for the effect of the reverse stock split) will be reserved for issuance to
eligible employees and directors of, and consultants to, the Company or any of
its subsidiaries. Upon expiration, cancellation or termination of unexercised
options, the shares of the Company's Common Stock subject to such options will
again be available for the grant of options under the 2001 Stock Option Plan.
Options granted under the 2001 Stock Option Plan may either be incentive or
nonqualified stock options. On September 28, 2001, the Company's shareholders
approved the 2001 Stock Purchase Plan, which enables eligible employees to
purchase in the aggregate up to 2,500,000 shares of common stock (subject to
adjustment for the effect of the reverse stock split) at not less than 85% of
the fair market value on the date of purchase.
DEBT FINANCINGS.
----------------
In July 2001, the Company entered into a Convertible Note Purchase Agreement for
$1,000,000, bearing an annual interest rate of 8%, due July 2004. The Note is
convertible into the Company's common stock. In September 2001, the Company
entered into a Convertible Promissory Note for $300,000, bearing an interest
rate of 8%, due September 2004. The Note is convertible into the Company's
common stock.
35
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 2001 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A or an amendment to the Form
10-K within 120 days after June 30, 2001.
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 18.
(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.
Form 8-K filed January 19, 2001
Form 8-K filed July 26, 2001
(c) EXHIBITS.
The following exhibits are filed as part of, or incorporated by
reference into, this Form 10-K.
3(a) Certificate of Incorporation of the Company, as amended, and currently
in effect. See also below (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) Certificate of Amendment of Certificate of Incorporation, filed January
12, 1999, as amended and currently in effect (Incorporated by reference
to Form 10-Q for the period ended December 31, 1998) *
3(e) Certificate Eliminating Reference to Certain Series of Shares of Stock
from the Certificate of Incorporation, filed January 12, 1999, as
amended and currently in effect (Incorporated by reference to Form 10-Q
for the period ended December 31, 1998) *
3(f) By-Laws of the Company, as amended, and currently in effect
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K) *
3(g) Certificate of Amendment of Certificate of Incorporation, filed May 12,
2000, as amended and currently in effect **
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) *
36
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
Convertible Preferred Stock of Imaging Technologies Corporation
(Incorporated by reference to Exhibit 4(c) to 1998 Form 10-K) *
4(d) Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series D Convertible
Preferred Stock, filed January 13, 1999 (Incorporated by reference to
Form 10-Q for the period ended December 31, 1998) *
4(e) Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series E Convertible
Preferred Stock, filed January 28, 1999 (Incorporated by reference to
Form 10-Q for the period ended December 31, 1998) *
10(a.1) 1988 Stock Option Plan for the Company (Incorporated by reference to
Exhibit 10(g) to Exhibit 10(d) to 1989 Form 10-K) *
10(a.2) Amendment and restatement of 1988 Stock Option Plan (Incorporated by
reference to Exhibit 10(d) to 1991 Form 10-K) *
10(a.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(b) 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(c) 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(d) Warrant to Purchase Stock between Imperial Bank and the Company dated
June 23, 1998 (Incorporated by reference to Exhibit 10(w) to 1998 Form
10-K) *
10(e) Form of Warrant to Purchase Common Stock between buyers and the Company
dated August 21, 1997 (Incorporated by reference to Exhibit 10(z) to
1998 Form 10-K) *
10(f) Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share dated January 13, 1999, between the Company and each of
the applicable parties named in Exhibit 10(j) hereto (Incorporated by
reference to Exhibit 10.5 to Form 10-Q for the period ended December
31, 1998) *
10(g) Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share dated February 2, 1999, between the Company and each of
the applicable parties named in Exhibit 10(n) hereto (Incorporated by
reference to Exhibit 10.8 to Form 10-Q for the period ended December
31, 1998) *
10(h) Form of Warrant to Purchase 50,000 shares of Common Stock of ITEC at
$1.50 per share, dated March 5, 1999, between ITEC and Carmel Mountain
Environmental L.L.C. (Incorporated by reference to Exhibit 4.9 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629) *
10(i) Form of Warrant to Purchase 50,000 Shares of Common Stock of ITEC at
$1.50 per share dated March 5, 1999, between ITEC and Carmel Mountain
#8 Associates, L.P. (Incorporated by reference to Exhibit 4.10 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629) *
10(j) Form of Warrant to Purchase 5,000 Shares of Common Stock of ITEC at
$1.50 per share,
37
dated March 5, 1999 between ITEC and John P. Mulder (Incorporated by
reference to Exhibit 4.12 to Amendment No. 2 to Form S-3 filed July 16,
1999, File No. 333-77629) *
10(k) Form of Warrant to Purchase 5,000 Shares of Common Stock of ITEC at
$1.50 per share, dated March 5, 1999 between ITEC and Steve Tiritilli
(Incorporated by reference to Exhibit 4.13 to Amendment No. 2 to Form
S-3 filed July 16, 1999, File No. 333-77629) *
10(l) Standard Industries/Commercial Single-Tenant Lease-Net, dated February
22, 1999 and addendum thereto, dated March 5, 1999, by and between
Carmel Mountain #8 Associates, L.P. and ITEC (Incorporated by reference
to Exhibit 10.10 to Form 10-Q for the period ended March 31, 1999) *
10(m) Form of Warrant to Purchase 60,000 Shares of Common Stock of ITEC at
$2.50 per share, dated June 23, 1998, between ITEC and Imperial Bank
(Incorporated by reference to Exhibit 4.40 to Amendment No.2 to Form
S-3 filed July 16, 1999, File No. 333-77629) *
10(n) Private Equity Line of Credit Agreement by and among certain Investors
and the Company (Incorporated by reference to Form 8-K, filed July 26,
2000) *
10(o) Convertible Note Purchase Agreement dated December 12, 2000 between the
Company and Amro International, S.A., Balmore Funds, S.A., and Celeste
Trust Reg. (Incorporated by reference to Form 8-K, filed January 19,
2001. *
10(p) Convertible Note Purchase Agreement dated July 26, 2001 between the
Company and Balmore Funds, S.A. (Incorporated by reference to Form 8-K
filed August 2, 2001. *
10(q) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc. (Incorporated by reference to Form 10-Q for the
period ended September 30, 2000) *
10(r) Agreement to Acquire Shares, dated December 1, 2000, between ITEC and
Quik Pix, Inc. (Incorporated by reference to Form 10-Q for the period
ended September 30, 2000) and subsequently cancelled. *
10(s) Agreement to Acquire Shares, dated December 17, 2000, between ITEC and
Pen Internconnect, Inc. (Incorporated by reference to Form 10-Q for the
period ended September 30, 2000) and subsequently cancelled. *
10(t) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc. (Incorporated by reference to Form 10-Q for the
period ended September 30, 2000) *
10(u) Convertible Promissory Note dated September 21, 2001 between the
Company and ** Stonestreet Limited Partnership.
10(v) Convertible Note Purchase Agreement dated September 21, 2001 between
the Company and ** Stonestreet Limited Partnership
10(w) Registration Rights Agreement dated September 21, 2001 between the
Company and ** Stonestreet Limited Partnership
10(x) Form of Warrant to Purchase 11,278,195 Shares of Common Stock of ITEC,
dated September ** 21, 2001, between ITEC and Stonestreet Limited
Partnership.
21 List of Subsidiaries of the Company **
23 Consent of Independent Accountants **
* Exhibit is incorporated by reference only and a copy is not included in
this Form 10-K filing.
** Filed herewith.
Exhibits 10(a.1), 10(a.2), and 10(a.3) are 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.
38
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 12, 2001 IMAGING TECHNOLOGIES CORPORATION
By: /s/ BRIAN BONAR
---------------------
Brian Bonar
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, Brian Bonar as his
attorney-in-fact, each with full power of substitution and resubstitution, for
him or her in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K (including post-effective amendments), and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-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 that said attorney-in-fact, or his 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 Annual Report on Form 10-K has been signed below by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brian Bonar Chairman of the Board of Directors, October 12, 2001
--------------- Chief Executive Officer, and
Brian Bonar Acting Chief Financial Officer
(PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
/s/ Robert A. Dietrich Director October 12, 2001
-----------------------
Robert A. Dietrich
/s/ Eric W. Gaer Director October 12, 2001
-----------------
Eric W. Gaer
/s/ Stephen J. Fryer Director October 12, 2001
---------------------
Stephen J. Fryer
/s/ Richard H. Green Director October 12, 2001
---------------------
Richard H. Green
39
EX-3
3
exh3gfor10k.txt
EXHIBIT 3(G)
EXHIBIT 3(g)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
IMAGING TECHNOLOGIES CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is Imaging Technologies Corporation.
2. The Certificate of Incorporation of the Corporation (hereinafter
called the "Certificate of Incorporation") is hereby further amended by deleting
the current first paragraph of the Fourth Article and replacing it with the
following:
"FOURTH: The aggregate number of shares of stock which the Corporation
shall have authority to issue is 200,100,000 shares divided into two classes;
200,000,000 shares of which shall be designated as Common Stock, $.005 par value
per share, and 100,000 shares of which shall be designated as Preferred Stock,
with $1,000.00 par value per share. There shall be no preemptive rights with
respect to any shares of capital stock of the Corporation."
3. The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Dated: May 12, 2000
By: /s/ Brian Bonar
---------------------------
Brian Bonar, President
ATTEST:
By: /s/ Philip Englund
---------------------------------
Philip Englund, Secretary
EX-10
4
exh10u.txt
EXHIBIT 10(U)
EXHIBIT 10(u)
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE REASONABLY
ACCEPTABLE TO THE MAKER ) IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH STATE SECURITIES LAWS.
IMAGING TECHNOLOGIES CORPORATION
Convertible Promissory Note
due September 21, 2004
No. CN-1 $300,000.00
Dated: September 21, 2001
For value received, IMAGING TECHNOLOGIES CORPORATION, a Delaware corporation
(the "Maker"), hereby promises to pay to the order of STONESTREET LIMITED
PARTNERSHIP (together with its successors, representatives, and permitted
assigns, the "Holder"), in accordance with the terms hereinafter provided, the
principal amount of Three Hundred Thousand Dollars ($300,000.00), together with
interest thereon.
All payments under or pursuant to this Note shall be made in United States
Dollars in immediately available funds to the Holder at the address of the
Holder first set forth above or at such other place as the Holder may designate
from time to time in writing to the Maker or by wire transfer of funds to the
Holder's account, instructions for which are attached hereto as Exhibit A. The
outstanding principal balance of this Note shall be due and payable on September
21, 2004 (the "Maturity Date") or at such earlier time as provided herein. This
Note may not be prepaid by the Maker.
Purchase Agreement. This Note has been executed and delivered pursuant to the
Convertible Note Purchase Agreement, dated as of September 21, 2001 (the
"Purchase Agreement"), by and among the Maker and the Holder. Capitalized terms
used and not otherwise defined herein shall have the meanings set forth for such
terms in the Purchase Agreement.
Interest. Beginning on the date hereof, the outstanding principal balance of
this Note shall bear interest, in arrears, at a rate per annum equal to eight
percent (8%), payable quarterly unless earlier converted or prepaid as provided
herein. Interest shall be computed on the basis of a 360-day year of twelve (12)
30-day months and shall accrue commencing on the issuance date of this Note (the
"Issuance Date"). The interest shall be payable, at the option of the Holder, in
cash or shares of the Maker's common stock, par value $.005 per share (the
"Common Stock"); provided, that if the Holder elects to receive any interest in
Common Stock, the Maker shall issue to the Holder registered and freely tradable
shares of Common Stock. The number of shares of Common Stock to be issued as
payment of accrued and unpaid interest shall be determined by dividing (a) the
total amount of accrued and unpaid interest to be converted into Common Stock by
the lesser of (i) $.0266 and (ii) an amount equal to 70% of the average Per
Share Market Value (as defined in Section 3.2(b) hereof) for the three (3)
Trading Days (as defined in Section 4.13 hereof) having the lowest Per Share
Market Value during the thirty (30) Trading Days prior to the date the interest
payment is due. Furthermore, upon the occurrence of an Event of Default (as
defined in Section 2.1 hereof), then to the extent permitted by law, the Maker
will pay interest to the Holder, payable on demand, on the outstanding principal
balance of the Note from the date of the Event of Default until payment in full
at the rate of fifteen percent (15%) per annum.
Payment on Non-Business Days. Whenever any payment to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of New York,
such payment may be due on the next succeeding business day and such next
succeeding day shall be included in the calculation of the amount of accrued
interest payable on such date.
Transfer. This Note may be transferred or sold, subject to the provisions of
Section 4.5 of this Note, or pledged, hypothecated or otherwise granted as
security by the Holder.
Replacement. Upon receipt of a duly executed, notarized and unsecured written
statement from the Holder with respect to the loss, theft or destruction of this
Note (or any replacement hereof), and without requiring an indemnity bond or
other security, or, in the case of a mutilation of this Note, upon surrender and
cancellation of such Note, the Maker shall issue a new Note, of like tenor and
amount, in lieu of such lost, stolen, destroyed or mutilated Note.
EVENTS OF DEFAULT; REMEDIES
---------------------------
Events of Default. The occurrence of any of the following events shall be an
"Event of Default" under this Note:
the Maker shall fail to make the payment of any amount of principal outstanding
on the date such payment is due hereunder; or
the Maker shall fail to make any payment of interest for a period of five (5)
days after the date such interest is due; or
the failure of the Registration Statement to be declared effective by the
Securities and Exchange Commission ("SEC") on or prior to the date which is one
hundred twenty (120) days after the Filing Date (as defined in the Registration
Rights Agreement); or
the suspension from listing or the failure of the Common Stock to be listed on
the OTC Bulletin Board for a period of five (5) consecutive Trading Days; or
the Maker's notice to the Holder, including by way of public announcement, at
any time, of its inability to comply (including for any of the reasons described
in Section 3.8(a) hereof) or its intention not to comply with proper requests
for conversion of this Note into shares of Common Stock; or
the Maker shall fail to (i) timely delivery the shares of Common Stock upon
conversion of the Note or any interest accrued and unpaid, (ii) timely file the
Registration Statement (as defined in the Registration Rights Agreement) or
(iii) make the payment of any fees and/or liquidated damages under this Note,
the Purchase Agreement or the Registration Rights Agreement, which failure in
the case of items (i) and (iii) of this Section 2.1(f) is not remedied within
seven (7) business days after the incurrence thereof; or
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 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 (10) consecutive Trading Days,
provided that the cause of such lapse or unavailability is not due to factors
solely within the control of Holder; or
default shall be made in the performance or observance of (i) any covenant,
condition or agreement contained in this Note (other than as set forth in clause
(f) of this Section 2.1) and such default is not fully cured within three (3)
business days after the occurrence thereof or (ii) any material covenant,
condition or agreement contained in the Purchase Agreement or the Registration
Rights Agreement which is not covered by any other provisions of this Section
2.1 and such default is not fully cured within seven (7) business days after the
occurrence thereof; or
any material representation or warranty made by the Maker herein or in the
Purchase Agreement or the Registration Rights Agreement shall prove to have been
false or incorrect or breached in a material respect on the date as of which
made; or
the Maker shall issue any debt securities which are not subordinate to this Note
on such terms as are acceptable to the Holders of a majority of the outstanding
principal amount of this Note and the other Notes purchased under the Purchase
Agreement; or
the consummation of any of the following transactions: (i) the consolidation,
merger or other business combination of the Maker with or into a person or
entity (other than (A) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Maker or (B) a
consolidation, merger or other business combination in which holders of the
Maker's voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities), except if in the case of a consolidation merger or other business
combination of the Maker, the Maker shall have given the Holder not less than
fifteen (15) business days prior written notice thereof (the "Transaction
Notice") and shall have furnished the Holder with such information regarding the
consolidation, merger or other business combination (including, without
limitation, the counterparties thereto) as the Holder may reasonably request in
order for the Holder to determine if it will exercise its conversion rights
hereunder prior to the consummation of such consolidation, merger or other
business combination; (ii) the sale or transfer of all or substantially all of
the Maker's assets; or (iii) the consummation of a purchase, tender or exchange
offer made to the holders of more than 30% of the outstanding shares of Common
Stock.
the Maker shall (i) default in any payment of any amount or amounts (x) of
principal of or interest on any Indebtedness (other than the Indebtedness
hereunder) the aggregate principal amount of which Indebtedness is in excess of
$75,000 or (ii) default in the observance or performance of any other agreement
or condition relating to any Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the
holder or holders or beneficiary or beneficiaries of such Indebtedness to cause
with the giving of notice if required, such Indebtedness to become due prior to
its stated maturity; or
the Maker shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property or assets, (ii) make a general assignment
for the benefit of its creditors, (iii) commence a voluntary case under the
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition
seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors'
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
or (vi) take any action under the laws of any jurisdiction (foreign or domestic)
analogous to any of the foregoing; or
a proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or composition
or readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of it or of all or any substantial part of its
assets in connection with the liquidation or dissolution of the Company or (iii)
similar relief in respect of it under any law providing for the relief of
debtors, and such proceeding or case described in clause (i), (ii) or (iii)
shall continue undismissed, or unstayed and in effect, for a period of sixty
(60) days or any order for relief shall be entered in an involuntary case under
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or
action under the laws of any jurisdiction (foreign or domestic) analogous to any
of the foregoing shall be taken with respect to the Maker and shall continue
undismissed, or unstayed and in effect for a period of sixty (60) days.
Remedies Upon An Event of Default. If an Event of Default shall have
occurred and shall be continuing, the Holder of this Note may at any time at its
option (a) declare the entire unpaid principal balance of this Note, together
with all interest accrued hereon, due and payable, and thereupon, the same shall
be accelerated and so due and payable, without presentment, demand, protest, or
notice, all of which are hereby expressly unconditionally and irrevocably waived
by the Maker; provided, however, that upon the occurrence of an Event of Default
described in (i) Sections 2.1 (l), (m) or (n), the outstanding principal balance
and accrued interest hereunder shall be automatically due and payable and (ii)
Sections 2.1 (c)-(k), demand the prepayment of this Note pursuant to Section 3.7
hereof, (b) demand that the principal amount of this Note then outstanding and
all accrued and unpaid interest thereon shall be converted into shares of Common
Stock at a conversion price per share calculated pursuant to Section 3.1 hereof
assuming that the date that the Event of Default occurs is the Conversion Date
(as defined in Section 3.1 hereof), or (c) exercise or otherwise enforce any one
or more of the Holder's rights, powers, privileges, remedies and interests under
this Note, the Purchase Agreement, the Registration Rights Agreement or
applicable law. No course of delay on the part of the Holder shall operate as a
waiver thereof or otherwise prejudice the right of the Holder. No remedy
conferred hereby shall be exclusive of any other remedy referred to herein or
now or hereafter available at law, in equity, by statute or otherwise.
CONVERSION; ANTIDILUTION; PREPAYMENT
------------------------------------
Conversion Option. At any time on or after October 9, 2001, this Note
shall be convertible (in whole or in part), at the option of the Holder (the
"Conversion Option"), into such number of fully paid and non-assessable shares
of Common Stock (the "Conversion Rate") as is determined by dividing (x) that
portion of the outstanding principal balance plus accrued and unpaid interest
under the Note as of such date that the Holder elects to convert by (y) the
Conversion Price (as hereinafter defined) then in effect on the date on which
the Holder faxes a notice of conversion (the "Conversion Notice"), duly
executed, to the Maker (facsimile number (858) 207-6505, Attn.: General Counsel)
(the "Conversion Date"), provided, however, that the Conversion Price shall be
subject to adjustment as described in Section 3.6 below.
Conversion Price.
(a) The term "Conversion Price" shall mean the lesser of (A) $.0266
(the "Fixed Conversion Price") and (B) an amount equal to seventy percent (70%)
of the average Per Share Market Value for the three (3) Trading Days having the
lowest Per Share Market Value during the thirty (30) Trading Days prior to the
Conversion Date, except that if during any period (a "Black-out Period"), a
Holder is unable to trade any Common Stock issued or issuable upon conversion of
the Notes immediately due to the postponement of filing or delay or suspension
of effectiveness of a registration statement or because the Maker has otherwise
informed such Holder that an existing prospectus cannot be used at that time in
the sale or transfer of such Common Stock, such Holder shall have the option but
not the obligation on any Conversion Date within ten (10) Trading Days following
the expiration of the Black-out Period of using the Conversion Price applicable
on such Conversion Date or any Conversion Price selected by such Holder that
would have been applicable had such Conversion Date been at any earlier time
during the Black-out Period or within the ten (10) Trading Days thereafter.
(b) The term "Per Share Market Value" means on any particular date (a)
the closing bid price of the Common Stock on such date on the OTC Bulletin
Board, The Nasdaq Small-Cap Market, the Nasdaq National Market or other
registered national stock exchange on which the Common Stock is then listed or
if there is no such price on such date, then the closing bid price on such
exchange or quotation system on the date nearest preceding such date, or (b) if
the Common Stock is not listed then on The Nasdaq Small-Cap Market, the Nasdaq
National Market or any registered national stock exchange, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by
NASDAQ or in the National Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting prices) at the close of
business on such date, then the average of the three (3) lowest closing bid or
closing prices, if applicable, of the "Pink Sheet" quotes for the relevant
thirty (30) day trading conversion period, as determined in good faith by the
Holder, or (d) if the Common Stock is not then publicly traded the fair market
value of a share of Common Stock as determined by an Independent Appraiser (as
defined in Section 4.13 hereof) selected in good faith by the Holders of a
majority in interest of the Notes; provided, however, that the Maker, after
receipt of the determination by such Independent Appraiser, shall have the right
to select an additional Independent Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such
Independent Appraiser; and provided, further that all determinations of the Per
Share Market Value shall be appropriately adjusted for any stock dividends,
stock splits or other similar transactions during such period. The determination
of fair market value by an Independent Appraiser shall be based upon the fair
market value of the Issuer determined on a going concern basis as between a
willing buyer and a willing seller and taking into account all relevant factors
determinative of value, and shall be final and binding on all parties. In
determining the fair market value of any shares of Common Stock, no
consideration shall be given to any restrictions on transfer of the Common Stock
imposed by agreement or by federal or state securities laws, or to the existence
or absence of, or any limitations on, voting rights.
Mechanics of Conversion.
Not later than three (3) Trading Days after any Conversion Date, the Maker will
deliver to the applicable Holder by express courier (A) a certificate or
certificates which shall be free of restrictive legends and trading restrictions
(other than those required by Section 5.1 of the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of the Notes and (B) one or more certificates representing the amount
of Notes not converted. If in the case of any Conversion Notice such certificate
or certificates are not delivered to or as directed by the applicable Holder by
the third Trading Day after the Conversion Date (the "Delivery Date"), the
Holder shall be entitled by written notice to the Maker at any time on or before
its receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Maker shall immediately return the certificates
representing the Notes tendered for conversion, whereupon the Maker and the
Holder shall each be restored to their respective positions immediately prior to
the delivery of such notice of revocation, except that any amounts described in
Sections 3.3(b) and (c) shall be payable through the date notice of rescission
is given to the Maker.
The Maker understands that a delay in the delivery of the shares of Common Stock
upon conversion of the Notes and failure to deliver certificates representing
the unconverted shares of the Notes beyond the Delivery Date could result in
economic loss to the Holder. If the Maker fails to deliver to the Holder such
certificate or certificates pursuant to this Section hereunder by the Delivery
Date, the Maker shall pay to such Holder, in cash, an amount per Trading Day for
each Trading Day until such certificates are delivered, together with interest
on such amount at a rate of 10% per annum, accruing until such amount and any
accrued interest thereon is paid in full, equal to (i) 1% of the aggregate
principal amount of the Notes requested to be converted for the first five (5)
Trading Days after the Delivery Date and (ii) 2% of the aggregate principal
amount of the Notes requested to be converted for each Trading Day thereafter
(which amounts shall be paid as liquidated damages and not as a penalty).
Nothing herein shall limit a Holder's right to pursue actual damages for the
Maker's failure to deliver certificates representing shares of Common Stock upon
conversion within the period specified herein (including, without limitation,
damages relating to any purchase of shares of Common Stock by such Holder to
make delivery on a sale effected in anticipation of receiving certificates
representing shares of Common Stock upon conversion, such damages to be in an
amount equal to (A) the aggregate amount paid by such Holder for the shares of
Common Stock so purchased minus (B) the aggregate amount of net proceeds, if
any, received by such Holder from the sale of the shares of Common Stock issued
by the Maker pursuant to such conversion), and such Holder shall have the right
to pursue all remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).
Notwithstanding anything to the contrary contained herein, the Holder shall be
entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker
shall only be obligated to pay the liquidated damages accrued in accordance with
this Section 3.3(b) through the date the Conversion Notice is withdrawn.
In addition to any other rights available to the Holder, if the Maker fails to
deliver to the Holder such certificate or certificates pursuant to Section
3.3(a) by the Delivery Date and if after the Delivery Date the Holder purchases
(in an open market transaction or otherwise) shares of Common Stock to deliver
in satisfaction of a sale by such Holder of the Conversion Shares which the
Holder anticipated receiving upon such conversion (a "Buy-In"), then the Maker
shall pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (A) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal amount of the Notes for which such
conversion was not timely honored, together with interest thereon at a rate of
15% per annum, accruing until such amount and any accrued interest thereon is
paid in full (which amount shall be paid as liquidated damages and not as a
penalty). For example, if the Holder purchases shares of Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate principal amount of the Notes, the Maker shall
be required to pay the Holder $1,000, plus interest. The Holder shall provide
the Maker written notice indicating the amounts payable to the Holder in respect
of the Buy-In.
Ownership Cap. Notwithstanding anything to the contrary set forth in Section 3
of this Note, at no time may a holder of this Note convert this Note if the
number of shares of Common Stock to be issued pursuant to such conversion would
exceed, when aggregated with all other shares of Common Stock owned by such
holder at such time, the number of shares of Common Stock which would result in
such holder owning more than 9.99% of all of the Common Stock outstanding at
such time; provided, however, that upon a holder of this Note providing the
Company with 75 days notice (pursuant to Section 4.1 hereof) (the "Waiver
Notice") that such holder would like to waive this Section 3.4 with regard to
any or all shares of Common Stock issuable upon conversion of this Note, this
Section 3.4 will be of no force or effect with regard to all or a portion of the
Note referenced in the Waiver Notice.
Intentionally Omitted.
Adjustment of Conversion Price.
The Fixed Conversion Price shall be subject to adjustment from time to time as
follows:
Adjustments for Stock Splits and Combinations. If the Maker shall at any time or
from time to time after the Issuance Date, effect a stock split of the
outstanding Common Stock, the applicable Fixed Conversion Price in effect
immediately prior to the stock split shall be proportionately decreased. If the
Maker shall at any time or from time to time after the Issuance Date, combine
the outstanding shares of Common Stock, the applicable Fixed Conversion Price in
effect immediately prior to the combination shall be proportionately increased.
Any adjustments under this Section 3.6(a)(i) shall be effective at the close of
business on the date the stock split or combination occurs.
(ii) Adjustments for Certain Dividends and Distributions. If the Maker
shall at any time or from time to time after the Issuance Date, make or issue or
set a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in shares of Common Stock,
then, and in each event, the applicable Fixed Conversion Price in effect
immediately prior to such event shall be decreased as of the time of such
issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, by multiplying, as applicable, the
applicable Fixed Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and
(2) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution.
(iii) Adjustment for Other Dividends and Distributions. If the Maker
shall at any time or from time to time after the Issuance Date, make or issue or
set a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in other than shares of Common
Stock, then, and in each event, an appropriate revision to the applicable Fixed
Conversion Price shall be made and provision shall be made (by adjustments of
the Conversion Price or otherwise) so that the holders of the Notes shall
receive upon conversions thereof, in addition to the number of shares of Common
Stock receivable thereon, the number of securities of the Maker which they would
have received had their Notes been converted into Common Stock on the date of
such event and had thereafter, during the period from the date of such event to
and including the Conversion Date, retained such securities (together with any
distributions payable thereon during such period), giving application to all
adjustments called for during such period under this Section 3.6(a)(iii) with
respect to the rights of the holders of the Notes.
(iv) Adjustments for Reclassification, Exchange or Substitution. If
the Common Stock issuable upon conversion of the Notes at any time or from time
to time after the Issuance Date shall be changed to the same or different number
of shares of any class or classes of stock, whether by reclassification,
exchange, substitution or otherwise (other than by way of a stock split or
combination of shares or stock dividends provided for in Sections 3.6(a)(i),
(ii) and (iii), or a reorganization, merger, consolidation, or sale of assets
provided for in Section 3.6(a)(v)), then, and in each event, an appropriate
revision to the Fixed Conversion Price shall be made and provisions shall be
made (by adjustments of the Conversion Price or otherwise) so that the holder of
each of the Notes shall have the right thereafter to convert such Note into the
kind and amount of shares of stock and other securities receivable upon
reclassification, exchange, substitution or other change, by holders of the
number of shares of Common Stock into
which such Note might have been converted immediately prior to such
reclassification, exchange, substitution or other change, all subject to further
adjustment as provided herein.
(v) Adjustments for Reorganization, Merger, Consolidation or Sales of
Assets. If at any time or from time to time after the Issuance Date there shall
be a capital reorganization of the Maker (other than by way of a stock split or
combination of shares or stock dividends or distributions provided for in
Section 3.6(a)(i), (ii) and (iii), or a reclassification, exchange or
substitution of shares provided for in Section 3.6(a)(iv)), or a merger or
consolidation of the Maker with or into another corporation, or the sale of all
or substantially all of the Maker's properties or assets to any other person (an
"Organic Change"), then as a part of such Organic Change an appropriate revision
to the Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price or otherwise) so that the holder of each
Note shall have the right thereafter to convert such Note into the kind and
amount of shares of stock and other securities or property of the Maker or any
successor corporation resulting from Organic Change. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 3.6(a)(v) with respect to the rights of the holders of the Notes
after the Organic Change to the end that the provisions of this Section
3.6(a)(v) (including any adjustment in the applicable Conversion Price then in
effect and the number of shares of stock or other securities deliverable upon
conversion of the Notes) shall be applied after that event in as nearly an
equivalent manner as may be practicable.
(vi) Adjustments for Issuance of Additional Shares of Common Stock. If
the Maker, at any time after the Issuance Date, shall issue any additional
shares of Common Stock (otherwise than as provided in the foregoing subsections
(i) through (v) of this Section 3.6) (the "Additional Shares of Common Stock"),
at a price per share less than the applicable Fixed Conversion Price then in
effect or without consideration, then the applicable Fixed Conversion Price upon
each such issuance shall be adjusted to that price (rounded to the nearest cent)
determined by multiplying the applicable Fixed Conversion Price then in effect
by a fraction:
(1) the numerator of which shall be equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to the issuance
of such Additional Shares of Common Stock plus (B) the number of shares of
Common Stock (rounded to the nearest whole share) which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at a price per share equal to the applicable Fixed
Conversion Price then in effect, and (2) the denominator of which shall be equal
to the number of shares of Common Stock outstanding immediately after the
issuance of such Additional Shares of Common Stock.
The provisions of this subsection (vi) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (i), (ii),
(iii), (iv) or (v) of this Section 3.6(a). No adjustment of the applicable Fixed
Conversion Price shall be made under this subsection (a)(iv) upon the issuance
of any Additional Shares of Common Stock which are issued pursuant to any Common
Stock Equivalent (as defined below) if upon the issuance of such Common Stock
Equivalent (x) any adjustment shall have been made pursuant to subsection (vii)
of this Section 3.6(a) or (y) no adjustment was required pursuant to subsection
(vii) of this Section 3.6(a). No adjustment of
the applicable Fixed Conversion Price shall be made under this subsection (vi)
in an amount less than $.005 per share, but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment, if any, which together with any adjustments so carried
forward shall amount to $.005 per share or more; provided that upon any
adjustment of the applicable Fixed Conversion Price as a result of any dividend
or distribution payable in Common Stock or Convertible Securities (as defined
below) or the reclassification, subdivision or combination of Common Stock into
a greater or smaller number of shares, the foregoing figure of $.005 per share
(or such figure as last adjusted) shall be adjusted (to the nearest one-half
cent) in proportion to the adjustment in the applicable Fixed Conversion Price.
(vii) Issuance of Common Stock Equivalents. If the Maker, at any time
after the Issuance Date, shall issue any securities convertible into or
exchangeable for, directly or indirectly, Common Stock ("Convertible
Securities"), other than this Note, or any rights or warrants or options to
purchase any such Common Stock or Convertible Securities, shall be issued or
sold (collectively, the "Common Stock Equivalents") and the price per share for
which Additional Shares of Common Stock may be issuable thereafter pursuant to
such Common Stock Equivalent shall be less than the applicable Fixed Conversion
Price then in effect, or if, after any such issuance of Common Stock
Equivalents, the price per share for which Additional Shares of Common Stock may
be issuable thereafter is amended or adjusted, and such price as so amended
shall be less than the applicable Fixed Conversion Price in effect at the time
of such amendment, then the applicable Fixed Conversion Price upon each such
issuance or amendment shall be adjusted as provided in the first sentence of
subsection (vi) of this Section 3.6(a) on the basis that (1) the maximum number
of Additional Shares of Common Stock issuable pursuant to all such Common Stock
Equivalents shall be deemed to have been issued (whether or not such Common
Stock Equivalents are actually then exercisable, convertible or exchangeable in
whole or in part) as of the earlier of (A) the date on which the Maker shall
enter into a firm contract for the issuance of such Common Stock Equivalent, or
(B) the date of actual issuance of such Common Stock Equivalent, and (2) the
aggregate consideration for such maximum number of Additional Shares of Common
Stock shall be deemed to be the minimum consideration received or receivable by
the Maker for the issuance of such Additional Shares of Common Stock pursuant to
such Common Stock Equivalent. No adjustment of the applicable Fixed Conversion
Price shall be made under this subsection (vii) upon the issuance of any
Convertible Security which is issued pursuant to the exercise of any warrants or
other subscription or purchase rights therefor, if any adjustment shall
previously have been made to the exercise price of such warrants then in effect
upon the issuance of such warrants or other rights pursuant to this subsection
(vii). If no adjustment is required under this subsection (vii) upon issuance of
any Common Stock Equivalent or once an adjustment is made under this subsection
(vii) based upon the Per Share Market Value in effect on the date of such
adjustment, no further adjustment shall be made under this subsection (vii)
based solely upon a change in the Per Share Market Value after such date.
(viii) Consideration for Stock. In case any shares of Common Stock or
any Common Stock Equivalents shall be issued or sold:
(1) in connection with any merger or consolidation in which the Maker is the
surviving corporation (other than any consolidation or merger in which the
previously outstanding shares of Common Stock of the Maker shall be changed to
or exchanged for the stock or other securities of another corporation), the
amount of consideration therefore shall be, deemed to be the fair value, as
determined reasonably and in good faith by the Board of Directors of the Maker,
of such portion of the assets and business of the nonsurviving corporation as
such Board may determine to be attributable to such shares of Common Stock,
Convertible Securities, rights or warrants or options, as the case may be; or
(2) in the event of any consolidation or merger of the Maker in which the Maker
is not the surviving corporation or in which the previously outstanding shares
of Common Stock of the Maker shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of
any corporation, the Maker shall be deemed to have issued a number of shares of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation. If any such calculation results in adjustment
of the applicable Fixed Conversion Price, or the number of shares of Common
Stock issuable upon conversion of the Notes, the determination of the applicable
Fixed Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Notes immediately prior to such merger, consolidation or sale,
shall be made after giving effect to such adjustment of the number of shares of
Common Stock issuable upon conversion of the Notes.
(b) Record Date. In case the Maker shall take record of the holders of
its Common Stock for the purpose of entitling them to subscribe for or purchase
Common Stock or Convertible Securities, then the date of the issue or sale of
the shares of Common Stock shall be deemed to be such record date.
(c) Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Maker shall not be required to make any adjustment of the
number of shares of Common Stock issuable upon conversion of the Notes upon the
grant after the Issuance Date of, or the exercise after the Issuance Date of,
options or warrants or rights to purchase stock under the Maker's existing stock
option plan or options or warrants or rights to purchase stock issued to
officers and/or directors of the Company.
(d) No Impairment. The Maker shall 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 hereunder by the Maker, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 3.6 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the Holder against
impairment. In the event a Holder shall elect to convert any Notes as provided
herein, the Maker cannot refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged in any
violation of law, violation of an agreement to which such Holder is a party or
for any reason whatsoever, unless, an injunction from a court, on notice,
restraining and or adjoining conversion of all or of said Notes shall have been
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to 130% of the amount of the Notes the Holder has elected to
convert plus the amount of the Notes outstanding, which bond shall remain in
effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder in the event it obtains
judgment.
(e) Certificates as to Adjustments. Upon occurrence of each adjustment
or readjustment of the Fixed Conversion Price or number of shares of Common
Stock issuable upon conversion of this Note pursuant to this Section 3.6, the
Maker at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to the Holder a certificate setting
forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Maker shall, upon written request
of the Holder, at any time, furnish or cause to be furnished to such holder a
like certificate setting forth such adjustments and readjustments, the
applicable Fixed Conversion Price in effect at the time, and the number of
shares of Common Stock and the amount, if any, of other securities or property
which at the time would be received upon the conversion of this Note.
Notwithstanding the foregoing, the Maker shall not be obligated to deliver a
certificate unless such certificate would reflect an increase or decrease of at
least one percent (1%) of such adjusted amount.
(f) Issue Taxes. The Maker shall pay any and all issue and other
taxes, excluding federal, state or local income taxes, that may be payable in
respect of any issue or delivery of shares of Common Stock on conversion of this
Note pursuant thereto; provided, however, that the Maker shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(g) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of this Note. In lieu of any fractional shares to which
the Holder would otherwise be entitled, the Maker shall pay cash equal to the
product of such fraction multiplied by the average of the Per Share Market
Values of the Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.
(h) Reservation of Common Stock. The Maker shall at all times when
this Note shall be outstanding, reserve and keep available out of its authorized
but unissued Common Stock, such number of share of Common Stock as shall from
time to time be sufficient to effect the conversion of this Note and all
interest accrued thereon; 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 this Note and all interest accrued thereon are at any time
convertible. The Maker shall, from time to time in accordance with the Delaware
General Corporation Law, as amended, increase the authorized number of shares of
Common Stock if at any time the unissued number of authorized shares shall not
be sufficient to satisfy the Maker's obligations under this Section 3.6(h). (i)
Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of this Note or any interest accrued thereon require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Maker shall, at its sole cost and expense, in good faith and as
expeditiously as possible, endeavor to secure such registration, listing or
approval, as the case may be.
Section 3.7 Prepayment
(a) Prepayment Upon an Event of Default. Notwithstanding anything to
the contrary contained herein, upon the occurrence of an Event of Default
described in Sections 2.1(c)-(k) hereof, the Holder shall have the right, at
such Holder's option, to require the Maker to prepay all or a portion of this
Note at a price equal to Prepayment Price (as defined in Section 3.7(c) below)
applicable at the time of such request. Nothing in this Section 3.7(a) shall
limit the Holder's rights under Section 2.2 hereof.
(b) Prepayment Option Upon Major Transaction. In addition to all other
rights of the holders of the Notes contained herein, simultaneous with the
occurrence of a Major Transaction (as defined below), each holder of the Notes
shall have the right, at such holder's option, to require the Maker to prepay
all or a portion of such holder's Notes at a price equal to the greater of (i)
115% of the aggregate principal amount of the Notes and (ii) the product of (A)
the Conversion Rate and (B) the Per Share Market Value of the Common Stock on
the Trading Day immediately preceding such Major Transaction ("Major Transaction
Prepayment Price").
(c) Prepayment Option Upon Triggering Event. In addition to all other
rights of the holders of the Notes contained herein, after a Triggering Event
(as defined below), each holder of the Notes shall have the right, at such
holder's option, to require the Maker to prepay all or a portion of such
holder's Notes at a price equal to the greater of (i) 130% of the aggregate
principal amount of the Notes and (ii) the product of (A) the Conversion Rate at
such time and (B) the Per Share Market Value of the Common Stock 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 Prepayment
Price" and, collectively with "Major Transaction Prepayment Price," the
"Prepayment Price").
(d) "Major Transaction." A "Major Transaction" shall be deemed to have
occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination of
the Maker with or into another Person (as defined in Section 4.13 hereof) (other
than (A) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Maker or (B) a consolidation,
merger or other business combination in which holders of the Maker's voting
power immediately prior to the transaction continue after the transaction to
hold, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or entities).
(ii) the sale or transfer of all or substantially all of the
Maker's assets; or
(iii) consummation of a purchase, tender or exchange offer made
to the holders of more than 30% of the outstanding shares of Common Stock.
(e) "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 which is 270 days after the Closing
Date, provided that the Maker has failed to file the Registration Statement on
or before the Filing Date (as defined in the Registration Rights Agreement) or
respond to any and each of the SEC's comments within fifteen (15) days of the
Maker's receipt of each of the SEC's comments;
(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 Notes 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 (10) consecutive Trading Days, provided that the cause of such
lapse or unavailability is due to factors within the control of the Maker and
not due to factors solely within the control of such holder of the Notes;
(iii) the suspension from trading or the failure of the Common
Stock to be traded on the OTC Bulletin Board for a period of five (5)
consecutive days, provided, that such suspension from listing or failure to be
listed is due to factors within the control of the Maker, including, but not
limited to, failure to timely file all reports required to be filed with the SEC
or to meet the net tangible assets requirements for listing, if any;
(iv) the Maker's notice to any holder of the Notes, including by
way of public announcement, at any time, of its inability to comply (including
for any of the reasons described in Section 3.8) or its intention not to comply
with proper requests for conversion of any of the Notes into shares of Common
Stock;
(v) the Maker's failure to comply with a Conversion Notice
tendered within ten (10) business days after the receipt by the Maker of the
Conversion Notice and the certificates representing the Notes; or
(vi) the Maker breaches any representation, warranty, covenant or
other term or condition of the Purchase Agreement, the Registration Rights
Agreement or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated thereby or hereby.
(f) Mechanics of Prepayment at Option of Buyer Upon Major Transaction.
No sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Maker shall deliver written notice thereof via
facsimile and overnight courier ("Notice of Major Transaction") to each holder
of the Notes. At any time after receipt of a Notice of Major Transaction (or, in
the event a Notice of Major Transaction is not delivered at least ten (10) days
prior to a Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of the Notes then outstanding may require the Maker to
prepay, effective immediately prior to the consummation of such Major
Transaction, all of the holder's Notes then outstanding by delivering written
notice thereof via facsimile and overnight courier ("Notice of Prepayment at
Option of Buyer Upon Major Transaction") to the Maker, which Notice of
Prepayment at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Notes that such holder is electing to prepay and (ii) the applicable
Major Transaction Prepayment Price, as calculated pursuant to Section 3.7(b)
above.
(g) Mechanics of Prepayment at Option of Buyer Upon Triggering Event.
Within one (1) day after the occurrence of a Triggering Event, the Maker shall
deliver written notice thereof via facsimile and overnight courier ("Notice of
Triggering Event") to each holder of the Notes. At any time after the earlier of
a holder's receipt of a Notice of Triggering Event and such holder becoming
aware of a Triggering Event, any holder of the Notes then outstanding may
require the Maker to prepay all of the Notes by delivering written notice
thereof via facsimile and overnight courier ("Notice of Prepayment at Option of
Buyer Upon Triggering Event") to the Maker, which Notice of Prepayment at Option
of Buyer Upon Triggering Event shall indicate (i) the number of Notes that such
holder is electing to prepay and (ii) the applicable Triggering Event Prepayment
Price, as calculated pursuant to Section 3.7(c) above.
(h) Payment of Prepayment Price. Upon the Maker's receipt of a
Notice(s) of Prepayment at Option of Buyer Upon Triggering Event or a Notice(s)
of Prepayment at Option of Buyer Upon Major Transaction from any holder of the
Notes, the Maker shall immediately notify each holder of the Notes by facsimile
of the Maker's receipt of such Notice(s) of Prepayment at Option of Buyer Upon
Triggering Event or Notice(s) of Prepayment at Option of Buyer Upon Major
Transaction and each holder which has sent such a notice shall promptly submit
to the Maker such holder's certificates representing the Notes which such holder
has elected to have prepaid. The Maker shall deliver the applicable Triggering
Event Prepayment Price, in the case of a prepayment pursuant to Section
3.7(g), to such holder within five (5) business days after the Maker's receipt
of a Notice of Prepayment at Option of Buyer Upon Triggering Event and, in the
case of a prepayment pursuant to Section 3.7(f), the Maker shall deliver the
applicable Major Transaction Prepayment Price immediately prior to the
consummation of the Major Transaction; provided that a holder's certificates
representing the Notes shall have been so delivered to the Maker; provided
further that if the Maker is unable to prepay all of the Notes to be prepaid,
the Maker shall prepay an amount from each holder of the Notes being prepaid
equal to such holder's pro-rata amount (based on the number of Notes held by
such holder relative to the number of Notes outstanding) of all Notes being
prepaid. If the Maker shall fail to prepay all of the Notes submitted for
prepayment (other than pursuant to a dispute as to the arithmetic calculation of
the Prepayment Price), in addition to any remedy such holder of the Notes may
have under this Note and the Purchase Agreement, the applicable Prepayment Price
payable in respect of such Notes not prepaid shall bear interest at the rate of
2.0% per month (prorated for partial months) until paid in full. Until the Maker
pays such unpaid applicable Prepayment Price in full to a holder of the Notes
submitted for prepayment, such holder shall have the option (the "Void Optional
Prepayment Option") to, in lieu of prepayment, require the Maker to promptly
return to such holder(s) all of the Notes that were submitted for prepayment by
such holder(s) under this Section 3.7 and for which the applicable Prepayment
Price has not been paid, by sending written notice thereof to the Maker via
facsimile (the "Void Optional Prepayment Notice"). Upon the Maker's receipt of
such Void Optional Prepayment Notice(s) and prior to payment of the full
applicable Prepayment Price to such holder, (i) the Notice(s) of Prepayment at
Option of Buyer Upon Triggering Event or the Notice(s) of Prepayment at Option
of Buyer Upon Major Transaction, as the case may be, shall be null and void with
respect to those Notes submitted for prepayment and for which the applicable
Prepayment Price has not been paid, (ii) the Maker shall immediately return any
Notes submitted to the Maker by each holder for prepayment under this Section
3.7(h) and for which the applicable Prepayment Price has not been paid and (iii)
the Conversion Price of such returned Notes shall be adjusted to the lesser of
(A) the Conversion Price as in effect on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker and (B) the lowest Per Share
Market Value during the period beginning on the date on which the Notice(s) of
Prepayment of Option of Buyer Upon Major Transaction or the Notice(s) of
Prepayment at Option of Buyer Upon Triggering event, as the case may be, is
delivered to the Maker and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder's delivery of a Void Optional Prepayment Notice
and exercise of its rights following such notice shall not effect the Maker's
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3.7 shall have priority to
payments to other stockholders in connection with a Major Transaction.
Section 3.8 Inability to Fully Convert.
(a) Holder's Option if Maker Cannot Fully Convert. If, upon the
Maker's receipt of a Conversion Notice, the Maker cannot issue shares of Common
Stock registered for resale under the Registration Statement for any reason,
including, without limitation, because the Maker (w) does not have a sufficient
number of shares of Common Stock authorized and available, (x) 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 Maker or any of its securities from issuing all of
the Common Stock which is to be issued to the Holder pursuant to a Conversion
Notice or (y) fails to have a sufficient number of shares of Common Stock
registered for resale under the Registration Statement, then the Maker shall
issue as many shares of Common Stock as it is able to issue in accordance with
the Holder's Conversion Notice and, with respect to the unconverted portion of
the Note, the Holder, solely at Holder's option, can elect to:
(i) require the Maker to prepay that portion of the Note for
which the Maker is unable to issue Common Stock in accordance with the Holder's
Conversion Notice (the "Mandatory Prepayment") at a price per share equal to the
Prepayment Price as of such Conversion Date (the "Mandatory Prepayment Price");
if the Maker's inability to fully convert is pursuant to Section
3.8(a)(y) above, require the Maker to issue restricted shares of Common Stock
equal to one hundred twenty percent (120%) of the number of shares of Common
Stock the Maker is unable to deliver in accordance with such holder's Conversion
Notice;
void its Conversion Notice and retain or have returned, as the
case may be, the Note that was to be converted pursuant to the Conversion Notice
(provided that the Holder's voiding its Conversion Notice shall not effect the
Maker's obligations to make any payments which have accrued prior to the date of
such notice).
(b) Mechanics of Fulfilling Holder's Election. The Maker shall
immediately send via facsimile to the Holder, upon receipt of a facsimile copy
of a Conversion Notice from the Holder which cannot be fully satisfied as
described in Section 3.8(a) above, a notice of the Maker's inability to fully
satisfy the Conversion Notice (the "Inability to Fully Convert Notice"). Such
Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is
unable to fully satisfy such holder's Conversion Notice, (ii) the amount of the
Note which cannot be converted and (iii) the applicable Mandatory Prepayment
Price. The Holder shall notify the Maker of its election pursuant to Section
3.8(a) above by delivering written notice via facsimile to the Maker ("Notice in
Response to Inability to Convert").
(c) Payment of Prepayment Price. If the Holder shall elect to have its
shares prepaid pursuant to Section 3.8(a)(i) above, the Maker shall pay the
Mandatory Prepayment Price in cash to the Holder within
five (5) days of the Maker's receipt of the Holder's Notice in Response to
Inability to Convert, provided that prior to the Maker's receipt of the Holder's
Notice in Response to Inability to Convert the Maker has not delivered a notice
to the Holder stating, to the satisfaction of the Holder, that the event or
condition resulting in the Mandatory Prepayment has been cured and all
Conversion Shares issuable to the Holder can and will be delivered to the Holder
in accordance with the terms of this Note. If the Maker shall fail to pay the
applicable Mandatory Prepayment Price to the Holder on a timely basis as
described in this Section 3.8(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Prepayment Price), in
addition to any remedy the Holder may have under this Note and the Purchase
Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month
(prorated for partial months) until paid in full. Until the full Mandatory
Prepayment Price is paid in full to the Holder, the Holder may (i) void the
Mandatory Prepayment with respect to that portion of the Note for which the full
Mandatory Prepayment Price has not been paid, (ii) receive back such Note, and
(iii) require that the Conversion Price of such returned Note be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Holder
voided the Mandatory Prepayment and (B) the lowest Per Share Market Value during
the period beginning on the Conversion Date and ending on the date the Holder
voided the Mandatory Prepayment.
Section 3.9 No Rights as Shareholder. Nothing contained in this Note shall
be construed as conferring upon the Holder, prior to the conversion of this
Note, the right to vote or to receive dividends or to consent or to receive
notice as a shareholder in respect of any meeting of shareholders for the
election of directors of the Maker or of any other matter, or any other rights
as a shareholder of the Maker. Upon the issuance of a Conversion Notice, the
Holder shall have all rights as a shareholder of the Maker.
MISCELLANEOUS
-------------
Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) upon hand delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated in the Purchase
Agreement (if delivered on a business day during normal business hours where
such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The Maker will give written notice to the Holder at least twenty (20) days prior
to the date on which the Maker closes its books or takes a record (x) with
respect to any dividend or distribution upon the Common Stock, (y) with respect
to any pro rata subscription offer to holders of Common Stock or (z) for
determining rights to vote with respect to any Organic Change, dissolution,
liquidation or winding-up and in no event shall such notice be provided to such
holder prior to such information being made known to the public. The Maker will
also give written notice to the Holder at least twenty (20) days prior to the
date on which any Organic Change, dissolution, liquidation or winding-up will
take place and in no event shall such notice be provided to the Holder prior to
such information being made known to the public.
Governing Law. This Note shall be governed by and construed in accordance
with the internal laws of the State of New York, without giving effect to the
choice of law provisions. This Note shall not be interpreted or construed with
any presumption against the party causing this Note to be drafted.
Headings. Article and section headings in this Note are included herein for
purposes of convenience of reference only and shall not constitute a part of
this Note for any other purpose.
Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note, at law or in equity (including,
without limitation, a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of compliance with
the provisions giving rise to such remedy and nothing herein shall limit a
holder's right to pursue actual damages for any failure by the Maker to comply
with the terms of this Note. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the holder thereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Maker (or
the performance thereof). The Maker acknowledges that a breach by it of its
obligations hereunder will cause irreparable and material harm to the Holder and
that the remedy at law for any such breach may be inadequate. Therefore the
Maker agrees that, in the event of any such breach or threatened breach, the
Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.
Enforcement Expenses. The Maker agrees to pay all costs and expenses of
enforcement of this Note, including, without limitation, reasonable attorneys'
fees and expenses.
Binding Effect. The obligations of the Maker and the Holder set forth
herein shall be binding upon the successors and assigns of each such party,
whether or not such successors or assigns are permitted by the terms hereof.
Amendments. This Note may not be modified or amended in any manner except
in writing executed by the Maker and the Holder.
Compliance with Securities Laws. The Holder of this Note acknowledges that
this Note is being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment, and that the Holder shall not
offer, sell or otherwise dispose of this Note. This Note and any Note issued in
substitution or replacement therefore shall be stamped or imprinted with a
legend in substantially the following form:
" THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL
(WHICH COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE MAKER) IN THE
FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT
THIS NOTE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED
OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE
SECURITIES LAWS."
Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby
irrevocably submits to the exclusive jurisdiction of the United States District
Court sitting in the Southern District of New York and the courts of the State
of New York located in New York county for the purposes of any suit, action or
proceeding arising out of or relating to this Note and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Maker and the Holder
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under the Purchase Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing in this Section
4.9 shall affect or limit any right to serve process in any other manner
permitted by law.
Parties in Interest. This Note shall be binding upon, inure to the benefit
of and be enforceable by the Maker, the Holder and their respective successors
and permitted assigns.
Failure or Indulgence Not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
Maker Waivers. Except as otherwise specifically provided herein, the Maker
and all others that may become liable for all or any part of the obligations
evidenced by this Note, hereby waive presentment, demand, notice of nonpayment,
protest and all other demands' and notices in connection with the delivery,
acceptance, performance and enforcement of this Note, and do hereby consent to
any number of renewals of extensions of the time or payment hereof and agree
that any such renewals or extensions may be made without notice to any such
persons and without affecting their liability herein and do further consent to
the release of any person liable hereon, all without affecting the liability of
the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.
No delay or omission on the part of the Holder in exercising its rights under
this Note, or course of conduct relating hereto, shall operate as a waiver of
such rights or any other right of the Holder, nor shall any waiver by the Holder
of any such right or rights on any one occasion be deemed a waiver of the same
right or rights on any future occasion.
THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
Section 4.13 Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Independent Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly engaged in the business of
appraising the Capital Stock or assets of corporations or other entities as
going concerns, and which is not affiliated with either the Issuer or the Holder
of any Warrant.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Trading Day" means (a) a day on which the Common Stock is traded on The
Nasdaq Small-Cap Market, the Nasdaq National Market or other registered national
stock exchange on which the Common Stock has been listed, or (b) if the Common
Stock is not listed on The Nasdaq Small-Cap Market, the Nasdaq National Market
or any registered national stock exchange, a day or which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board, or
(c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which
the Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); provided, however, that in the
event that the Common Stock is not listed or quoted as set forth in (a), (b) and
(c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
IMAGING TECHNOLOGIES CORPORATION
By:
---------------------------------
Name: Brian Bonar
Title: Chief Executive Officer
EXHIBIT A
WIRE INSTRUCTIONS.
Payee:
---------------------------------------------------------
Bank:
----------------------------------------------------------
Address:
------------------------------------------------------
Bank No.:
------------------------------------------------------
Account No.:
---------------------------------------------------
Account Name:
--------------------------------------------------
FORM OF
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the
principal amount of the above Note No. ___ into shares of Common Stock of
IMAGING TECHNOLOGIES CORPORATION (the "Maker") according to the conditions
hereof, as of the date written below.
Date of Conversion*
------------------------------------------------------
Applicable Conversion Price *
---------------------------------------------
Signature
-----------------------------------------------------------------
[Name]
Address:
------------------------------------------------------------------
EX-10
5
ex10v.txt
EXHIBIT 10(V)
EXHIBIT 10(V)
CONVERTIBLE NOTE PURCHASE
AGREEMENT
Dated as of September 21, 2001
among
IMAGING TECHNOLOGIES CORPORATION
and
THE PURCHASER LISTED ON EXHIBIT A
TABLE OF CONTENTS
page
----
ARTICLE I Purchase and Sale of Note..................................................................59
Section 1.1 Purchase and Sale of Note.............................................................59
Section 1.2 The Conversion Shares.................................................................59
Section 1.3 Purchase Price and Closing............................................................59
Section 1.4 Warrant...............................................................................59
ARTICLE II Representations and Warranties.............................................................59
Section 2.1 Representations and Warranties of the Company.........................................59
Section 2.2 Representations and Warranties of the Purchaser.......................................65
ARTICLE III Covenants..................................................................................67
Section 3.1 Securities Compliance.................................................................67
Section 3.2 Registration and Listing..............................................................67
Section 3.3 Inspection Rights.....................................................................67
Section 3.4 Compliance with Laws..................................................................67
Section 3.5 Keeping of Records and Books of Account...............................................67
Section 3.6 Reporting Requirements................................................................67
Section 3.7 Amendments............................................................................68
Section 3.8 Other Agreements......................................................................68
Section 3.9 Distributions.........................................................................68
Section 3.10 Intentionally Omitted.................................................................68
Section 3.11 Regulation S. ........................................................................68
Section 3.12 Future Financings.....................................................................68
Section 3.13 Reservation of Shares.................................................................68
Section 3.14 Transfer Agent Instructions...........................................................68
ARTICLE IV Conditions.................................................................................69
Section 4.1 Conditions Precedent to the Obligation of the
Company to Sell the Note..............................................................69
ARTICLE V Registration Rights........................................................................70
ARTICLE VI Certificate Legend.........................................................................70
Section 6.1 Legend................................................................................70
ARTICLE VII Termination................................................................................71
Section 7.1 Termination by Mutual Consent.........................................................71
Section 7.2 Other Termination.....................................................................71
Section 7.3 Effect of Termination.................................................................71
ARTICLE VIII Indemnification............................................................................71
Section 8.1 General Indemnity.....................................................................71
Section 8.2 Indemnification Procedure.............................................................71
ARTICLE IX Miscellaneous.........................................................................................72
Section 9.1 Fees and Expenses.....................................................................72
Section 9.2 Specific Enforcement, Consent to Jurisdiction.........................................72
Section 9.3 Entire Agreement; Amendment...........................................................72
Section 9.4 Notices...............................................................................72
Section 9.5 Waivers...............................................................................73
Section 9.6 Headings..............................................................................74
Section 9.7 Successors and Assigns................................................................74
Section 9.8 No Third Party Beneficiaries..........................................................74
Section 9.9 Governing Law.........................................................................74
Section 9.10 Survival..............................................................................74
Section 9.11 Counterparts..........................................................................74
Section 9.12 Publicity.............................................................................74
Section 9.13 Severability..........................................................................74
Section 9.14 Further Assurances....................................................................74
CONVERTIBLE NOTE PURCHASE AGREEMENT
This CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is dated as of
September 21, 2001 by and between Imaging Technologies Corporation, a Delaware
corporation (the "Company"), and the Purchaser of the Convertible Note of the
Company whose name is set forth on Exhibit A hereto (the "Purchaser").
The parties hereto agree as follows:
Purchase and Sale of Note
-------------------------
Purchase and Sale of Note. Upon the following terms and conditions, the
Company shall issue and sell to the Purchaser and the Purchaser shall purchase
from the Company, (i) a convertible promissory note in the aggregate principal
amount of $300,000 bearing interest at the rate of 8% per annum, due September
21, 2004, convertible into shares of the Company's Common Stock, par value $.005
per share (the "Common Stock"), in substantially the form attached hereto as
Exhibit B (the "Note"), and (ii) a Warrant to purchase shares of the Company's
Common Stock, in substantially the form attached hereto as Exhibit C (the
"Warrant"). The purchase price for the Note and the Warrant shall be $300,000
(the "Purchase Price"). The Company and the Purchaser are executing and
delivering this Agreement in accordance with and 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
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), Regulation S ("Regulation S") as promulgated by the Commission under the
Securities Act, or Section 4(2) of the Securities Act.
The Conversion Shares. Immediately upon the filing of a Certificate of
Amendment to the Company's Certificate of Incorporation with the Delaware
Secretary of State increasing its authorized capital stock, the Company shall
authorize, reserve and maintain, free of preemptive rights and other similar
contractual rights of stockholders, no less than 150% of the aggregate number of
shares of Common Stock needed to effect the conversion of the Note at the Fixed
Conversion Price (as defined in the Note) and any interest accrued and
outstanding thereon and exercise of the Warrant. Any shares of Common Stock
issuable upon conversion of the Note and any interest accrued and outstanding
thereon and exercise of the Warrant (and such shares when issued) are herein
referred to as the "Conversion Shares" and the "Warrant Shares," respectively.
The Note, the Conversion Shares and the Warrant Shares are sometimes
collectively referred to herein as the "Shares."
Purchase Price and Closing. The Company agrees to issue and sell to the
Purchaser and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchaser agrees to purchase the Note set forth opposite its name on Exhibit
A for a purchase price equal to $300,000. The closing of the purchase and sale
of the Note and Warrant (the "Closing") to be acquired by the Purchaser from the
Company under this Agreement shall take place at the offices of Jenkens &
Gilchrist Parker Chapin LLP at 10:00 a.m. E.S.T. on the date on which the last
to be fulfilled or waived of the conditions set forth in Article IV hereof and
applicable to the Closing shall be fulfilled or waived in accordance herewith or
such other time and place or on such date as the Purchaser and the Company may
agree upon (the "Closing Date"). On the Closing Date, the Company shall deliver
to the Purchaser the Note and the Purchaser shall deliver to the Company the
Purchase Price. In addition, each party shall deliver all documents, instruments
and writings required to be delivered by such party pursuant to this Agreement
at or prior to the Closing. This Agreement shall become effective upon the date
of execution of this Agreement by each of the parties hereto, which date shall
be no later than October 15, 2001, unless otherwise agreed upon by the Purchaser
and the Company.
Warrant. The Company agrees to issue to the Purchaser a Warrant to
purchase 11,278,195 shares of Common Stock on the Closing Date. The Warrant
shall have an exercise price equal to the Warrant Price (as defined in the
Warrant) and shall expire on the fifth anniversary of the issuance date of such
Warrant.
Representations and Warranties
------------------------------
Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to the Purchaser:
(a) Organization, Good Standing and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted. The Company does not have any subsidiaries except as set
forth on Schedule 2.1(g) hereto. The Company and each such subsidiary 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 or property
owned by it makes such qualification necessary except for any jurisdiction(s)
(alone or in the aggregate) in which the failure to be so qualified will not
have
a Material Adverse Effect. For the purposes of this Agreement, "Material Adverse
Effect" means any adverse effect on the business, operations, properties,
prospects, or financial condition of the Company or its subsidiaries and which
is material to such entity or other entities controlling or controlled by such
entity. (b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and perform this Agreement, the Registration
Rights Agreement attached hereto as Exhibit D (the "Registration Rights
Agreement"), the Transfer Agent Instructions (as defined in Section 3.14 hereof)
and the Warrant (collectively, the "Transaction Documents") and to issue and
sell the Shares in accordance with the terms hereof and the Warrant, as
applicable. The execution, delivery and performance of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate action, and no further consent or authorization of the Company or its
Board of Directors or stockholders is required. This Agreement has been duly
executed and delivered by the Company. The Registration Rights Agreement will
have been duly executed and delivered by the Company at Closing. Each of the
Transaction Documents constitutes, or shall constitute when executed and
delivered, a valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor's rights and remedies or by
other equitable principles of general application.
(c) Capitalization. The authorized capital stock of the Company
and the shares thereof currently issued and outstanding as of September 20, 2001
are set forth on Schedule 2.1(c) hereto. All of the outstanding shares of the
Company's Common Stock have been duly and validly authorized. Except as set
forth in this Agreement and the Registration Rights Agreement and as set forth
on Schedule 2.1(c) hereto, no shares of Common Stock are entitled to preemptive
rights or registration rights and there are no outstanding options, warrants,
scrip, rights to subscribe to, call or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company. Furthermore, except as set forth in this Agreement and the
Registration Rights Agreement and as set forth on Schedule 2.1(c), there are no
contracts, commitments, understandings, or arrangements by which the Company is
or may become bound to issue additional shares of the capital stock of the
Company or options, securities or rights convertible into shares of capital
stock of the Company. Except for customary transfer restrictions contained in
agreements entered into by the Company in order to sell restricted securities or
as provided on Schedule 2.1 (c) hereto, the Company is not a party to any
agreement granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. The Company is not a party to,
and it has no knowledge of, any agreement restricting the voting or transfer of
any shares of the capital stock of the Company. Except as set forth on Schedule
2.1(c) hereto, the offer and sale of all capital stock, convertible securities,
rights, warrants, or options of the Company issued prior to the Closing complied
with all applicable Federal and state securities laws, and no stockholder has a
right of rescission or damages with respect thereto which would have a Material
Adverse Effect (as defined in Section 2.1(e) herein) on the Company's financial
condition or operating results. The Company has furnished or made available to
the Purchaser true and correct copies of the Company's Certificate of
Incorporation as in effect on the date hereof (the "Certificate"), and the
Company's Bylaws as in effect on the date hereof (the "Bylaws").
(d) Issuance of Note. The Note to be issued at the Closing has
been duly authorized by all necessary corporate action and, when paid for or
issued in accordance with the terms hereof, the Note shall be validly issued and
outstanding, fully paid and nonassessable and free and clear of all liens,
encumbrances and rights of refusal of any kind. When the Conversion Shares and
the Warrant Shares are issued in accordance with the terms of the Note and the
Warrant, respectively, such shares will be duly authorized by all necessary
corporate action and validly issued and outstanding, fully paid and
nonassessable, and the holders shall be entitled to all rights accorded to a
holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated herein and therein do not (i) violate any provision of
the Company's Certificate or Bylaws, (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 agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company is a
party, (iii) create or impose a lien, charge or encumbrance on any property of
the Company under any agreement or any commitment to which the Company is a
party or by which the Company is bound or by which any of its respective
properties or assets are bound, or (iv) result in a violation of any federal,
state, local or foreign statute, rule, regulation, order, judgment or decree
(including Federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries are bound or affected, except, in all cases
other than violations pursuant to clause (i) above, for such conflicts,
defaults, terminations, amendments, acceleration, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse Effect.
The business of the Company and its subsidiaries is not being conducted in
violation of any laws, ordinances or regulations of any governmental entity,
except for possible violations which singularly or in the aggregate do not and
will not have a Material Adverse Effect. The Company is not required under
Federal, state or local law, rule or regulation 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 the Transaction Documents or issue and sell the Note, the
Conversion Shares and the Warrant Shares in accordance with the terms hereof or
thereof (other than any filings which may be required to be made by the Company
with the Commission or state securities administrators subsequent to the Closing
or any registration statement which may be filed pursuant hereto); provided
that, for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Purchaser herein.
(f) Commission Documents, Financial Statements. The Common Stock
of the Company is registered pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Commission pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant to
Section 13(a) or 15(d) of the Exchange Act (all of the foregoing including
filings incorporated by reference therein being referred to herein as the
"Commission Documents"). The Company has delivered or made available to the
Purchaser true and complete copies of the Commission Documents filed with the
Commission since March 31, 2001. The Company has not provided to the Purchaser
any material non-public information or other information which, according to
applicable law, rule or regulation, should have been disclosed publicly by the
Company but which has not been so disclosed, other than with respect to the
transactions contemplated by this Agreement. As of their respective dates, the
audited financial statements as presented in the Commission Documents for the
year ended June 30, 2000 (the "Financial Statement") and the Form 10-Q for the
fiscal quarter ended March 31, 2001 (the "Form 10-Q") complied in all material
respects with the requirements of the Exchange Act and the rules and regulations
of the Commission promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to such documents, and, as of their
respective dates, neither the Financial Statement nor the Form 10-Q referred to
above 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. The financial statements of the Company included in the
Commission Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission or other applicable rules and regulations with respect thereto. Such
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis 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 not include footnotes or may be condensed or summary
statements), and fairly present in all material respects the financial position
of the Company and its subsidiaries as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
(g) Subsidiaries. Schedule 2.1(g) hereto sets forth each
subsidiary of the Company, showing the jurisdiction of its incorporation or
organization and showing the percentage of each person's ownership of the
outstanding stock or other interests of such subsidiary. For the purposes of
this Agreement, "subsidiary" shall mean any corporation or other entity of which
at least a majority of the securities or other ownership interest having
ordinary voting power (absolutely or contingently) for the election of directors
or other persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other subsidiaries. All of the
outstanding shares of capital stock of each subsidiary have been duly authorized
and validly issued, and are fully paid and nonassessable. There are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary for the purchase
or acquisition of any shares of capital stock of any subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Neither the Company nor any
subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence. Neither the Company nor any subsidiary is party to,
nor has any knowledge of, any agreement restricting the voting or transfer of
any shares of the capital stock of any subsidiary.
(h) No Material Adverse Change. Since March 31, 2001, the date
through which the most recent quarterly report of the Company on Form 10-Q has
been prepared and filed with the Commission, a copy of which is included in the
Commission Documents, the Company has not experienced or suffered any Material
Adverse Effect.
(i) No Undisclosed Liabilities. Neither the Company nor any of its
subsidiaries has any liabilities, obligations, claims or losses (whether
liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent
or otherwise) other than those incurred in the ordinary course of the Company's
or its subsidiaries respective businesses since March 31, 2001 and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect on the Company or its subsidiaries.
(j) No Undisclosed Events or Circumstances. No event or
circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective businesses, properties, prospects, operations
or financial condition, which, under applicable law, rule or regulation,
requires public disclosure or announcement by the Company but which has not been
so publicly announced or disclosed.
(k) Indebtedness. Schedule 2.1(k) hereto sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the Company or any
subsidiary, or for which the Company or any subsidiary has commitments. For the
purposes of this Agreement, "Indebtedness" shall mean (a) any liabilities for
borrowed money or amounts owed in excess of $75,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company's
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease payments in
excess of $75,000 due under leases required to be capitalized in accordance with
GAAP. Except as set forth on Schedule 2.1(k) hereto, neither the Company nor any
subsidiary is in default with respect to any Indebtedness.
(l) Title to Assets. Except as set forth on Schedule 2.1(k)
hereto, each of the Company and the subsidiaries has good and marketable title
to all of its real and personal property, free of any mortgages, pledges,
charges, liens, security interests or other encumbrances, except for those such
that, individually or in the aggregate, do not cause a Material Adverse Effect
on the Company's financial condition or operating results. All said leases of
the Company and each of its subsidiaries are valid and subsisting and in full
force and effect.
(m) Actions Pending. There is no action, suit, claim,
investigation or proceeding pending or, to the knowledge of the Company,
threatened against the Company or any subsidiary which questions the validity of
this Agreement or the transactions contemplated hereby or any action taken or to
be taken pursuant hereto or thereto. Except as set forth in the Commission
Documents, there is no action, suit, claim, investigation or proceeding pending
or, to the knowledge of the Company, threatened, against or involving the
Company, any subsidiary or any of their respective properties or assets. Except
as set forth on Schedule 2.1(m) hereto, there are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as such
that would, individually or in the aggregate, have a Material Adverse Effect.
(n) Compliance with Law. The business of the Company and the
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except such that, individually or in the aggregate, do not cause a
Material Adverse Effect. The Company and each of its subsidiaries have all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.
(o) Taxes. The Company and each of the subsidiaries has accurately
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, and adequate provisions have been and
are reflected in the financial statements of the Company and the subsidiaries
for all current taxes and other charges to which the Company or any subsidiary
is subject and which are not currently due and payable. None of the federal
income tax returns of the Company or any subsidiary have been audited by the
Internal Revenue Service. The Company has no knowledge of any additional
assessments, adjustments or contingent tax liability (whether federal or state)
pending or threatened against the Company or any subsidiary for any period, nor
of any basis for any such assessment, adjustment or contingency.
(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto,
no brokers, finders or financial advisory fees or commissions will be payable by
the Company or any subsidiary or any Purchaser with respect to the transactions
contemplated by this Agreement.
(q) Disclosure. To the best of the Company's knowledge, neither
this Agreement or the Schedules hereto nor any other documents, certificates or
instruments furnished to the Purchaser by or on behalf of the Company or any
subsidiary in connection with the transactions contemplated by this Agreement
contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made herein or therein, in the light of the
circumstances under which they were made herein or therein, not misleading.
(r) Operation of Business. The Company and each of the
subsidiaries owns or possesses all patents, trademarks, domain names (whether or
not registered) and any patentable improvements or copyrightable derivative
works thereof, websites and intellectual property rights relating thereto,
service marks, trade names, copyrights, licenses and authorizations and all
rights with respect to the foregoing, which are necessary for the conduct of its
business as now conducted without any conflict with the rights of others.
(s) Environmental Compliance. The Company and each of its
subsidiaries have obtained all material approvals, authorization, certificates,
consents, licenses, orders and permits or other similar authorizations of all
governmental authorities, or from any other person, that are required under any
Environmental Laws. No material permits, licenses and other authorizations have
been issued under any Environmental Laws to the Company or its subsidiaries.
"Environmental Laws" shall mean all applicable laws relating to the protection
of the environment including, without limitation, all requirements pertaining to
reporting, licensing, permitting, controlling, investigating or remediating
emissions, discharges, releases or threatened releases of hazardous substances,
chemical substances, pollutants, contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. The Company has
all necessary governmental approvals required under all Environmental Laws and
used in its business or in the business of any of its subsidiaries. The Company
and each of its subsidiaries are also in compliance with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws. Except for such instances as
would not individually or in the aggregate have a Material Adverse Effect, there
are no past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its subsidiaries
that violate or may violate any Environmental Law after the Closing or that may
give rise to any environmental liability, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or investigation (i)
under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.
"Environmental Liabilities" means all liabilities of a person (whether such
liabilities are owed by such person to governmental authorities, third parties
or otherwise) whether currently in existence or arising hereafter which arise
under or relate to any Environmental Law.
(t) Books and Records Internal Accounting Controls. The records
and documents of the Company and its subsidiaries accurately reflect in all
material respects the information relating to the business of the Company and
the subsidiaries, the location and collection of their assets, and the nature of
all transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary. The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient, in the judgment of the
Company's board of directors, 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 actions is taken
with respect to any differences.
(u) Material Agreements. Except as set forth on Schedule 2.1(u)
hereto, neither the Company nor any subsidiary is a party to any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement, a
copy of which would be required to be filed with the Commission as an exhibit to
a registration statement on Form S-1 or applicable form (collectively, "Material
Agreements") if the Company or any subsidiary were registering securities under
the Securities Act. The Company and each of its subsidiaries has in all material
respects performed all the obligations required to be performed by them to date
under the foregoing agreements, have received no notice of default and, to the
best of the Company's knowledge are not in default under any Material Agreement
now in effect, the result of which could cause a Material Adverse Effect. No
written or oral contract, instrument, agreement, commitment, obligation, plan or
arrangement of the Company or of any subsidiary limits or shall limit the
payment of dividends on the Company's Note, its preferred stock, if any, or its
Common Stock.
(v) Transactions with Affiliates. Except as set forth in the
Commission Documents and as set forth on Schedule 2.1(v) hereto, there are no
loans, leases, agreements, contracts, royalty agreements, management contracts
or arrangements or other continuing transactions exceeding $100,000 between (a)
the Company, any subsidiary or any of their respective customers or suppliers on
the one hand, and (b) on the other hand, any officer,
employee, consultant or director of the Company, or any of its subsidiaries, or
any person owning any capital stock of the Company or any subsidiary or any
member of the immediate family of such officer, employee, consultant, director
or stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder.
(w) Securities Act of 1933. The Company has complied and will
comply with all applicable Federal and state securities laws in connection with
the offer, issuance and sale of the Note and the Warrant hereunder. Neither the
Company nor anyone acting on its behalf, directly or indirectly, has or will
sell, offer to sell or solicit offers to buy the Note, the Warrant or similar
securities to, or solicit offers with respect thereto from, or enter into any
preliminary conversations or negotiations relating thereto with, any person, or
has taken or will take any action so as to bring the issuance and sale of the
Note and the Warrant under the registration provisions of the Securities Act and
applicable state securities laws. 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 Securities Act) in connection with the offer or sale of the Note and the
Warrant.
(x) Governmental Approvals. Except for the filing of any notice
prior or subsequent to the Closing that may be required under applicable state
and/or Federal securities laws (which if required, shall be filed on a timely
basis), including the filing of a registration statement or statements pursuant
to the Registration Rights Agreement, no authorization, consent, approval,
license, exemption of, filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the execution or
delivery of the Note, or for the performance by the Company of its obligations
under the Transaction Documents.
(y) Employees. Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any of its employees.
Neither the Company nor any subsidiary has any employment contract, agreement
regarding proprietary information, non-competition agreement, non-solicitation
agreement, confidentiality agreement, or any other similar contract or
restrictive covenant, relating to the right of any officer, employee or
consultant to be employed or engaged by the Company or such subsidiary. Since
March 31, 2001, no officer, consultant or key employee of the Company or any
subsidiary whose termination, either individually or in the aggregate, could
have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or
engagement with the Company or any subsidiary.
(z) Absence of Certain Developments. Except as set forth on
Schedule 2.1(z) hereto, since March 31, 2001, neither the Company nor any
subsidiary has:
(i) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
(ii) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of business during the
comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company's or such subsidiary's business;
(iii) discharged or satisfied any material lien or encumbrance or
paid any material obligation or liability (absolute or contingent), other than
current liabilities paid in the ordinary course of business;
(iv) declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or redeemed, or
made any agreements so to purchase or redeem, any shares of its capital stock;
(v) sold, assigned or transferred any other tangible assets, or
canceled any material debts or claims, except in the ordinary course of
business;
(vi) sold, assigned or transferred any patent rights, trademarks,
trade names, copyrights, trade secrets or other intangible assets or
intellectual property rights, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of business
or to the Purchaser or its representatives;
(vii) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or suffered
the loss of any material amount of prospective business;
(viii) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;
(ix) made capital expenditures or commitments therefor that
aggregate in excess of $100,000;
(x) entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether or
not in the ordinary course of business;
(xi) made charitable contributions or pledges in excess of
$25,000;
(xii) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
(xiii) experienced any material problems with labor or management
in connection with the terms and conditions of their employment;
(xiv) effected any two or more events of the foregoing kind which
in the aggregate would be material to the Company or its subsidiaries; or
(xv) entered into an agreement, written or otherwise, to take any
of the foregoing actions.
(aa) Use of Proceeds. The proceeds from the sale of the Note will
be used by the Company for working capital and general corporate purposes.
(ab) Public Utility Holding Company Act and Investment Company Act
Status. The Company is not a "holding company" or a "public utility company" as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended. The Company is not, and as a result of and immediately upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.
(ac) ERISA. No liability to the Pension Benefit Guaranty
Corporation has been incurred with respect to any Plan by the Company or any of
its subsidiaries which is or would be materially adverse to the Company and its
subsidiaries. The execution and delivery of this Agreement and the issue and
sale of the Note will not involve any transaction which is subject to the
prohibitions of Section 406 of ERISA or in connection with which a tax could be
imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as
amended, provided that, if the Purchaser, or any person or entity that owns a
beneficial interest in the Purchaser, is an "employee pension benefit plan"
(within the meaning of Section 3(2) of ERISA) with respect to which the Company
is a "party in interest" (within the meaning of Section 3(14) of ERISA), the
requirements of Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met.
As used in this Section 2.1(ac), the term "Plan" shall mean an "employee pension
benefit plan" (as defined in Section 3 of ERISA) which is or has been
established or maintained, or to which contributions are or have been made, by
the Company or any subsidiary or by any trade or business, whether or not
incorporated, which, together with the Company or any subsidiary, is under
common control, as described in Section 414(b) or (c) of the Code.
(ad) Dilutive Effect. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the Note and
the Warrant Shares issuable upon exercise of the Warrant will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Note in accordance with this
Agreement and its obligations to issue the Warrant Shares upon the exercise of
the Warrant in accordance with this Agreement and the Warrant, is, in each case,
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interest of other stockholders of the Company.
(ae) No "Directed Selling Efforts." In connection with the offer
and sale of the Note and the Warrant, no distributor or any affiliates or any
person acting on behalf of the Company or any affiliate of the Company or any
distributor has engaged in any "directed selling efforts" (as such term is
defined under Regulation S) nor conducted any general solicitation relating to
the offer to persons residing within the United States or to "U.S. Persons" (as
that term is defined under Regulation S).
(af) Filings Under the Act and the Exchange Act. The Company has
filed all reports and other documents required to be filed by it under the Act
and the Exchange Act, and no such document, at the time it was filed, contained
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading. There has been no
material change in the Company since its last filing with the Commission except
for changes in senior
management. The Company is a "reporting issuer" as defined in Rule 902 of
Regulation S and will remain a reporting issuer for at least one year from the
date hereof.
Representations and Warranties of the Purchaser. The Purchaser hereby makes
the following representations and warranties to the Company:
(a) Organization and Standing of the Purchaser. The Purchaser is a
corporation or partnership duly incorporated or organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization and Power. The Purchaser has the requisite power
and authority to enter into and perform this Agreement and to purchase the Note
being sold to it hereunder. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by such Purchaser and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action (if the
Purchaser is an entity), and no further consent or authorization of such
Purchaser or its Board of Directors, stockholders, or partners, as the case may
be, is required. Each of this Agreement and the Registration Rights Agreement
has been duly authorized, executed and delivered by such Purchaser.
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement and the consummation by such
Purchaser of the transactions contemplated hereby and thereby or relating hereto
do not and will not (i) result in a violation of such Purchaser's charter
documents or bylaws 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 agreement, indenture or instrument to which such Purchaser
is a party, or result in a violation of any law, rule, or regulation, or any
order, judgment or decree of any court or governmental agency applicable to such
Purchaser or its properties (except for such conflicts, defaults and violations
as would not, individually or in the aggregate, have a Material Adverse Effect
on such Purchaser). Such Purchaser 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 this Agreement or the Registration Rights Agreement, or
relating hereto or thereto, or to purchase the Note in accordance with the terms
hereof, provided that for purposes of the representation made in this sentence,
such Purchaser is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.
(d) Acquisition for Investment. The Purchaser is purchasing the
Note and acquiring the Warrant solely for its own account for the purpose of
investment and not with a view to or for sale in connection with distribution.
The Purchaser does not have a present intention to sell the Note or the Warrant,
nor a present arrangement (whether or not legally binding) or intention to
effect any distribution of the Note or the Warrant to or through any person or
entity; provided, however, that by making the representations herein and subject
to Section 2.2(f) below, such Purchaser does not agree to hold the Note or the
Warrant for any minimum or other specific term and reserves the right to dispose
of the Note or the Warrant at any time in accordance with Federal securities
laws applicable to such disposition. Such Purchaser acknowledges that it is able
to bear the financial risks associated with an investment in the Note or the
Warrant and that it has been given full access to such records of the Company
and the subsidiaries and to the officers of the Company and the subsidiaries as
it has deemed necessary or appropriate to conduct its due diligence
investigation.
(e) Accredited Purchaser. The Purchaser is an "accredited
investor" as defined in Regulation D promulgated under the Securities Act and is
a resident of the jurisdiction indicated on Exhibit A hereto.
(f) Rule 144. The Purchaser understands that the Shares must be
held indefinitely unless such Shares are registered under the Securities Act or
an exemption from registration is available. Such Purchaser acknowledges that
such person is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
and that such person has been advised that Rule 144 permits resales only under
certain circumstances. Such Purchaser understands that to the extent that Rule
144 is not available, such person will be unable to sell any Shares without
either registration under the Securities Act or the existence of another
exemption from such registration requirement.
(g) General. Such Purchaser understands that the Shares are being
offered and sold in reliance on a transactional exemption from the registration
requirement of Federal and state securities laws and the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Shares.
(h) Foreign Purchaser. The Purchaser is not a "U.S. person" as
defined under Rule 902(o) of Regulation S under the Securities Act. The
Purchaser is not acquiring the Note and Warrant for the account or benefit of
any U.S. person.
(i) Offshore Transaction. The document effecting this purchase and
sale has been executed by the Purchaser outside the "United States" (as defined
in Rule 902(p) of Regulation S). The Purchaser is acquiring the Note and Warrant
in an "offshore transaction" (as defined in Rule 902(i) of Regulation S). The
Note and Warrant were not offered to the Purchaser in the United States and at
the time of execution of this Agreement and the time of any offer to the
Purchaser to purchase the Note and Warrant hereunder, the Purchaser was
physically outside of the United States.
(j) Independent Investigation; Advertisements. The Purchaser, in
offering to purchase the Note and Warrant hereunder, has relied solely upon an
independent investigation made by such Purchaser and its representatives, if
any, and has, prior to the date hereof, been given access to and the opportunity
to examine all books and records of the Company, and all material contracts and
documents of the Company. In making its investment decision to purchase the Note
and Warrant, the Purchaser is not relying on any oral or written representations
or assurances from the Company or any other person or any representation of the
Company or any other person other than as set forth in this Agreement, or on any
information other than contained in the Company's public filings required under
the Act and the Exchange Act. The Purchaser is not subscribing for the Note and
Warrant as a result of or subsequent to any advertisement, article, notice or
other communication published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar.
Covenants
---------
The Company covenants with the Purchaser as follows, which covenants are
for the benefit of the Purchaser and its permitted assignees (as defined
herein).
Securities Compliance.
---------------------
(a) The Company shall notify the Commission in accordance with
their rules and regulations, of the transactions contemplated by any of the
Transaction Documents, and shall take all necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Note and the Warrant Shares to the Purchaser or
subsequent holders.
(b) The Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
the Purchaser set forth herein in order to determine the applicability of
Federal and state securities laws exemptions and the suitability of the
Purchaser to acquire the Note.
Registration and Listing. The Company will cause its Common Stock to
continue to be registered under Sections 12(b) or 12(g) of the Exchange Act,
will comply in all respects with its reporting and filing obligations under the
Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement or the Registration Rights Agreement,
and will not take any action or file any document (whether or not permitted by
the Securities Act or the rules promulgated thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted
herein. The Company will take all action necessary to continue the listing or
trading of its Common Stock on the over-the-counter electronic bulletin board or
any successor market.
Inspection Rights. The Company shall permit, during normal business hours
and upon reasonable request and reasonable notice, each Purchaser or any
employees, agents or representatives thereof, so long as such Purchaser shall be
obligated hereunder to purchase the Note or shall beneficially own any Note, or
shall own Conversion Shares which, in the aggregate, represent more than 2% of
the total combined voting power of all voting securities then outstanding, to
examine and make reasonable copies of and extracts from the records and books of
account of, and visit and inspect the properties, assets, operations and
business of the Company and any subsidiary, and to discuss the affairs, finances
and accounts of the Company and any subsidiary with any of its officers,
consultants, directors, and key employees.
Compliance with Laws. The Company shall comply, and cause each subsidiary
to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could have a Material Adverse Effect.
Keeping of Records and Books of Account. The Company shall keep and cause
each subsidiary to keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied, reflecting
all financial transactions of the Company and its subsidiaries, and in which,
for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.
Reporting Requirements. The Company shall furnish the following to each
Purchaser so long as such Purchaser shall be obligated hereunder to purchase the
Note or shall beneficially own any Note, or shall own Conversion Shares which,
in the aggregate, represent more than 2% of the total combined voting power of
all voting securities then outstanding, provided, however, that the Company
shall not be obligated to furnish the following, if the following reports have
been filed by the Company with the Commission pursuant to the Commission's
"electronic data gathering and retrieval" (EDGAR) service:
(a) Quarterly Reports filed with the Commission on Form 10-Q as
soon as available, and in any event within 45 days after the end of each of the
first three (3) fiscal quarters of the Company;
(b) Annual Reports filed with the Commission on Form 10-K as soon
as available, and in any event within 90 days after the end of each fiscal year
of the Company; and
(c) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.
Amendments. The Company shall not amend or waive any provision of the
Certificate or Bylaws of the Company, or Registration Rights Agreement in any
way that would adversely affect the liquidation preferences, dividends rights,
conversion rights, voting rights or redemption rights of the holders of the
Note.
Other Agreements. The Company shall not enter into any agreement in which
the terms of such agreement would restrict or impair the right or ability to
perform of the Company or any subsidiary under any Transaction Document.
Distributions. So long as any Note remain outstanding, the Company agrees
that it shall not (i) declare or pay any dividends or make any distributions to
any holder(s) of Common Stock or (ii) purchase or otherwise acquire for value,
directly or indirectly, any Common Stock or other equity security of the
Company.
Intentionally Omitted.
---------------------
Regulation S. The Company covenants and agrees that if the Company fails to
register the Conversion Shares within 60 days from the Closing Date under the
terms and conditions of the Registration Rights Agreement attached hereto as
Exhibit D, then for so long as such registration statement is not effective and
as any of the Shares remain outstanding and continue to be "restricted
securities" within the meaning of Rule 144 under the Securities Act, the Company
shall, in order to permit resales of any of the Shares pursuant to Regulation S
under the Securities Act, (a) continue to file all material required to be filed
pursuant to Section 13(a) or 15(d) of the Exchange Act, and (b) not
knowingly engage in directed selling efforts in connection with the resale of
securities by any Purchaser under Regulation S.
Future Financings. The Company covenants and agrees that during the period
from the Closing Date through the 180th day immediately following the effective
date of the Registration Statement (as such term is defined in the Registration
Rights Agreement), the Company shall not, without the written consent of the
Purchaser, offer, sell or issue: (i) any shares of Common Stock or (ii) any
securities convertible or exchangeable into Common Stock other than a Permitted
Financing. For purposes of this Section 3.12, a "Permitted Financing" shall mean
(A) shares of Common Stock to be issued pursuant to the Convertible Note
Purchase Agreement, dated December 12, 2000, by and among certain investors and
the Company, (B) shares of Common Stock to be issued pursuant to the Convertible
Note Purchase Agreement, dated July 26, 2001, by and among certain investors and
the Company, (C) shares of Common Stock to be issued pursuant to the Agreement
and Release, dated March 1, 2001, by and among the Company, American Industries,
Inc. and various other parties thereto, and (D) shares of Common Stock to be
issued pursuant to the Second OEM Amendment, dated October 25, 2000, between the
Company and Artifex Software, Inc.
Reservation of Shares. Immediately upon the filing of a Certificate of
Amendment to the Company's Certificate of Incorporation with the Delaware
Secretary of State increasing its authorized capital stock and so long as any of
the Notes or Warrants remain outstanding, 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 aggregate number of shares of Common Stock
needed to provide for the issuance of the Conversion Shares and the Warrant
Shares.
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 Purchaser or its respective
nominee(s), for the Conversion Shares and the Warrant Shares in such amounts as
specified from time to time by each Purchaser to the Company upon conversion of
the Note or exercise of the Warrant in the form of Exhibit E attached hereto
(the "Irrevocable Transfer Agent Instructions"). Prior to registration of the
Conversion Shares and the Warrant Shares under the Securities Act, all such
certificates shall bear the restrictive legend specified in Section 6.1 of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 3.14 will be given by
the Company to its transfer agent and that the Shares 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 3.14 shall affect in any way each Purchaser's obligations and
agreements set forth in Section 6.1 to comply with all applicable prospectus
delivery requirements, if any, upon resale of the Shares. If a Purchaser
provides the Company with an opinion of counsel, in a generally acceptable form,
to the effect that a public sale, assignment or transfer of the Shares may be
made without registration under the Securities Act or the Purchaser provides the
Company with reasonable assurances that the Shares 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, 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 Purchaser and without any
restrictive legend. The Company acknowledges that a breach by it of its
obligations under this Section 3.14 will cause irreparable harm to the Purchaser
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 3.14 will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 3.14, that the Purchaser shall be entitled, in addition to all other
available remedies, to an order and/or 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.
Conditions
----------
Conditions Precedent to the Obligation of the Company to Sell the Note. The
obligation hereunder of the Company to issue and sell the Note and the Warrant
to the Purchaser is subject to the satisfaction or waiver, at or before the
Closing Date, of each of the conditions set forth below. These conditions are
for the Company's sole benefit and may be waived by the Company at any time in
its sole discretion.
(a) Accuracy of Each Purchaser's Representations and Warranties.
The representations and warranties of each Purchaser shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.
(b) Performance by the Purchaser. The Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Purchaser at or prior to the Closing Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 4.2 Conditions Precedent to the Obligation of the Purchaser to Purchase
the Note. The obligation hereunder of the Purchaser to acquire and pay for the
Note and the Warrant is subject to the satisfaction or waiver, at or before the
Closing Date, of each of the conditions set forth below. These conditions are
for the Purchaser's sole benefit and may be waived by the Purchaser at any time
in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. Each
of the representations and warranties of the Company shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a particular date), which shall be true and correct in all material
respects as of such date.
(b) Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing Date.
(c) No Suspension, Etc. From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the
Commission (except for any suspension of trading of limited duration agreed to
by the Company, which suspension shall be terminated prior to the Closing Date),
and, at any time prior to the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets ("Bloomberg") shall not have been
suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported by Bloomberg, or on the New York Stock
Exchange, nor shall a banking moratorium have been declared either by the United
States or New York State authorities, nor shall there have occurred any material
outbreak or escalation of hostilities or other national or international
calamity or crisis of such magnitude in its effect on, or any material adverse
change in any financial market which, in each case, in the judgment of such
Purchaser, makes it impracticable or inadvisable to purchase the Note.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) No Proceedings or Litigation. No action, suit or proceeding
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Company or any subsidiary, or any of the officers, directors or
affiliates of the Company or any subsidiary seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or seeking damages in
connection with such transactions.
(f) Opinion of Counsel, Etc. At the Closing, the Purchaser shall
have received an opinion of counsel to the Company, dated the date of the
Closing, in the form of Exhibit F hereto, and such other certificates and
documents as the Purchaser or its counsel shall reasonably require incident to
the Closing.
(g) Registration Rights Agreement. At the Closing, the Company
shall have executed and delivered the Registration Rights Agreement to each
Purchaser.
(h) Certificates. The Company shall have executed and delivered to
each Purchaser, the certificates (in such denominations as such Purchaser shall
request) for the Note and the Warrant being purchased by such Purchaser at the
Closing.
(i) Resolutions. Prior to the Closing Date, the Board of Directors
of the Company shall have adopted resolutions consistent with Section 2.1(b)
above in a form reasonably acceptable to such Purchaser (the "Resolutions").
(j) Reservation of Shares. Immediately upon the filing of a
Certificate of Amendment to the Company's Certificate of Incorporation with the
Delaware Secretary of State increasing its authorized capital stock, the Company
shall authorize, reserve and maintain out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Note and the
exercise of the Warrant, a number of shares of Common
Stock equal to at least 150% of the aggregate number of Conversion Shares
issuable upon conversion of the Note outstanding on the Closing Date and the
number of Warrant Shares issuable upon exercise of the Warrant assuming such
Warrant was granted on the Closing Date (after giving effect to the Note and the
Warrant to be issued on the Closing Date and assuming such Note and Warrant were
fully convertible or exercisable on such date regardless of any limitation on
the timing or amount of such conversions or exercises).
(k) Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in the form of Exhibit E attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
(l) Secretary's Certificate. The Company shall have delivered to
such Purchaser a secretary's certificate, dated as of the Closing Date, as to
(i) the Resolutions, (ii) the Certificate, (iii) the Bylaws, each as in effect
at the Closing, and (iv) the authority and incumbency of the officers of the
Company executing the Transaction Documents and any other documents required to
be executed or delivered in connection therewith.
Registration Rights
-------------------
At the Closing, the Company and the Purchaser shall enter into a
Registration Rights Agreement in the form attached hereto as Exhibit D.
Certificate Legend
------------------
Legend. Each certificate representing the Note and the Warrant and, if
appropriate, securities issued upon conversion and exercise thereof, shall be
stamped or otherwise imprinted with a legend substantially in the following form
(in addition to any legend required by applicable state securities or "blue sky"
laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS OR IMAGING TECHNOLOGIES CORPORATION SHALL HAVE
RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH
SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
The Company agrees to reissue certificates representing the Note and the
Warrant, without the legend set forth above if at such time, prior to making any
transfer of any Note, Warrant, Conversion Shares or Warrant Shares, such holder
thereof shall give written notice to the Company describing the manner and terms
of such transfer and removal as the Company may reasonably request. Such
proposed transfer will not be effected until: (a) the Company has notified such
holder that either (i) in the opinion of Company counsel, the registration of
such Note, Warrant, Conversion Shares or Warrant Shares under the Securities Act
is not required in connection with such proposed transfer; or (ii) a
registration statement under the Securities Act covering such proposed
disposition has been filed by the Company with the Commission and has become
effective under the Securities Act; and (b) the Company has notified such holder
that either: (i) in the opinion of Company counsel, the registration or
qualification under the securities or "blue sky" laws of any state is not
required in connection with such proposed disposition, or (ii) compliance with
applicable state securities or "blue sky" laws has been effected. The Company
will use its best efforts to respond to any such notice from a holder within 10
days. In the case of any proposed transfer under this Section 6, the Company
will use reasonable efforts to comply with any such applicable state securities
or "blue sky" laws, but shall in no event be required, in connection therewith,
to qualify to do business in any state where it is not then qualified or to take
any action that would subject it to tax or to the general service of process in
any state where it is not then subject. The restrictions on transfer contained
in Section 6.1 shall be in addition to, and not by way of limitation of, any
other restrictions on transfer contained in any other section of this Agreement.
Termination
-----------
Termination by Mutual Consent. This Agreement may be terminated at any time
prior to the Closing Date by the mutual written consent of the Company and the
Purchaser.
Other Termination. This Agreement may be terminated by the action of the
Board of Directors of the Company or by the Purchaser at any time if the Closing
shall not have been consummated by October 15, 2001, as long as the failure to
so consummate is not the fault of the terminating party.
Effect of Termination. In the event of termination by the Company or the
Purchaser, written notice thereof shall forthwith be given to the other party
and the transactions contemplated by this Agreement and the Registration Rights
Agreement shall be terminated without further action by either party. If this
Agreement is terminated as provided in Section 7.1 or 7.2 herein, this Agreement
shall become void and of no further force and effect, except for Sections 9.1
and 9.2, and Article VIII herein. Nothing in this Section 7.3 shall be deemed to
release the Company or any Purchaser from any liability for any breach under
this Agreement or the Registration Rights Agreement, or to impair the rights of
the Company and the Purchaser to compel specific performance by the other party
of its obligations under this Agreement and the Registration Rights Agreement.
Indemnification
---------------
General Indemnity. The Company agrees to indemnify and hold harmless the
Purchaser (and its respective directors, officers, affiliates, agents,
successors and assigns) from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorney's fees, charges and disbursements) incurred by the Purchaser
as a result of any inaccuracy in or breach of the representations, warranties or
covenants made by the Company herein. The Purchaser agrees to indemnify and hold
harmless the Company and its directors, officers, affiliates, agents, successors
and assigns from and against any and all losses, liabilities, deficiencies,
costs, damages and expenses (including, without limitation, reasonable attorneys
fees, charges and disbursements) incurred by the Company as result of any
inaccuracy in or breach of the representations, warranties or covenants made by
the Purchaser herein.
Indemnification Procedure. Any party entitled to indemnification under this
Article VIII (an "indemnified party") will give written notice to the
indemnifying party of any matters giving rise to a claim for indemnification;
provided, that the failure of any party entitled to indemnification hereunder to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Article VIII except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any action,
proceeding or claim is brought against an indemnified party in respect of which
indemnification is sought hereunder, the indemnifying party shall be entitled to
participate in and, unless in the reasonable judgment of the indemnified party a
conflict of interest between it and the indemnifying party may exist with
respect of such action, proceeding or claim, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. In the event that the
indemnifying party advises an indemnified party that it will contest such a
claim for indemnification hereunder, or fails, within 30 days of receipt of any
indemnification notice to notify, in writing, such person of its election to
defend, settle or compromise, at its sole cost and expense, any action,
proceeding or claim (or discontinues its defense at any time after it commences
such defense), then the indemnified party may, at its option, defend, settle or
otherwise compromise or pay such action or claim. In any event, unless and until
the indemnifying party elects in writing to assume and does so assume the
defense of any such claim, proceeding or action, the indemnified party's costs
and expenses arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party 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 which relates to such
action or claim. The indemnifying party shall keep the indemnified party fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The indemnifying party shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VIII to the contrary, the indemnifying
party shall not, without the indemnified party's prior written consent, settle
or compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VIII shall be made by
periodic payments of the amount thereof during the course of investigation or
defense, as and when bills are received or expense, loss, damage or liability is
incurred, so long as the indemnified party irrevocably agrees to refund such
moneys if it is ultimately determined by a court of competent jurisdiction that
such party was not entitled to indemnification. Notwithstanding anything in this
Article VIII to the contrary, the Purchaser shall be liable under this Article
VIII for only that amount of indemnification as does not exceed the proceeds to
such Purchaser as a result of the sale of the Conversion Shares by the
Purchaser. The indemnity agreements contained herein shall be in addition
to (a) any cause of action or similar rights of the indemnified party against
the indemnifying party or others, and (b) any liabilities the indemnifying party
may be subject to pursuant to the law.
Miscellaneous
-------------
Fees and Expenses. Each party shall pay the fees and expenses of its
advisors, counsel, accountants and other experts, if any, and all other
expenses, incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. In addition, the Company
shall pay all reasonable fees and expenses incurred by the Purchaser in
connection with the filing and declaration of effectiveness by the Commission of
the Registration Statement (as defined in the Registration Rights Agreement),
any amendments, modifications or waivers of this Agreement or any of the other
Transaction Documents or incurred in connection with the enforcement of this
Agreement and any of the other Transaction Documents, including, without
limitation, all reasonable attorneys fees and expenses. The Company shall pay
all stamp or other similar taxes and duties levied in connection with issuance
of the Note pursuant hereto.
Specific Enforcement, Consent to Jurisdiction.
---------------------------------------------
(a) The Company and the Purchaser acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement or the Registration Rights Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent or
cure breaches of the provisions of this Agreement or the Registration Rights
Agreement and to enforce specifically the terms and provisions hereof or
thereof, this being in addition to any other remedy to which any of them may be
entitled by law or equity.
(b) Each of the Company and the Purchaser (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court
sitting in the Southern District of New York for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement or the
Registration Rights Agreement and (ii) hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of such court, that the suit, action or proceeding
is brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper. Any suit, action or proceeding arising out of or
relating to this Agreement or the Registration Rights Agreement brought by
either the Company or the Purchaser shall be brought in the jurisdiction of the
United States District Court sitting in the Southern District of New York. Each
of the Company and the Purchaser consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 9.2 shall affect or limit any right to serve
process in any other manner permitted by law.
Entire Agreement; Amendment. This Agreement contains the entire
understanding of the parties with respect to the matters covered hereby and,
except as specifically set forth herein or in the Transaction Documents, neither
the Company nor the Purchaser makes any representations, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
waived or amended other than by a written instrument signed by the Company and
the Purchaser, and no provision hereof may be waived other than by an a written
instrument signed by the party against whom enforcement of any such amendment or
waiver is sought. No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of any of the
Transaction Documents unless the same consideration is also offered to all of
the parties to the Transaction Documents or holder of the Note, as the case may
be.
Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) upon hand delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: Imaging Technologies Corporation
15175 Innovation Drive
San Diego, California 92128
Attention: Chief Executive Officer
Telephone No.: (858) 613-1300
Facsimile No.: (858) 207-6505
with copies (which copies
shall not constitute notice
to the Company) to: General Counsel
Imaging Technologies Corporation
15175 Innovation Drive
San Diego, California 92128
Telephone No.: (858) 613-1300
Facsimile No.: (858) 207-6505
If to any Purchaser: At the address of such Purchaser set forth on
Exhibit A to this Agreement.
with copies (which copies
shall not constitute notice
to the Company) to: Jenkens & Gilchrist Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Attention: Christopher S. Auguste, Esq.
Telephone No.: (212) 704-6000
Facsimile No.: (212) 704-6288
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to the
other party hereto.
Waivers. No waiver by either party of any default with respect to
any provision, condition or requirement of this Agreement shall be deemed to be
a continuing waiver in the future or a waiver of any other provisions, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.
Headings. The article, section and subsection headings in this Agreement
are for convenience only and shall not constitute a part of this Agreement for
any other purpose and shall not be deemed to limit or affect any of the
provisions hereof.
Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and assigns. After the Closing,
the assignment by a party to this Agreement of any rights hereunder shall not
affect the obligations of such party under this Agreement.
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.
Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to the choice of law provisions.
Survival. The representations and warranties of the Company and the Purchaser
contained in Sections 2.1(o) and (s) should survive indefinitely and those
contained in Article II, with the exception of Sections 2.1(o) and (s), shall
survive the execution and delivery hereof and the Closing until the date three
(3) years from the Closing Date, and
the agreements and covenants set forth in Article I, III, V, VII, VIII and IX of
this Agreement shall survive the execution and delivery hereof and the Closing
hereunder until the Purchaser beneficially owns (determined in accordance with
Rule 13d-3 under the Exchange Act) less than 2% of the total combined voting
power of all voting securities then outstanding, provided, that Sections 3.1,
3.2, 3.4, 3.5, 3.7, 3.8, 3.9, 3.12, 3.13, and 3.14 shall not expire until the
Registration Statement required by Section 2 of the Registration Rights
Agreement is no longer required to be effective under the terms and conditions
of Registration Rights Agreement.
Counterparts. This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument and
shall become effective when counterparts have been signed by each party and
delivered to the other parties hereto, it being understood that all parties need
not sign the same counterpart. In the event any signature is delivered by
facsimile transmission, the party using such means of delivery shall cause four
(4) additional executed signature pages to be physically delivered to the other
parties within five (5) days of the execution and delivery hereof.
Publicity. The Company agrees that it will not disclose, and will not
include in any public announcement, the name of the Purchaser without the
consent of the Purchaser, which consent shall not be unreasonably withheld, or
unless and until such disclosure is required by law or applicable regulation,
and then only to the extent of such requirement.
Severability. The provisions of this Agreement and the Registration Rights
Agreement are severable and, in the event that any court of competent
jurisdiction shall determine that any one or more of the provisions or part of
the provisions contained in this Agreement or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement or the Registration
Rights Agreement shall be reformed and construed as if such invalid or illegal
or unenforceable provision, or part of such provision, had never been contained
herein, so that such provisions would be valid, legal and enforceable to the
maximum extent possible.
Further Assurances. From and after the date of this Agreement, upon the
request of the Purchaser or the Company, each of the Company and the Purchaser
shall execute and deliver such instruments, documents and other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement, the Note, the Conversion
Shares, the Warrant, the Warrant Shares and the Registration Rights Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.
IMAGING TECHNOLOGIES CORPORATION
By:
----------------------------------
Name: Brian Bonar
Title: Chief Executive Officer
STONESTREET LIMITED PARTNERSHIP
By:
----------------------------------
Name:
Title:
EXHIBIT A
Purchaser / Number of Notes and Warrants
Name and Residence Number of Notes Dollar Amount
of Purchaser and Warrants Purchased of Investment
-------------------- ----------------------- -------------
Stonestreet Limited Partnership Note: $300,000.00 Note. $300,000.00
260 Town Center Blvd. Ste. 201 Warrant: to purchase
Markham, ON L3R 8H8 11,278,195 shares of
Fax No.: 416-956-8989 Common Stock.
EXHIBIT B
Form of Convertible Promissory Note
EXHIBIT C
Form of Warrant
EXHIBIT D
Form of Registration Rights Agreement
EXHIBIT E
Form of Transfer Agent Instructions
EXHIBIT F
Form of Opinion
Schedule 2.1(c)
---------------
Capitalization
Classes of Capital Stock
------------------------
Authorized Outstanding
---------- -----------
Common Stock, $0.005 par value 200,000,000* 170,958,065
Series A Preferred Stock, $1,000 par value 7,500 420
Registration Rights Granted
---------------------------
Artifex Software Inc. 1,200,000 share of Common Stock
American Industries, Inc. $100,000 value at variable conversion rate
Outstanding Options and Warrants to Purchase Common Stock
---------------------------------------------------------
Shares
------
Warrants associated with Series D Convertible Preferred Stock 1,100,000
Warrants associated with Series E Convertible Preferred Stock 2,625,000
Incentive warrants for retention of key employees 1,913,000
General warrants 1,769,225
Employee Stock Option Plans 682,185
Schedule 2.1(g)
---------------
Subsidiaries
1. Laser Printer Accessories Corporation, a Delaware corporation and a
wholly-owned subsidiary of ITEC (inactive)
2. Co-Processors, Inc., a California corporation and a wholly-owned subsidiary
of ITEC (Inactive)
3. NewGen Imaging Systems, Inc., a California Corporation and a wholly-owned
subsidiary of ITEC (inactive)
4. NewGen Systems Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of ITEC (inactive)
5. Prima, Inc., a California corporation and a wholly-owned subsidiary of ITEC
(inactive)
6. McMican Corporation, a California corporation and a wholly-owned subsidiary
of ITEC (inactive)
7. Color Solutions, Inc., a California corporation and a wholly-owned
subsidiary of ITEC (inactive)
8. DealSeekers.com, Inc., a Delaware corporation, 71.4% owned by ITEC
9. EduAdvantage.com, Inc., a California corporation and a wholly-owned
subsidiary of ITEC
* The number of authorized shares of common stock shall be increased to
300,000,000 upon the filing of a Certificate of Amendment to our Certificate
of Incorporation with the Delaware Secretary of State, which we will use our
best efforts to file by October 9, 2001.
--------------------
Schedule 2.1(k)
---------------
Indebtedness
The Settlement Agreement with Imperial Bank requires that we make monthly
payments of $150,000 until the indebtedness is paid in full. See Schedule
2.1(m).
Throughout fiscal 1999, 2000 and 2001, approximately fifty trade creditors
have made claims and/or filed actions alleging the failure of us to pay our
obligations to them in a total amount exceeding $3 million. These actions are in
various stages of litigation, with many resulting in judgments being entered
against us. Several of those who have obtained judgments have filed judgment
liens on our assets. These claims range in value from less than one thousand
dollars to just over one million dollars, with the great majority being less
than twenty thousand dollars. To date, the superior security interest held by
Imperial Bank has prevented nearly all of these trade creditors from collecting
on their judgments.
See also our Financial Statements contained in our Form 10-Q for the period
ended March 31, 2001.
Schedule 2.1(m)
---------------
Actions Pending
---------------
On August 20, 1999, at the request of Imperial Bank, our primary lender,
the Superior Court, San Diego appointed an operational receiver to us. On August
23, 1999, the operational receiver took control of our day-to-day operations.
Through further equity infusion, primarily in the form of the exercise of
warrants to purchase our common stock, operations have continued, and on June
21, 2000, the Superior Court, San Diego issued an order dismissing the
operational receiver as a part of a settlement of litigation with Imperial Bank
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. However, in the future,
without additional funding sufficient to satisfy Imperial Bank and our other
creditors, as well as providing for our working capital, there can be no
assurances that an operational receiver may not be reinstated.
Throughout fiscal 1999, 2000 and 2001, approximately fifty trade creditors
have made claims and/or filed actions alleging the failure of us to pay our
obligations to them in a total amount exceeding $3 million. These actions are in
various stages of litigation, with many resulting in judgments being entered
against us. Several of those who have obtained judgments have filed judgment
liens on our assets. These claims range in value from less than one thousand
dollars to just over one million dollars, with the great majority being less
than twenty thousand dollars. To date, the superior security interest held by
Imperial Bank has prevented nearly all of these trade creditors from collecting
on their judgments.
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull,
Stull & Brody made a public announcement that they had filed a lawsuit against
us and certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. A motion to dismiss the lawsuit was granted on
February 16, 2001 on our behalf and those individual defendants that have been
served. However, on or about March 19, 2001, an amended complaint was filed on
behalf of Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and Michael S.
Taylor, on behalf of themselves and others similarly situated. On or about March
20, 2001, we once again filed a motion to dismiss the case along with certain
other individual defendants. The motion was denied and an answer to the
complaint has been filed on behalf of the company and certain individual
defendants. We believe these claims are without merit and we intend to
vigorously defend against them on our behalf as well as on behalf of the other
defendants. The defense of this action has been tendered to our insurance
carriers.
Schedule 2.1(p)
---------------
Certain Fees
BiCoastal Consulting is entitled to a fee of $30,000 and 30,000 shares of
our common stock to be converted at the Fixed Conversion Price with respect to
this transaction.
Schedule 2.1(u)
---------------
Material Agreements
On December 11, 2000, ITEC and Quik Pix, Inc. (QPI) entered into an
agreement whereby ITEC would acquire a majority of the shares of the common
stock of QPI in consideration of ITEC's agreement to liquidate certain debts of
QPI, which was subject to the approval of the current shareholders of QPI.
Subsequently, QPI's management withdrew their recommendation that the
shareholders of QPI approve this transaction and indefinitely postponed the
shareholders' meeting that had been scheduled to consider such approval, among
other things. On September 21, 2001, ITEC and QPI signed a Settlement Agreement
and Mutual General Release which, once again provides for ITEC to acquire a
majority of the shares of the common stock of QPI.
Schedule 2.1(v)
---------------
Transactions with Affiliates
None.
Schedule 2.1(z)
---------------
Absence of Certain Developments
We entered into a Convertible Note Purchase Agreement on July 26, 2001 with
an investor whereby we issued a $1,000,000 promissory note convertible into
shares of our common stock.
EX-10
6
exh10w.txt
EXHIBIT 10(W)
EXHIBIT 10(w)
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and
entered into as of September 21, 2001, between Imaging Technologies Corporation,
a Delaware corporation (the "Company") and the purchaser listed on Schedule I
attached hereto (the "Purchaser")
This Agreement is being entered into pursuant to the Convertible
Note Purchase Agreement, dated as of the date hereof between the Company and the
Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions.
-----------
Capitalized terms used and not otherwise defined herein shall have
the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common control
with such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Board" shall have meaning set forth in Section 3(n).
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" means the date of the closing of the purchase and
sale of the Notes and Warrant Shares pursuant to the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $0.005
per share.
"Effectiveness Date" means with respect to the Registration
Statement the 150th day following the Closing Date.
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Event" shall have the meaning set forth in Section 7(e)(i).
"Event Date" shall have the meaning set forth in Section 7(e)(i).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means the 60th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock issuable
upon conversion of the Note and the shares of Common Stock issuable upon
exercise of the Warrant; provided, however, that Registrable Securities shall
include (but not be limited to) a number of shares of Common Stock equal to no
less than 150% of the maximum number of shares of Common Stock which would be
issuable upon conversion of the Note and upon exercise of the Warrant, assuming
such conversion and exercise occurred on the Closing Date or the Filing Date,
whichever date would result in the greater number of Registrable Securities.
Such registered shares of Common Stock shall be allocated among the Holders 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 Commission.
Notwithstanding anything herein contained to the contrary, if the actual number
of shares of Common Stock issuable upon conversion of the Note and upon exercise
of the Warrant exceeds 150% of the number of shares of Common Stock issuable
upon conversion of the Note and upon exercise of the Warrant based upon a
computation as at the Closing Date or the Filing Date, the term "Registrable
Securities" shall be deemed to include such additional shares of Common Stock.
"Registration Statement" means the registration statements and any
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
2. Shelf Registration.
On or prior to the Filing Date the Company shall prepare and file
with the Commission a "shelf" Registration Statement covering all Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form S-2. The Company shall (i) not
permit any securities other than the Registrable Securities to be included in
the Registration Statement without the consent of the Purchaser and (ii) use its
best efforts to cause the Registration Statement to be declared effective under
the Securities Act as promptly as possible after the filing thereof, but in any
event prior to the Effectiveness Date, and to keep such Registration Statement
continuously effective under the Securities Act until such date as is the
earlier of (x) the date when all Registrable Securities covered by such
Registration Statement have been sold or (y) the date on which the Registrable
Securities may be sold without any restriction pursuant to Rule 144 as
determined by the counsel to the Company pursuant to a written opinion letter,
addressed to the Company's transfer agent to such effect (the "Effectiveness
Period"). If an additional Registration Statement is required to be filed
because the actual number of shares of Common Stock into which the Notes are
convertible and the Warrants are exercisable exceeds the number of shares of
Common Stock initially registered in respect of the Conversion Shares and the
Warrant Shares based upon the computation on the Closing Date, the Company shall
have forty-five (45) Business Days to file such additional Registration
Statement, and the Company shall use its best efforts to cause such additional
Registration Statement to be declared effective by the Commission as soon as
possible, but in no event later than ninety (90) days after filing.
3. Registration Procedures.
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on Form S-2 in accordance with the method or
methods of distribution thereof as specified by the Holders (except if otherwise
directed by the Holders), and cause the Registration Statement to become
effective and remain effective as provided herein; provided, however, that not
less than five (5) Business Days prior to the filing of the Registration
Statement or any related Prospectus or any amendment or supplement thereto
(including any document that would be incorporated therein by reference), the
Company shall (i) furnish to the Holders and any Special Counsel, copies of
all such documents proposed to be filed, which documents (other than those
incorporated by reference) will be subject to the review of such Holders and
such Special Counsel, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of counsel to such Holders, to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities or any Special Counsel shall reasonably object in writing
within three (3) Business Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement as may be necessary to
keep the Registration Statement continuously effective as to the applicable
Registrable Securities for the Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (ii) cause
the related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424
(or any similar provisions then in force) promulgated under the Securities Act;
(iii) respond as promptly as possible to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold and any
Special Counsel as promptly as possible (and, in the case of (i)(A) below, not
less than five (5) days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one (1) Business Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement and (C) with respect to the Registration Statement
or any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment.
(f) Furnish to each Holder and any Special Counsel, without charge, at
least one conformed copy of each Registration Statement and each amendment
thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference, and all exhibits
to the extent requested
by such Person (including those previously furnished or incorporated by
reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder and any Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders and
any Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder requests in writing, to
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold pursuant
to a Registration Statement, which certificates shall be free of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any Holder may request at least two (2) Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(vi),
as promptly as possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an 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 the light of the circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the OTC Bulletin Board, The
Nasdaq Small-Cap Market and any other securities exchange, quotation system or
market, if any, on which similar securities issued by the Company are then
listed as and when required pursuant to the Purchase Agreement.
(l) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) The Company may require each selling Holder to furnish to the
Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such information
within a reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or otherwise
as the holder of any securities of the Company, then such Holder shall have the
right to require (if such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force) the
deletion of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "Advice")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
(n) If (i) there is material non-public information regarding the
Company which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose, then the Company may postpone or suspend filing or
effectiveness of a registration statement for a period not to exceed 20
consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 12 month period; provided, however, that no such postponement or suspension
shall be permitted for consecutive 20 day periods, arising out of the same set
of facts, circumstances or transactions.
4. Registration Expenses.
All fees and expenses incident to the performance of or compliance
with this Agreement by the Company, except as and to the extent specified in
Section 4(b), shall be borne by the Company whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the OTC
Bulletin Board and each other securities exchange or market on which Registrable
Securities are required hereunder to be listed, (B) with respect to filings
required to be made with the National Association of Securities Dealers, Inc.
and the NASD Regulation, Inc. and (C) in compliance with state securities or
Blue Sky laws (including, without limitation, fees and disbursements of counsel
for the Holders in connection with Blue Sky qualifications of the Registrable
Securities and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as the Holders of a majority
of Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the Holders, in
the case of the Special Counsel, to a maximum amount of $5,000, (v) Securities
Act liability insurance, if the Company so desires such insurance, and (vi) fees
and expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement, including,
without limitation, he Company's independent public accountants (including the
expenses of any comfort letters or costs associated with the delivery by
independent public accountants of a comfort letter or comfort letters). In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
5. Indemnification.
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, which information was
reasonably relied on by the Company for use therein or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto.
The Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus or
such form of prospectus or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party) in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying, Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties
6. Rule 144.
As long as any Holder owns Shares, Conversion Shares, Warrants or
Warrant Shares, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act and to promptly furnish the Holders with true
and complete copies of all such filings. As long as any Holder owns Shares,
Conversion Shares, Warrants or Warrant Shares, if the Company is not required to
file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will
prepare and furnish to the Holders and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act annual and quarterly
financial statements, together with a discussion and analysis of such financial
statements in form and substance substantially similar to those that would
otherwise be required to be included in reports required by Section 13(a) or
15(d) of the Exchange Act, as well as any other information required thereby, in
the time period that such filings would have been required to have been made
under the Exchange Act. The Company further covenants that it will take such
further action as any Holder may reasonably request, all to the extent required
from time to time to enable such Person to sell Conversion Shares and Warrant
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including providing any legal opinions relating to such sale pursuant to Rule
144. Upon the request of any Holder, the Company shall deliver to such Holder a
written certification of a duly authorized officer as to whether it has complied
with such requirements.
7. Miscellaneous.
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof entered into and currently in effect,
nor shall the Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that is
inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as disclosed in Schedule
2.1(c) of the Purchase Agreement, neither the Company nor any of its
subsidiaries has previously entered into any agreement currently in effect
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict with the
provisions of this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any of
its security holders (other than the Holders in such capacity pursuant hereto or
as disclosed in Schedule 2.1(c) of the Purchase Agreement) may include
securities of the Company in the Registration Statement, and the Company shall
not after the date hereof enter into any agreement providing such right to any
of its securityholders, unless the right so granted is subject in all respects
to the prior rights in full of the Holders set forth herein, and is not
otherwise in conflict with the provisions of this Agreement.
(d) Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering (i) Conversion Shares or (ii) Warrant
Shares, the Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity 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 send to each holder of Registrable Securities written
notice of such determination and, if within thirty (30) days after receipt of
such notice, any such holder shall so request in writing, (which request shall
specify the Registrable Securities intended to be disposed of by the Purchaser),
the Company will cause the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the holder, to the extent requisite to permit the disposition of the Registrable
Securities so to be registered, provided that if at any time after giving
written notice of its intention to register any securities and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to such holder and, thereupon, (i) in the
case of a determination not to register, shall be relieved of its obligation to
register any Registrable Securities in connection with such registration (but
not from its obligation to pay expenses in accordance with Section 4 hereof),
and (ii) in the case of a determination to delay registering, shall be permitted
to delay registering any Registrable Securities being registered pursuant to
this Section 7(d) for the same period as the delay in registering such other
securities. The Company shall include in such registration statement all or any
part of such Registrable Securities such holder requests to be registered;
provided, however, that the Company shall not be required to register any
Registrable Securities pursuant to this Section 7(d) that are eligible for sale
pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten
public offering, if the managing underwriter(s) or underwriter(s) should
reasonably object to the inclusion of the Registrable Securities in such
registration statement, then if the Company after consultation with the managing
underwriter should reasonably determine that the inclusion of such Registrable
Securities, would materially adversely affect the offering contemplated in such
registration statement, and based on such determination recommends inclusion in
such registration statement of fewer or none of the Registrable Securities of
the Holders, then (x) the number of Registrable Securities of the Holders
included in such registration statement shall be reduced pro-rata among such
Holders (based upon the number of Registrable Securities requested to be
included in the registration), if the Company after consultation with the
underwriter(s) recommends the inclusion of fewer Registrable Securities, or (y)
none of the Registrable Securities of the Holders shall be included in such
registration statement, if the Company
after consultation with the underwriter(s) recommends the inclusion of none of
such Registrable Securities; provided, however, that if Securities are being
offered for the account of other persons or entities as well as the Company,
such reduction shall not represent a greater fraction of the number of
Registrable Securities intended to be offered by the Holders than the fraction
of similar reductions imposed on such other persons or entities (other than the
Company).
(e) Failure to File Registration Statement and Other Events. The
Company and the Purchaser agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Time or if
certain other events occur. The Company and the Holders further agree that it
would not be feasible to ascertain the extent of such damages with precision.
Accordingly, if (A) the Registration Statement is not filed on or prior to the
Filing Date, or is not declared effective by the Commission on or prior to the
Effectiveness Date (or in the event an additional Registration Statement is
filed because the actual number of shares of Common Stock into which the Notes
are convertible and the Warrants are exercisable exceeds the number of shares of
Common Stock initially registered is not filed and declared effective with the
time periods set forth in Section 2(a)), or (B) the Company fails to file with
the Commission a request for acceleration in accordance with Rule 12dl-2
promulgated under the Exchange Act within five (5) Business Days of the date
that the Company is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be "reviewed," or not subject
to further review, or (C) the Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities at any time prior to the expiration of the Effectiveness
Period, without being succeeded immediately by a subsequent Registration
Statement filed with and declared effective by the Commission, or (D) trading in
the Common Stock shall be suspended or if the Common Stock is delisted from the
OTC Bulletin Board or The Nasdaq Small-Cap Market for any reason for more than
three Business Days in the aggregate, or (E) the conversion rights of the
Holders are suspended for any reason except as a result of Section 5(a)(iii) of
the Certificate of Designation, or (F) the Company breaches in a material
respect any covenant or other material term or condition to this Agreement, the
Certificate of Designation, the Purchase Agreement (other than a representation
or warranty contained therein) or any other agreement, document, certificate or
other instrument delivered in connection with the transactions contemplated
hereby and thereby, and such breach continues for a period of thirty days after
written notice thereof to the Company, or (G) the Company has breached Section
3(n) (any such failure or breach being referred to as an "Event," and for
purposes of clauses (A) and (E) the date on which such Event occurs, or for
purposes of clause (B) the date on which such five day period is exceeded, or
for purposes of clause (C) after more than fifteen Business Days, or for
purposes of clause (D) the date on which such three Business Day period is
exceeded, or for clause (F) the date on which such thirty day period is
exceeded, being referred to as "Event Date"), the Company shall pay, at the
option of the Holder, an amount in cash or shares of Common Stock, as liquidated
damages to each Holder equal to 1% for the first calendar month and 2% per
calendar month thereafter or portion thereof of the principal amount of the
Notes held by such Holder plus the principal amount of any Notes that have been
converted to the extent any of the Conversion Shares issued upon such conversion
have not been sold from the Event Date until the applicable Event is cured.
Payments to be made pursuant to this Section 7(e)(i) shall be due and payable
immediately upon demand in immediately available funds. If the Holder elects to
be paid in shares of Common Stock, the number of such shares of Common Stock
shall be based on the liquidated damage amount divided by the Conversion Rate
(as defined in the Note).
(f) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and each of the Holders. Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of Holders and that does not directly or indirectly
affect the rights of other Holders may be given by Holders of at least a
majority of the Registrable Securities to which such waiver or consent relates;
provided, however, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.
(g) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice prior to 5:00 p.m., New York
City time, on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice later than 5:00 p.m., New York
City time, on any date and earlier than 11:59 p.m., New York City time, on such
date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service or (iv) actual receipt by the
party to whom such notice is required to be given. The addresses for such
communications shall be with respect to each Holder at its address set forth
under its name on Schedule 1 attached hereto, or with respect to the Company,
addressed to:
Imaging Technologies Corporation
15175 Innovation Drive
San Diego, California 92128
Attention: Chief Executive Officer
Telephone No.: (858) 613-1300
Facsimile No.: (858) 207-6505
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Company shall be sent to Jenkens &
Gilchrist Parker Chapin LLP, 405 Lexington Avenue, New York New York 10174,
Attention: Christopher S. Auguste, Esq., Facsimile No.: (212) 704-6288.
(h) Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of each Holder and its successors and
assigns. The Company may not assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of each Holder. The
Purchaser may assign its rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(i) Assignment of Registration Rights. The rights of each Holder
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any Affiliate of such Holder or any
other Holder or Affiliate of any other Holder of all or a portion of the Notes
or the Registrable Securities if: (i) the Holder 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) following such transfer or assignment
the further disposition of such securities by the transferee or assignees is
restricted under the Securities Act and applicable state securities laws, (iv)
at or before the time the Company receives the written notice contemplated by
clause (ii) of this Section, the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions of this Agreement, and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Purchase Agreement. In addition, each Holder shall have the right to assign
its rights hereunder to any other Person with the prior written consent of the
Company, which consent shall not be unreasonably withheld. The rights to
assignment shall apply to the Holders (and to subsequent) successors and
assigns.
(j) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(k) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of law thereof.
(l) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or restriction
of this Agreement is held to be invalid, illegal, void or unenforceable in any
respect, the remainder of the terms, provisions, covenants and restrictions set
forth herein shall remain in full force and effect and shall in no way be
affected, impaired or invalidated, and the parties hereto shall use their
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or
restriction. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(n) Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
(o) Shares Held by the Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed by their respective authorized persons as of the
date first indicated above.
IMAGING TECHNOLOGIES CORPORATION
By:
-------------------------------------
Name: Brian Bonar
Title: Chief Executive Officer
STONESTREET LIMITED PARTNERSHIP
By:
-------------------------------------
Name:
Title:
Schedule I
----------
STONESTREET LIMITED PARTNERSHIP
260 Town Center Blvd. Ste 201
Markham, ON L3R 8H8
Fax No.: 416-956-8989
EX-10
7
exh10x.txt
EXHIBIT 10(X)
EXHIBIT 10(x)
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
IMAGING TECHNOLOGIES CORPORATION
Expires September 21, 2006
No. W-1 New York, New York
September 21, 2001
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, IMAGING TECHNOLOGIES CORPORATION, a Delaware corporation (together
with its successors and assigns, the "Issuer"), hereby certifies that
STONESTREET LIMITED PARTNERSHIP
or its registered assigns is entitled to subscribe for and purchase, during the
period specified in this Warrant, up to 11,278,195 shares (subject to adjustment
as hereinafter provided) of the duly authorized, validly issued, fully paid and
non-assessable Common Stock of the Issuer, at an exercise price per share equal
to the Warrant Price then in effect, subject, however, to the provisions and
upon the terms and conditions hereinafter set forth. Capitalized terms used in
this Warrant and not otherwise defined herein shall have the respective meanings
specified in Section 8 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on October ---- 9, 2001 and shall expire at
5:00 p.m., New York City time, on September 21, 2006 (such period being the
"Term").
2. Method of Exercise Payment: Issuance of New Warrant: Transfer and
Exchange.
(a) Time of Exercise. The purchase rights represented by this Warrant may
be exercised in whole or in part at any time and from time to time during the
Term commencing on October 9, 2001.
(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable by certified or official bank check.
(c) Issuance of Stock Certificates. In the event of any exercise of the
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof which shall
have been cancelled in payment or partial payment of the Warrant Price as
hereinabove provided) shall also be issued to the Holder hereof at the Issuer's
expense within such time.
(d) Transferability of Warrant. This Warrant may not be transferred by a
Purchaser without the prior written consent of the Company, such consent not to
be unreasonably withheld. If transferred pursuant to this paragraph and subject
to the provisions of subsection (e) of this Section 2, this Warrant may be
transferred on the
books of the Issuer by the Holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant at the principal office of the Issuer,
properly endorsed (by the Holder executing an assignment in the form attached
hereto) and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. This Warrant is exchangeable at the principal
office of the Issuer for Warrants for the purchase of the same aggregate number
of shares of Warrant Stock, each new Warrant to represent the right to purchase
such number of shares of Warrant Stock as the Holder hereof shall designate at
the time of such exchange. All Warrants issued on transfers or exchanges shall
be dated the Original Issue Date and shall be identical with this Warrant except
as to the number of shares of Warrant Stock issuable pursuant hereto.
(e) Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and the shares of Warrant Stock to be issued upon
exercise hereof are being acquired solely for the Holder's own account and
not as a nominee for any other party, and for investment, and that the
Holder will not offer, sell or otherwise dispose of this Warrant or any
shares of Warrant Stock to be issued upon exercise hereof except pursuant
to an effective registration statement, or an exemption from registration,
under the Securities Act and any applicable state securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant and all
certificates representing shares of Warrant Stock issued upon exercise
hereof shall be stamped or imprinted with a legend in substantially the
following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
(iii) The restrictions imposed by this subsection (e) upon the
transfer of this Warrant and the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities shall have
been effectively registered under the Securities Act, (B) upon the Issuer's
receipt of an opinion of counsel, in form and substance reasonably
satisfactory to the Issuer, addressed to the Issuer to the effect that such
restrictions are no longer required to ensure compliance with the
Securities Act or (C) upon the Issuer's receipt of other evidence
reasonably satisfactory to the Issuer that such registration is not
required. Whenever such restrictions shall cease and terminate as to any
such securities, the Holder thereof shall be entitled to receive from the
Issuer (or its transfer agent and registrar), without expense (other than
applicable transfer taxes, if any), new Warrants (or, in the case of shares
of Warrant Stock, new stock certificates) of like tenor not bearing the
applicable legends required by paragraph (ii) above relating to the
Securities Act and state securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at any
time after each exercise of this Warrant, upon the request of the Holder hereof
or of any shares of Warrant Stock issued upon such exercise, acknowledge in
writing the extent, if any, of its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if any such
Holder shall fail to make any such request, the failure shall not affect the
continuing obligation of the Issuer to afford such rights to such Holder.
3. Stock Fully Paid: Reservation and Listing of Shares: Covenants.
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees
that all shares of Warrant Stock which may be issued upon the exercise of this
Warrant or otherwise hereunder will, upon issuance, be duly authorized, validly
issued, fully paid and non-assessable and free from all taxes, liens and charges
created by or through Issuer. The Issuer further covenants and agrees that
during the period within which this Warrant may be exercised, the Issuer will at
all times have authorized and reserved for the purpose of the issue upon
exercise of this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(b) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon
the exercise of this Warrant if at the time any securities of the same class
shall be listed on such securities exchange or market by the Issuer.
(c) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) not permit the par value, if any, of its
Common Stock to exceed the then effective Warrant Price, (ii) not amend or
modify any provision of the Certificate of Incorporation or by-laws of the
Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant,
and (iv) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
reasonably necessary to enable the Issuer to perform its obligations under this
Warrant.
(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(e) Rights and Obligations under the Registration Rights Agreement. The
Warrant Stock are entitled to the benefits and subject to the terms of the
Registration Rights Agreement dated as of even date herewith between the Issuer
and the Holders listed on the signature pages thereof (as amended from time to
time, the "Registration Rights Agreement"). The Issuer shall keep or cause to be
kept a copy of the Registration Rights Agreement, and any amendments thereto, at
its chief executive office and shall furnish, without charge, copies thereof to
the Holder upon request.
4. Adjustment of Warrant Price and Warrant Share Number. The number and
kind of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale. (i) In case the Issuer after the Original Issue Date shall do
any of the following (each, a "Triggering Event") (a) consolidate with or merge
into any other Person and the Issuer shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) permit any other Person to
consolidate with or merge into the Issuer and the Issuer shall be the continuing
or surviving Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged for Securities of
any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Warrant, the
Holder of this Warrant shall be entitled (x) upon the exercise hereof at any
time after the consummation of such Triggering Event, to the extent this Warrant
is not exercised prior to such Triggering Event, or is redeemed in connection
with such Triggering Event, to receive at the Warrant Price in effect at the
time immediately prior to the consummation of such Triggering Event in lieu of
the Common Stock issuable upon such exercise of this Warrant prior to such
Triggering Event, the Securities, cash and property to which such Holder would
have been entitled upon the consummation of such Triggering Event if such Holder
had exercised the rights represented by this Warrant immediately prior thereto,
subject to adjustments and increases (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for in Section 4
hereof or (y) to sell this Warrant (or, at such Holder's election, a portion
hereof) to the Person continuing after or surviving such Triggering Event, or to
the Issuer (if Issuer is the continuing or surviving Person) at a sales price
equal to the amount of cash, property and/or Securities to which a holder of the
number of shares of Common Stock which would otherwise have been delivered upon
the exercise of this Warrant would have been entitled upon the effective date or
closing of any such Triggering Event (the "Event Consideration"), less the
amount or portion of such Event Consideration having a fair value equal to the
aggregate Warrant Price applicable to this Warrant or the portion hereof so
sold.
(ii) Notwithstanding anything contained in this Warrant to the contrary,
the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the
obligations of the Issuer under this Warrant (and if the Issuer shall survive
the consummation of such Triggering Event, such assumption shall be in addition
to, and shall not release the Issuer from, any continuing obligations of the
Issuer under this Warrant) and (B) the obligation to deliver to such Holder such
shares of Securities, cash or property as, in accordance with the foregoing
provisions of this subsection (a), such Holder shall be entitled to receive, and
such Person shall have similarly delivered to such Holder an opinion of counsel
for such Person, which counsel shall be reasonably satisfactory to such Holder,
stating that this Warrant shall thereafter continue in full force and effect and
the terms hereof (including, without limitation, all of the provisions of this
subsection (a)) shall be applicable to the Securities, cash or property which
such Person may be required to deliver upon any exercise of this Warrant or the
exercise of any rights pursuant hereto.
(iii) If with respect to any Triggering Event, the Holder of this Warrant
has exercised its right as provided in clause (y) of subparagraph (i) of this
subsection (a) to sell this Warrant or a portion thereof, the Issuer agrees that
as a condition to the consummation of any such Triggering Event the Issuer shall
secure such right of Holder to sell this Warrant to the Person continuing after
or surviving such Triggering Event and the Issuer shall not effect any such
Triggering Event unless upon or prior to the consummation thereof the amounts of
cash, property and/or Securities required under such clause (y) are delivered to
the Holder of this Warrant. The obligation of the Issuer to secure such right of
the Holder to sell this Warrant shall be subject to such Holder's cooperation
with the Issuer, including, without limitation, the giving of customary
representations and warranties to the purchaser in connection with any such
sale. Prior notice of any Triggering Event shall be given to the Holder of this
Warrant in accordance with Section 11 hereof.
(b) Subdivision or Combination of Shares. If the Issuer, at any time while
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of Holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of Holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time while
this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other distribution
to its stockholders (without consideration therefor) of, shares of Common
Stock, the Warrant Price shall be adjusted, as at the date the Issuer shall
take a record of the Holders of the Issuer's Capital Stock for the purpose
of receiving such dividend or other distribution (or if no such record is
taken, as at the date of such payment or other distribution), to that price
determined by multiplying the Warrant Price in effect immediately prior to
such record date (or if no such record is taken, then immediately prior to
such payment or other distribution), by a fraction (1) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (2) the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the event that the
Issuer paid cash for fractional shares, the number of additional shares
which would have been outstanding had the Issuer issued fractional shares
in connection with said dividends); or
(ii) Other Dividends. Pay a dividend on, or make any distribution of
its assets upon or with respect to (including, but not limited to, a
distribution of its property as a dividend in liquidation or partial
liquidation or by way of return of capital), the Common Stock (other than
as described in clause (i) of this subsection (c)), or in the event that
the Company shall offer options or rights to subscribe for shares of Common
Stock, or issue any Common Stock Equivalents, to all of its holders of
Common Stock, then on the record date for such payment, distribution or
offer or, in the absence of a record date, on the date of such payment,
distribution or offer, the Holder shall receive what the Holder would have
received had it exercised this Warrant in full immediately prior to the
record date of such payment, distribution or offer or, in the absence of a
record date, immediately prior to the date of such payment, distribution or
offer.
(d) Other Provisions Applicable to Adjustments Under this Section 4. The
following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
(i) Computation of Consideration. The consideration received by the
Issuer shall be deemed to be the following: to the extent that any
Additional Shares of Common Stock or any Common Stock Equivalents shall be
issued for a cash consideration, the consideration received by the Issuer
therefor, or if such Additional Shares of Common Stock or Common Stock
Equivalents are offered by the Issuer for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Common Stock
Equivalents are sold to underwriters or dealers for public offering without
a subscription offering, the public offering price, in any such case
excluding any amounts paid or receivable for accrued interest or accrued
dividends and without deduction of any compensation, discounts,
commissions, or expenses paid or
incurred by the Issuer for or in connection with the underwriting thereof
or otherwise in connection with the issue thereof; to the extent that such
issuance shall be for a consideration other than cash, then, except as
herein otherwise expressly provided, the fair market value of such
consideration at the time of such issuance as determined in good faith by
the Board. The consideration for any Additional Shares of Common Stock
issuable pursuant to any Common Stock Equivalents shall be the
consideration received by the Issuer for issuing such Common Stock
Equivalents, plus the additional consideration payable to the Issuer upon
the exercise, conversion or exchange of such Common Stock Equivalents. In
case of the issuance at any time of any Additional Shares of Common Stock
or Common Stock Equivalents in payment or satisfaction of any dividend upon
any class of Capital Stock of the Issuer other than Common Stock, the
Issuer shall be deemed to have received for such Additional Shares of
Common Stock or Common Stock Equivalents a consideration equal to the
amount of such dividend so paid or satisfied. In any case in which the
consideration to be received or paid shall be other than cash, the Board
shall notify the Holder of this Warrant of its determination of the fair
market value of such consideration prior to payment or accepting receipt
thereof. If, within thirty days after receipt of said notice, the Majority
Holders shall notify the Board in writing of their objection to such
determination, a determination of the fair market value of such
consideration shall be made by an Independent Appraiser selected by the
Majority Holders with the approval of the Board (which approval shall not
be unreasonably withheld), whose fees and expenses shall be paid by the
Issuer.
(ii) Readjustment of Warrant Price. Upon the expiration or termination
of the right to convert, exchange or exercise any Common Stock Equivalent
the issuance of which effected an adjustment in the Warrant Price, if such
Common Stock Equivalent shall not have been converted, exercised or
exchanged in its entirety, the number of shares of Common Stock deemed to
be issued and outstanding by reason of the fact that they were issuable
upon conversion, exchange or exercise of any such Common Stock Equivalent
shall no longer be computed as set forth above, and the Warrant Price shall
forthwith be readjusted and thereafter be the price which it would have
been (but reflecting any other adjustments in the Warrant Price made
pursuant to the provisions of this Section 4 after the issuance of such
Common Stock Equivalent) had the adjustment of the Warrant Price been made
in accordance with the issuance or sale of the number of Additional Shares
of Common Stock actually issued upon conversion, exchange or issuance of
such Common Stock Equivalent and thereupon only the number of Additional
Shares of Common Stock actually so issued shall be deemed to have been
issued and only the consideration actually received by the Issuer (computed
as in clause (i) of this subsection (g)) shall be deemed to have been
received by the Issuer.
(iii) Outstanding Common Stock. The number of shares of Common Stock
at any time outstanding shall (A) not include any shares thereof then
directly or indirectly owned or held by or for the account of the Issuer or
any of its Subsidiaries, and (B) be deemed to include all shares of Common
Stock then issuable upon conversion, exercise or exchange of any then
outstanding Common Stock Equivalents or any other evidences of
Indebtedness, shares of Capital Stock or other Securities which are or may
be at any time convertible into or exchangeable for shares of Common Stock
or Other Common Stock.
(e) Other Action Affecting Common Stock. In case after the Original Issue
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (d) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(f) Adjustment of Warrant Share Number. Upon each adjustment in the Warrant
Price pursuant to any of the foregoing provisions of this Section 4, the Warrant
Share Number shall be adjusted, to the nearest one hundredth of a whole share,
to the product obtained by multiplying the Warrant Share Number immediately
prior to such adjustment in the Warrant Price by a fraction, the numerator of
which shall be the Warrant Price immediately before giving effect to such
adjustment and the denominator of which shall be the Warrant Price immediately
after giving effect to such adjustment. If the Issuer shall be in default under
any provision contained in Section 3 of this Warrant so that shares issued at
the Warrant Price adjusted in accordance with this Section 4 would not be
validly issued, the adjustment of the Warrant Share Number provided for in the
foregoing sentence shall nonetheless be made and the Holder of this Warrant
shall be entitled to purchase such greater number of shares at the lowest price
at which such shares may then be validly issued under applicable law. Such
exercise shall not constitute a waiver of any claim arising against the Issuer
by reason of its default under Section 3 of this Warrant.
(g) Form of Warrant after Adjustments. The form of this Warrant need not be
changed because of any adjustments in the Warrant Price or the number and kind
of Securities purchasable upon the exercise of this Warrant.
5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the
Holder of this Warrant promptly after each adjustment. Any dispute between the
Issuer and the Holder of this Warrant with respect to the matters set forth in
such certificate may at the option of the Holder of this Warrant be submitted to
one of the national accounting firms currently known as the "big five" selected
by the Holder, provided that the Issuer shall have ten days after receipt of
notice from such Holder of its selection of such firm to object thereto, in
which case such Holder shall select another such firm and the Issuer shall have
no such right of objection. The firm selected by the Holder of this Warrant as
provided in the preceding sentence shall be instructed to deliver a written
opinion as to such matters to the Issuer and such Holder within thirty days
after submission to it of such dispute. Such opinion shall be final and binding
on the parties hereto. The fees and expenses of such accounting firm shall be
paid by the Issuer.
6. Fractional Shares. No fractional shares of Warrant Stock will be issued
in connection with and exercise hereof, but in lieu of such fractional shares,
the Issuer shall make a cash payment therefor equal in amount to the product of
the applicable fraction multiplied by the Per Share Market Value then in effect.
7. Warrant Exercise Restriction. Notwithstanding anything to the contrary
set forth in this Warrant, at no time may a holder of this Warrant exercise this
Warrant, or a portion hereof, if the number of shares of Common Stock to be
issued pursuant to such exercise would exceed, when aggregated with all other
shares of Common Stock owned by such holder at such time, would result in such
holder owning more than 9.99% of all of the Common Stock issued and outstanding
at such time; provided, however, that upon a holder of this Warrant providing
the Issuer with 75 days notice (pursuant to Section 11 hereof) (the "Waiver
Notice") that such holder would like to waive Section 7 of this Warrant with
regard to any or all shares of Common Stock issuable upon exercise of the
Warrant, this Section 7 will be of no further force or effect with regard to the
number of shares exercisable pursuant to the Warrant, or the applicable portion
thereof, referenced in the Waiver Notice.
8. Definitions. For the purposes of this Warrant, the following terms have
the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
issued by the Issuer after the Original Issue Date, and all shares of Other
Common, if any, issued by the Issuer after the Original Issue Date, except (i)
Warrant Stock, (ii) any shares of Common Stock issuable upon conversion of the
Notes pursuant to the Purchase Agreement, (iii) any shares of Common Stock
issuable upon conversion of the promissory notes and exercise of the warrants
issued pursuant to the Convertible Note Purchase Agreement dated December 12,
2000, (iv) any shares of Common Stock issuable upon conversion of the promissory
note and exercise of the warrant issued pursuant to the Convertible Note
Purchase Agreement dated July 26, 2001, (v) shares of Common Stock to be issued
pursuant to the Agreement and Release, dated March 1, 2001, by and among the
Issuer, American Industries, Inc. and various other parties thereto, (vi) shares
of Common Stock to be issued pursuant to the Second OEM Amendment, dated October
25, 2000, between the Issuer and Artifex Software, Inc. and (vii) options or
warrants or rights to purchase stock issued to officers and/or directors of the
Maker and any shares of Common Stock issuable upon exercise of the Stock
Options.
"Board" shall mean the Board of Directors of the Issuer.
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or
limited) in any Person which is a partnership, (iii) all membership
interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any
other type.
"Certificate of Incorporation" means the Certificate of Incorporation
of the Issuer as in effect on the Original Issue Date, and as hereafter
from time to time amended, modified, supplemented or restated in accordance
with the terms hereof and thereof and pursuant to applicable law.
"Original Issue Date" means September 21, 2001.
"Common Stock" means the Common Stock, $.005 par value, of the Issuer
and any other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant,
option or other right to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Security.
"Convertible Securities" means the Notes, evidences of Indebtedness,
shares of Capital Stock or other Securities which are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock. The
term "Convertible Security" means one of the Convertible Securities.
"Governmental Authority" means any governmental, regulatory or
self-regulatory entity, department, body, official, authority, commission,
board, agency or instrumentality, whether federal, state or local, and
whether domestic or foreign.
"Holders" mean the Persons who shall from time to time own any
Warrant. The term "Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Issuer) that is regularly engaged
in the business of appraising the Capital Stock or assets of corporations
or other entities as going concerns, and which is not affiliated with
either the Issuer or the Holder of any Warrant.
"Issuer" means Imaging Technologies Corporation, a Delaware
corporation, and its successors.
"Majority Holders" means at any time the Holders of Warrants
exercisable for a majority of the shares of Warrant Stock issuable under
the Warrants at the time outstanding.
"NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.
"Notes" means the convertible promissory notes issued pursuant to the
Purchase Agreement.
"Other Common" means any other Capital Stock of the Issuer of any
class which shall be authorized at any time after the date of this Warrant
(other than Common Stock) and which shall have the right to participate in
the distribution of earnings and assets of the Issuer without limitation as
to amount.
"Person" means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on The Nasdaq
Small-Cap Market, the Nasdaq National Market or other registered national
stock exchange on which the Common Stock is then listed or if there is no
such price on such date, then the closing bid price on such exchange or
quotation system on the date nearest preceding such date, or (b) if the
Common Stock is not listed then on The Nasdaq Small-Cap Market, the Nasdaq
National Market or any registered national stock exchange, the closing bid
price for a share of Common Stock in the over-the-counter market, as
reported by NASDAQ or in the National Quotation Bureau Incorporated or
similar organization or agency succeeding to its functions of reporting
prices) at the close of business on such date, or (c) if the Common Stock
is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share
of Common Stock as determined by an Independent Appraiser selected in good
faith by the Majority Holders; provided, however, that the Issuer, after
receipt of the determination by such Independent Appraiser, shall have the
right to select an additional Independent Appraiser, in which case, the
fair market value shall be equal to the average of the determinations by
each such Independent Appraiser; and provided, further that all
determinations of the Per Share Market Value shall be appropriately
adjusted for any stock dividends, stock splits or other similar
transactions during such period. The determination of fair market value by
an Independent Appraiser shall be based upon the fair market value of the
Issuer determined on a going concern basis as between a willing buyer and a
willing seller and taking into account all relevant factors determinative
of value, and shall be final and binding on all parties. In determining the
fair market value of any shares of Common Stock, no consideration shall be
given to any restrictions on transfer of the Common Stock imposed by
agreement or by federal or state securities laws, or to the existence or
absence of, or any limitations on, voting rights.
"Purchase Agreement" means the Convertible Note Purchase Agreement
dated as of September 21, 2001 among the Issuer and the purchaser named
therein.
"Registration Rights Agreement" has the meaning specified in Section
3(e) hereof.
"Securities" means any debt or equity securities of the Issuer,
whether now or hereafter authorized, any instrument convertible into or
exchangeable for Securities or a Security, and any option, warrant or other
right to purchase or acquire any Security. "Security" means one of the
Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute then in effect.
"Stock Options" means options to purchase shares of Common Stock
issued by the Issuer on the Original Issue Date to certain members of the
Issuer's senior management, as the same may from time to time be amended,
modified or supplemented in accordance with their terms.
"Subsidiary" means any corporation at least 50% of whose outstanding
Voting Stock shall at the time be owned directly or indirectly by the
Issuer or by one or more of its Subsidiaries, or by the Issuer and one or
more of its Subsidiaries.
"Trading Day" means (a) a day on which the Common Stock is traded on
The Nasdaq Small-Cap Market, the Nasdaq National Market or other registered
national stock exchange on which the Common Stock has been listed, or (b)
if the Common Stock is not listed on The Nasdaq Small-Cap Market, the
Nasdaq National Market or any registered national stock exchange, a day or
which the Common Stock is traded in the over-the-counter market, as
reported by the OTC Bulletin Board, or (c) if the Common Stock is not
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its
functions of reporting prices); provided, however, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions
in the State of New York are authorized or required by law or other
government action to close.
"Term" has the meaning specified in Section 1 hereof.
"Voting Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) having
ordinary voting power for the election of a majority of the members of the
Board of Directors (or other governing body) of such corporation, other
than Capital Stock having such power only by reason of the happening of a
contingency.
"Warrants" means the Warrants issued and sold pursuant to the Purchase
Agreement, including, without limitation, this Warrant, and any other
warrants of like tenor issued in substitution or exchange for any thereof
pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any
of such other Warrants.
"Warrant Price" means initially $.038, as such price may be adjusted
from time to time as shall result from the adjustments specified in Section
4 hereof.
"Warrant Share Number" means at any time the aggregate number of
shares of Warrant Stock which may at such time be purchased upon exercise
of this Warrant, after giving effect to all prior adjustments and increases
to such number made or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any
Warrant or Warrants or otherwise issuable pursuant to any Warrant or
Warrants.
8. Other Notices. In case at any time:
(A) the Issuer shall make any distributions to the holders
of Common Stock; or
(B) the Issuer shall authorize the granting to all holders
of its Common Stock of rights to subscribe for or
purchase any shares of Capital Stock of any class or of
any Common Stock Equivalents or Convertible Securities
or other rights; or
(C) there shall be any reclassification of the Capital
Stock of the Issuer; or
(D) there shall be any capital reorganization by the
Issuer; or
(E) there shall be any (i) consolidation or merger
involving the Issuer or (ii) sale, transfer or other
disposition of all or substantially all of the Issuer's
property, assets or business (except a merger or other
reorganization in which the Issuer shall be the
surviving corporation and its shares of Capital Stock
shall continue to be outstanding and unchanged and
except a consolidation, merger, sale, transfer or other
disposition involving a wholly-owned Subsidiary); or
(F) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of
Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
days prior to the action in question and not less than twenty days prior to the
record date or the date on which the Issuer's transfer books are closed in
respect thereto. The Issuer shall give to the Holder notice of
all meetings and actions by written consent of its stockholders, at the same
time in the same manner as notice of any meetings of stockholders is required to
be given to stockholders who do not waive such notice (or, if such requires no
notice, then two Trading Days written notice thereof describing the matters upon
which action is to be taken). The Holder shall have the right to send two
representatives selected by it to each meeting, who shall be permitted to
attend, but not vote at, such meeting and any adjournments thereof. This Warrant
entitles the Holder to receive copies of all financial and other information
distributed or required to be distributed to the holders of the Common Stock.
9. Amendment and Waiver. Any term, covenant, agreement or condition in this
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
reduce the Warrant Share number, increase the Warrant Price, shorten the period
during which this Warrant may be exercised or modify any provision of this
Section 9 without the consent of the Holder of this Warrant.
10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW.
11. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., New York City time, on
a Business Day, (ii) the Business Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., New York City time, on any
date and earlier than 11:59 p.m., New York City time, on such date, (iii) the
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such
notice is required to be given. The addresses for such communications shall be
with respect to the Holder of this Warrant or of Warrant Stock issued pursuant
hereto, addressed to such Holder at its last known address or facsimile number
appearing on the books of the Issuer maintained for such purposes, or with
respect to the Issuer, addressed to:
Imaging Technologies Corporation
15175 Innovation Drive
San Diego, California 92128
Attention: Chief Executive Officer
Facsimile No.: (858) 613-1300
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Holder shall be sent to Jenkens &
Gilchrist Parker Chapin LLP, 405 Lexington Avenue, New York, New York, 10174,
Attention: Christopher S. Auguste, Facsimile No.: (212) 704-6288.
12. Warrant Agent. The Issuer may, by written notice to each Holder of
this Warrant, appoint an agent having an office in New York, New York for the
purpose of issuing shares of Warrant Stock on the exercise of this Warrant
pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant
to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. Remedies. The Issuer stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by the
Issuer in the performance of or compliance with any of the terms of this Warrant
are not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
14. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Issuer, the Holder hereof and (to the extent provided herein) the
Holders of Warrant Stock issued pursuant hereto, and shall be enforceable by any
such Holder or Holder of Warrant Stock
15. Modification and Severability. If, in any action before any court
or agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
16. Headings. The headings of the Sections of this Warrant are for
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day
and year first above written.
IMAGING TECHNOLOGIES CORPORATION
By:
-------------------------------------
Brian Bonar,
Chief Executive Officer
EXERCISE FORM
IMAGING TECHNOLOGIES CORPORATION
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of IMAGING
TECHNOLOGIES CORPORATION covered by the within Warrant.
Dated: Signature
----------------- --------------------------------
Address
---------------------
------------------------
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: Signature
----------------- --------------------------------
Address
---------------------
------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: Signature
----------------- --------------------------------
Address
---------------------
------------------------
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-_____ cancelled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.
EX-21
8
ex21.txt
EXHIBIT 21
EXHIBIT 21 - LIST OF SUBSIDIARIES OF THE COMPANY
================================================================================
1. Laser Printer Accessories Corporation, a Delaware corporation and a
wholly-owned subsidiary of ITEC (Inactive).
2. Personal Computer Products, Inc., doing business as PCPI Technologies,
a California corporation and a wholly-owned subsidiary of ITEC.
3. Co-Processors, Inc., a California corporation and a wholly-owned
subsidiary of ITEC (Inactive).
4. NewGen Imaging Systems, Inc., a California corporation and a
wholly-owned subsidiary of ITEC.
5. Prima, Inc., a California corporation and a wholly-owned subsidiary of
ITEC.
6. McMican Corporation, a California corporation and a wholly-owned
subsidiary of ITEC.
7. Color Solutions, Inc., a California corporation and a wholly-owned
subsidiary of ITEC.
8. Dealseekers.com, Inc., a Delaware corporation, 71.4% owned by ITEC.
9. EduAdvantage.com, Inc., a California corporation and a wholly-owned
subsidiary of ITEC.
EX-23
9
ex23.txt
EXHIBIT 23
EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS
================================================================================
We hereby consent to the incorporation by reference in each of the Registration
Statements on Form S-2 (No. 333-55874), Form S-8 (No.'s 333-39766, 333-37310,
333-31104, 333-95655, 333-92239, 333-87541, 333-84457, 333-81033 and 333-80135)
of Imaging Technologies Corporation of our report dated October 10, 2000 of our
report dated October 10, 2001 appearing in the June 30, 2001 Annual Report of
this Form 10-K.
BOROS & FARRINGTON APC
SAN DIEGO, CALIFORNIA
October 10, 2001