-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AB/098dMo0ojSmtGWBENHDwFvFNLCe+EaTnVhHxBQ+q6QRoiZ5xSSer8x4zLFIVj 6qsb7CEkPDy+CInazZcYLw== 0001047469-98-037092.txt : 19981014 0001047469-98-037092.hdr.sgml : 19981014 ACCESSION NUMBER: 0001047469-98-037092 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981013 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMAGING TECHNOLOGIES CORP/CA CENTRAL INDEX KEY: 0000725394 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 330021693 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12641 FILM NUMBER: 98724620 BUSINESS ADDRESS: STREET 1: 11031 VIA FRONTERA STE #100 CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194858411 FORMER COMPANY: FORMER CONFORMED NAME: PERSONAL COMPUTER PRODUCTS INC DATE OF NAME CHANGE: 19920703 10-K 1 10-K UNITED STATES 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, 1998 OR / / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ COMMISSION FILE NO. 0-12641 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ [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) 11031 Via Frontera San Diego, California 92127 (619) 613-1300 (Address of Principal Executive Offices and Registrant's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $0.005 PAR VALUE Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. At October 9, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $20,625,000, based on the last trade price as reported by The Nasdaq SmallCap Market. For purposes of this calculation, shares owned by officers, directors, and 10% stockholders known to the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. At October 9, 1998, there were 12,801,078 shares of the registrant's Common Stock, $0.005 par value, issued and outstanding. Information required by Part III of this Form 10-K is incorporated therein by reference from the Company's definitive Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after June 30, 1998. FORWARD LOOKING STATEMENTS In addition to historical information, this Annual Report on Form 10-K may contain forward-looking statements that involve a number of risks and uncertainties, including those discussed below at "Risks and Uncertainties." While this outlook represents management's current judgement on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report. The Company undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances arising after the date of this document. See "Risks and Uncertainties." References in this Annual Report on Form 10-K to "ITEC" and the "Company" are to Imaging Technologies Corporation and its wholly-owned direct and indirect subsidiaries, Personal Computer Products, Incorporated, a California corporation (PCPI), NewGen Imaging Systems, Incorporated, a California corporation (NewGen), and Prima International a California corporation (Prima), Color Solutions, Inc, a California corporation (CSI) and McMican corporation a California corporation (McMican), ITEC Europe, Ltd, formed under the laws of the United Kingdom, (ITEC Europe) and AMT Accel Uk Ltd, formed under the laws of the United Kingdom (AMT). PART I ITEM 1. BUSINESS Imaging Technologies Corporation develops, manufactures, and distributes high-quality digital imaging solutions. The Company produces a wide range of printer and imaging products for use in graphics and publishing, digital photography as well as other niche business and technical markets. Beginning with a core technology in the design and development of controllers for non-impact printers and multifunction peripherals, the Company has expanded its product offerings to include monochrome and color printers, external print servers, digital image storage devices, and software to improve the accuracy of color reproduction. ITEC manufactures advanced digital color and monochrome output devices for the publishing, prepress, graphic design, on-demand printing, business and technical office, and digital photography markets, as well as other niche applications. The new generation of products incorporate advanced printer and imaging controller technologies to produce faster, enhanced image output at competitive prices. All of ITEC's color laser and dye-sublimation printers are "ColorBlind Aware" incorporating the Company's proprietary ColorBlind-Registered Trademark- Color Management software. ITEC's Xtinguisher-TM- line of external print servers are designed to enable printing of high-quality images on digital color copiers. This is an extension of ITEC's technical strengths in embedded controllers. In the digital photographic imaging and storage market, ITEC offers specialized memory modules, PC cards and associated readers, digital cameras, removable hard disks, and solid state data storage devices. ITEC manufactures data storage modules, as well as distributes imaging and storage solutions. The Company's ColorBlind-Registered Trademark- Color Management software is a suite of applications, utilities and tools designed to create, edit and apply industry standard ICC (International Color Consortium) profiles that produce accurate color rendering across a wide range of peripheral devices. "ColorBlind Aware" is being recognized as an industry standard for color accuracy as manufacturers integrate ColorBlind's Color Management resources into their product designs. ITEC benefits from technology alliances with industry leaders, Adobe Systems Inc. (Adobe) and NEC Electronics, to develop embedded printer controller and digital imaging technology. As one of only a handful of authorized Adobe-Registered Trademark- PostScript-Registered Trademark-Development Partners, ITEC produces printer controllers that provide modularity, and performance advantages for its OEM customers. ITEC's customers also benefit by outsourcing their engineering development and manufacturing to ITEC, thus achieving faster time-to-market. Imaging Technologies Corporation (NASDAQ: ITEC) was incorporated in March, 1982 under the laws of the State of California, and reincorporated in May, 1983 under the laws of the State of Delaware. The Company's principal executive offices are located at 11031 Via Frontera, San Diego, California 92127. The Company's main phone number is (619) 613-1300. 2 MARKET OVERVIEW ITEC's principal markets encompass many aspects of digital imaging, printing and image storage technology. The Company's primary market segments include digital memory storage, used to capture and transfer the image from the digital camera to a computer for manipulation and placement; image management technology to control the function of the printer or digital copier; as well as digital printers and proofing devices that take the image to the plate making stage. Throughout the imaging process, color integrity is an important underlying requirement. Factors that the Company believes will influence these markets in the future include the widespread use of color applications at the desktop, demand for higher quality color reproduction, expanded use of the Internet for document dissemination, growth of office networks and the increased acceptance and use of digital photography. The desktop color laser printer market is a rapidly-growing segment of the computer printing industry. The total color laser market grew 42% from 1996 to 1997, and International Data Corporation ("IDC") estimates that the shipments of desktop color laser printers are expected to grow at a 1997-2002 compound annual growth rate of 56%. The Company believes this is largely due to increased user education on the benefits of color in office documents and the availability of higher quality, easier to use, lower priced desktop color laser printers. In 1997, the color laser printer market was made up of 78% desktop color laser printer shipments, and 21% color laser copier shipments. IDC estimates that by 2002, desktop color laser printer shipments are expected to increase to 91% of the total and that total printer shipments in the US are expected to reach 22 million units. Changes in the technology of document creation, management, production and transmittal are transforming the imaging market. The growth of networks, the increased availability and dissemination of documents on the Internet, and the rapid adoption of color at the desktop have significantly changed the way printing and document management is being administered. In just a few short years, the market has gone from dedicated printers and scanners at the workstation, to a document workflow with network shared imaging solutions and remote document delivery and distribution. "Print and Distribute" has given way to "Distribute and Print". Imaging professionals are dealing with an increasingly complex and distributed workflow. Powerful authoring applications enable the creation of documents, the components of which originate from multiple locations around the world. Adobe Systems' Acrobat-Registered Trademark- Portable Document Format (PDF)-Registered Trademark- and PostScript-Registered Trademark- printing technologies are becoming increasingly important elements in the document imaging workflow due to their ability to improve the efficiency of digital master document transmission and the reliability of printing at remote locations. As large corporations master the challenges of image and document management, the resultant solutions trickle down to small business and the home office environment. The transition from traditional film-based photography to digital technologies is driving a revolution in photographic imaging. This revolution is producing rapid growth in the use of digital products and tools. Today there are about 120 different digital still cameras on the market for under $1,000. ITEC believes that the overriding demands of the imaging market are for higher resolution, faster printing, easier and more consistent color rendering, and a reduced dependence on device specific applications. In the future, imaging productivity will drive the market as customers shift from the current print and distribute mode, to an on-demand global distribute and print environment. BUSINESS STRATEGY The Company's mission is to be a global market leader in digital imaging by delivering higher-quality, easier to use solutions and engineering greater value into each product. ITEC is focused on the continued development and manufacturing of advanced integrated digital imaging solutions. The primary products ITEC is targeting include embedded printer controller technology for non-impact printers (laser, dye-sublimation and ink jet); external digital print controllers and print servers for the Print-On-Demand market; specialized printers and digital proofers for the graphics and publishing markets, and other niche business applications; color management software products; and data storage modules for digital imaging. PRINTER CONTROLLER PRODUCTS ITEC's core intelligence is in the design, development, and integration of digital printing controller technology. The printer controller manages the intelligent functions of the modern laser or other non- 3 impact printer. The controller is a powerful image management microcomputer that directs the output functions of the printer, including the layout, form, font, and function of the printed image. ITEC engineers and manufactures embedded imaging controllers for original equipment manufacturers (OEMs). ITEC's customers benefit by outsourcing their engineering development and manufacturing, thus achieving faster time-to-market. In an age of constantly changing technology, the ability to achieve faster time-to-market is critical to product success. ITEC has established relationships with leading OEMs around the world and with Adobe Systems, Inc. As one of only three independent authorized Adobe-Registered Trademark- PostScript-Registered Trademark-Development Partners, ITEC has the ability to embed the core technology of PostScript into every image management product. Adobe-Registered Trademark- PostScript-Registered Trademark- is the most widely accepted printing and imaging technology for corporations, publishers, and government agencies. Of all commercial publications printed, 75% are imaged on PostScript-Registered Trademark- devices. These include monochrome and color printers, imagesetters and plate making devices, as well as direct digital printing systems. The newest release, Adobe-Registered Trademark- PostScript-Registered Trademark-3-TM-, takes the PostScript standard beyond a page description language into a fully optimized printing system that addresses a broad range of new requirements in today's increasingly complex document workflow. By incorporating PostScript-Registered Trademark- technology, ITEC's controllers can deliver advanced features and universal operating environment in the digital document arena. ITEC produces a range of integrated controller solutions for printers and multifunction peripherals. The Company's new line of ImageScript-Registered Trademark- embedded imaging controllers are sold to OEM customers for integration into digital color and monochrome printers. ImageScript represents a milestone in controller technology. With true Adobe-Registered Trademark- PostScript-Registered Trademark- 3-TM- compatibility, a powerful RISC (reduced instruction set computer) processor, image enhancement coprocessors and resolution up to 1200 dpi, the ImageScript controller accommodates a wide range of new printer designs. The flexible architecture of the ImageScript controller allows the OEM customer to select from a range of options including processor speed, resolution and communication/networking connectivity. PRINT-ON-DEMAND The Print-On-Demand market is a natural extension for ITEC's technical strengths in embedded print controllers, as well as ITEC's color management technology. The combination of digital color copiers and powerful external controllers are the foundation for the Print-On-Demand movement. Where once we had photocopy machines that scanned and output one printed page at a time, today digital copy machines bypass the desktop printer in the digital workflow and go directly to reproducing quantities of collated and bound documents. The Xtinguisher-TM- line of network print servers is designed to enable printing of high-quality images on digital color copiers, as well as wide format color printers. This new line of Windows-Registered Trademark- NT-based servers incorporate Adobe-Registered Trademark- PostScript-Registered Trademark-to improve performance and enhance image quality. A single Xtinguisher-TM- server is designed to simultaneously support several copiers. Integrated into each Xtinguisher workstation is ITEC's ColorBlind-Registered Trademark- Color Management. For the monochrome digital duplicator market, ITEC produces an Adobe-Registered Trademark- PostScript-Registered Trademark- 3-TM- raster image processing (RIP) controller. This controller is sold to OEM manufacturers and integrated into digital duplicators. Unlike a copier, digital or analog, a digital duplicator creates a print master that is placed on a drum within the unit. The drum then transfers the image to the paper using lithography ink. A digital duplicator is referred to as a "stencil duplicator" or more generically as a modern day equivalent of the Mimeograph machine. Digital duplicators are used for short run printing due to significant cost savings over conventional copy machines when printing in relative volume. Primary users of digital duplicators include quick-print shops, churches, schools, and government offices. ITEC's digital duplicator controller has a universal architecture that allows it to manage the output functions of a wide range of duplicator products produced by most of the major manufacturers. DIGITAL PRINTERS ITEC's new line of laser printers are network compatible and incorporate Adobe-Registered Trademark- PostScript-Registered Trademark- 3-TM- technology to provide higher performance, enhanced image quality, and advanced page processing. 4 Under the ITEC and NewGen brand names, the Company sells an expanding range of products in both monochrome and color. The Company's product strategy is to produce higher-value added printers that meet the more exacting requirements of specialized segments of the market. The ColorImage-Registered Trademark- 2400 color laser printers feature proprietary printer controller technology and color management software developed by ITEC. With resolution up to 1200 dpi, a powerful RISC processor, a special image enhancement chip, and a precision toner delivery system, these printers are designed to produce quick, convenient color or monochrome output in the business or technical office environment. The ColorImage-Registered Trademark- lasers are the first of a new generation that integrate ITEC's key technical strengths in image enhancement and placement, embedded controller function, and color management and represent the Company's first entry into the office color market. The new LaserImage-TM- 1200 series of laser printers are designed to quickly produce full-bleed proofs for pre-press and graphic arts applications. These printers are a workgroup solution for quickly printing complex documents or high volumes. LaserImage-TM- 1200 printers feature Adobe-Registered Trademark- PostScript-Registered Trademark- 3-TM- with a RISC processor-based controller technology designed and engineered by ITEC. These printers are available in a number of network compatibility and paper size configurations to satisfy specific prepress proofing and workgroup requirements. In the digital prepress market, ITEC's ColorImage-Registered Trademark- 3120 is designed to provide accurate color prepress proofs. The ColorImage-Registered Trademark- 3120 is a dual technology (dye-sublimation and thermal) continuous tone color printer which is capable of producing full bleed tabloid/A3 sized (12.4" x 19.8") output of digital color comps and proofs for computer-to-plate and direct-to-press applications as well as photo-realistic renderings. The color output on the ColorImage-Registered Trademark- 3120 is highly accurate and repeatable. ITEC is expanding its product offerings in the digital photographic market with its next generation digital color photographic printer. The ColorImage-Registered Trademark- 3000 is a dye-sublimation color printer that produces continuous tone color images targeted for the mid-to-high-end digital photography market. The ColorImage-Registered Trademark- 3000 delivers digital photographs with the look and feel of traditional glossy photographs. Precise control of the thermal printing combines with a new high-density ink to produce vivid saturated colors, smooth gradations, and print-to-print color uniformity. COLOR MANAGEMENT Easy to use, predictable and consistent, color is one of the largest single problems facing the imaging industry. The way different devices deal with color is referred to as the color space. Unfortunately the color space for printed materials (CMYK: cyan, magenta, yellow and black) is different from the color space for devices such as cameras, scanners and monitors (RGB: red, green, blue). Because these color spaces are different in size and the colors they contain, a color management system is needed so users can convert their files for use with the different devices. Conversion among color spaces is typically performed by a color management method (CMM). But the CMM must know something about the characteristics of each device to perform the color management as accurately as possible. The varying characteristics of each device are captured in a device profile. The ICC - International Color Consortium - has established a standard for the format for these ICC profiles. ITEC's ColorBlind-Registered Trademark- Color Management software is a suite of applications, utilities and tools that allows users to precisely profile each device in the color workflow including scanners, monitors, digital cameras, printers and other specialized digital color input and output devices. Devices are profiled in conformance with the internationally accepted ICC standards. Once profiled, ColorBlind balances these profiles to produce accurate, consistent and reliable color rendering from input to output. "ColorBlind Aware" is being recognized as an industry standard for color accuracy, as printer scanner and monitor manufacturers integrate ColorBlind's Color Management resources into product designs. ColorBlind is sold as a standalone application or licensed by OEM's for resale in conjunction with peripherals. DIGITAL IMAGE STORAGE Continued expansion of the digital photographic market creates increasing opportunities for ITEC's "dfilm-TM-" (digital film) line of digital photographic storage products and accessories. As consumers use and share their digital pictures, demand increases for the digital media to quickly transfer the image from the camera to the computer or printer for hardcopy output. ITEC manufactures a range of digital imaging storage products to fit most of the digital cameras on the market today. 5 "dfilm-TM-" is the equivalent of traditional chemical-based film in the new generation of digital cameras. The "dfilm-TM-" products feature Flash memory modules for high-speed transfer of stored images and data. The "dfilm" modules also have applications in many portable devices such as handheld personal computers running the Windows CE-Registered Trademark- operating system. OPERATIONS EXPANDED INTERNATIONAL PRESENCE. The Company intends to pursue international markets as key avenues for growth and to increase the percentage of sales generated in international markets. In Fiscal 1998, 1997, and 1996, sales outside the United States represented approximately 56%, 57% and 81% of the Company's net sales, respectively. In 1998, the Company established a European Headquarters to facilitate its European sales operations. Located in Bracknell, Berkshire, near London, ITEC Europe provides both sales and support functions to customers within the UK, European Community (EC) and Eastern European Block for ITEC's printer and imaging products. In addition, at the close of Fiscal 1998, ITEC acquired the European-based assets and operations of AMT. AMT was the European sales and distribution arm of Singapore-based Lam Soon, manufacturer of dot matrix, laser and inkjet printers and plotters for specialized applications. The Company expects export sales to continue to represent a significant portion of its sales. International sales and operations are subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, currency exchange fluctuations, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations and collecting accounts receivable. In addition, the laws of certain countries do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. As the Company continues to expand its international business, there can be no assurance that these factors will not have an adverse effect on the Company. MARKETING AND DISTRIBUTION CHANNELS ITEC's products are marketed and sold through an established distribution channel of value-added resellers (VARS), manufacturer's representatives, retail vendors, and systems integrators. ITEC has a network of dealers and distributors in the United States and Canada, in the EC and on the European Continent, as well as a growing number of resellers in Africa, Asia, the Middle East, Latin America, and Australia. ITEC supports its worldwide distribution network and end-user customers through centralized manufacturing, distribution, and repair operations headquartered in San Diego, which serve North and South America, the Pacific Rim and Asia. In addition, ITEC Europe, located in a suburb of London, manages distribution and service for customers in Europe, Africa and the Middle East. As of June 30, 1998, the Company directly employed 32 individuals involved in marketing and sales activities. The sales and marketing operation is headquartered in ITEC's Silicon Valley offices in Northern California. The Company's sales are principally made through distributors which may carry competing product lines. Such distributors could reduce or discontinue sales of the Company's products which could have a material adverse effect on the Company's financial condition and results of operations. There can be no assurance that these independent distributors will devote the resources necessary to provide effective sales and marketing support of the Company's products. In addition, the Company is dependent upon the continued viability and financial stability of these distributors, many of which are small organizations with limited capital. These distributors, in turn, are substantially dependent on general economic conditions and other unique factors affecting the Company's markets. The Company believes that its future growth and success will continue to depend in large part upon its distribution channels. There can be no assurance that actual bad debts from the Company's distributors will not exceed recorded allowances resulting in a material adverse effect on the Company. To expand its distribution channels, the Company has entered into select OEM arrangements that allow it to address specific market segments or geographic areas. In order to prevent inventory write-downs, to the extent that OEM customers do not purchase products as anticipated, the Company may need to convert such products to make them salable to other customers. PRODUCTION AND SOURCES OF SUPPLY ITEC presently outsources the production of most of its manufactured products through a number of vendors located in Northern and Southern California. These vendors assemble products, utilizing components purchased by the Company from other sources or from their own internal inventory. The terms of supply contracts are negotiated separately in each instance. The Company believes that its present vendors have sufficient capacity to meet projected market demand for the Company's products or that alternate production sources are available without undue disruption. ITEC has not experienced any difficulty over the past several years in engaging contractors or in purchasing components. ITEC's contract vendors generally perform multi-step quality control testing prior to shipping their products to the Company. ITEC, in turn, includes appropriate software, performs additional tests on the products, then packages and ships products into the distribution channels. In addition to buying such items as printed circuit boards and other components from outside vendors, the Company purchases and/or licenses software programs, including operating systems and intellectual property modules (pre-written software code to execute a specifically defined operation). ITEC purchases these products from vendors who have licenses to sell such software to the Company from the originators of such software, and has, from time to time, directly licensed system software that is either embedded or otherwise incorporated in certain ITEC products. While most components are available locally from multiple vendors, certain components used in the Company's products are only available from single sources. Although alternate suppliers are readily available for many of these components, for some components the process of qualifying replacement suppliers, replacing tooling or ordering and receiving replacement components could take several months and cause substantial disruption to the Company's operations. Any significant increase in component prices or decrease in component availability could have a material adverse effect on the Company. RESEARCH AND DEVELOPMENT The markets for the Company's products are characterized by rapidly evolving technology, frequent new product introductions and significant price competition. Consequently, short product life cycles and reductions in unit selling prices due to competitive pressures over the life of a product are common. The Company's future success will depend on its ability to continue to develop and manufacture competitive products and achieve cost reductions for its existing products. In addition, the Company monitors new technology developments and coordinates with suppliers, distributors and dealers to enhance existing products and lower costs. Advances in technology will require increased investment to maintain the Company's market position. The Company's financial condition and results of operations could be adversely affected if the Company is unable to develop and manufacture new, competitive products in a timely manner. COMPETITION The markets for the Company's products are highly competitive and rapidly changing. Some of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company's ability to compete in its markets depends on a number of factors within and outside its control, including the success and timing of product introductions by the Company and its competitors, selling prices, product performance, product distribution, marketing ability and customer support. A key element of the Company's strategy is to provide competitively priced, quality products. There can be no assurance that the Company's products will continue to be competitively priced. The Company has reduced prices on certain of its products in the past and will likely continue to do so in the future. Price reductions, if not offset by similar reductions in product costs, will affect gross margins and may adversely affect the Company's financial condition and results of operations. See "Risks and Uncertainties--Short Product Lives and Technological Change" and "Business--Competition." 6 INTELLECTUAL PROPERTY ITEC's software products, hardware designs, and circuit layouts are copyrighted. However, copyright protection does not prevent other companies from emulating the features and benefits provided by the Company's software, hardware designs or the integration of the two. The Company protects its software source code as trade secrets and makes its Company proprietary source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints. In many product hardware designs, the Company develops application-specific integrated circuits (ASICs) which encapsulate proprietary technology and are installed on the circuit board. This can serve to significantly reduce the risk of duplication by competitors, but in no way ensures the complete lack of potential for a competitor to replicate a feature or the benefit in a similar product. The Company currently holds no patents. Because computer and printer imaging technology is such a rapidly changing business environment, the Company believes the effectiveness of patents, trade secrets, and copyright protection are less important in influencing long term success than the experience of the Company's technical team, contractual relationships, and a continuous focus on technical advancement. The Company has obtained U.S. registration for several of its trade names or trademarks, including: PCPI, NewGen, ColorBlind, LaserImage, ColorImage, ImageScript, ImageFont, ImagePress, and ImageNet. These trade names are used to distinguish the Company's products in the marketplace. Pending trademarks for which registration is currently being sought include: dfilm, Xtinguisher, ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP. From time to time, certain competitors have asserted patent rights relevant to the Company's business. The Company expects that this will continue. The Company carefully evaluates each assertion relating to its products. If the Company is not successful in establishing that asserted rights have not been violated, the Company could be prohibited from marketing the products that incorporate such technology. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against the Company. If the Company's products should be found to infringe upon the intellectual property rights of others, the Company could be enjoined from further infringement and be liable for any damages. The Company relies on a combination of trade secret, copyright and trademark protection and non-disclosure agreements to protect its proprietary rights. There can be no assurance, however, that the measures adopted by the Company for the protection of its intellectual property will be adequate to protect its interests, or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. PERSONNEL RESOURCES Imaging Technologies Corporation employed a total of 124 individuals worldwide as of June 30, 1998. None of ITEC's employees are represented by any union. Of this number 14 are involved in corporate administration and finance, 56 are in engineering and research and development, 13 are in manufacturing operations, 32 are in sales and marketing and 9 are in technical support. Of that number, ITEC's European Headquarters employed 10 individuals. RISKS AND UNCERTAINTIES FUTURE CAPITAL NEEDS There can be no assurance with respect to the Company's future profitability or revenue growth. Losses may occur on a quarterly or annual basis for a number of reasons outside the Company's control. See "Potential Fluctuation in Quarterly Performance." The growth of the Company's business will require the commitment of substantial capital resources. If funds are not available from operations, the Company will need additional funds. The Company may seek such additional funding through public and private financing, including debt or equity financing. Adequate funds for these purposes, whether through financial markets or from other sources, may not be available when needed or, if available, not on terms acceptable to the Company. Insufficient funds may require the Company to delay, reduce or eliminate some or all of its planned activities. POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE The Company's quarterly operating results can fluctuate significantly depending on factors such as the timing of product announcements and subsequent introductions of products by the Company and its competitors, availability and cost of components, timing of shipments of the Company's products, mix of product families shipped, market acceptance of new products, seasonality, currency fluctuations, changes in prices by the Company and its competitors, and price protection for selling price reductions offered to distributors and OEMs. In addition, the timing of expenditures for staffing and related support costs, advertising, trade show attendance, promotion, research and development expenditures, and, of course, changes in general economic conditions can impact quarterly performance. Any one of these factors could have a material adverse effect on the Company's results of operations. The Company may experience significant quarterly fluctuations in total revenues as well as operating expenses with respect to future new product introductions. In addition, the Company's component purchases, production and spending levels are based upon forecast demand for the Company's products. Accordingly, any inaccuracy in forecasting could adversely affect the Company's financial condition and results of operations. Demand for the Company's products could be adversely affected by a slowdown in the overall demand for computer systems, printer products or digitally printed images. The Company's failure to complete shipments during a quarter could have a material adverse effect on the Company's results of operations for that quarter. Quarterly results are not necessarily indicative of future performance for any particular period. HIGHLY COMPETITIVE INDUSTRY The markets for the Company's products are highly competitive and rapidly changing. Some of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company's ability to compete in its markets depends on a number of factors within and outside its control, including the success and timing 7 of product introductions by the Company and its competitors, selling prices, product performance, product distribution, marketing ability and customer support. A key element of the Company's strategy is to provide competitively priced, quality products. There can be no assurance that the Company's products will continue to be competitively priced. The Company has reduced prices on certain of its products in the past and will likely continue to do so in the future. Price reductions, if not offset by similar reductions in product costs, will affect gross margins and may adversely affect the Company's financial condition and results of operations. See "Short Product Lives and Technological Change." SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE The markets for the Company's products are characterized by rapidly evolving technology, frequent new product introductions and significant price competition. Consequently, short product life cycles and reductions in unit selling prices due to competitive pressures over the life of a product are common. The Company's future success will depend on its ability to continue to develop and manufacture competitive products and achieve cost reductions for its existing products. In addition, the Company monitors new technology developments and coordinates with suppliers, distributors and dealers to enhance existing products and lower costs. Advances in technology will require increased investment to maintain the Company's market position. The Company's financial condition and results of operations could be adversely affected if the Company is unable to develop and manufacture new, competitive products in a timely manner. DEVELOPING MARKETS AND APPLICATIONS The markets for the Company's products are relatively new and are still developing. The Company believes that there has been growing market acceptance for color printers and related technologies and supplies. There can be no assurance that such markets will continue to grow. Other technologies are constantly evolving and improving. There can be no assurance that products based on these other technologies will not have a material adverse effect on the demand for the Company's products. DEPENDENCE ON ADOBE RELATIONSHIP The Company's relationship with Adobe as an authorized Co-development Partner to implement the inclusion of Adobe's PostScript language on printer controllers and in software products is an integral part of its business strategy. There can be no assurance that this relationship will be successful or that it will remain in force for some time to come. Loss of the Adobe relationship could have a substantial negative effect on future revenues. DEPENDENCE UPON SUPPLIERS At present, many of the Company's products use technology licensed from outside suppliers. The Company relies heavily on Adobe for upgrades and support of the PostScript language. In the case of its font products, the Company licenses such fonts from outside suppliers, including Adobe, who also own the intellectual property rights to such fonts. The reliance on third-party suppliers involves risk, including limited control over potential hardware and software incompatibilities with the Company's products. Furthermore, there can be no assurance that all of the suppliers of products marketed by the Company will continue to license their products to the Company indefinitely, or that these suppliers will not license to other companies simultaneously. RISKS RELATED TO ACQUISITIONS During Fiscal 1998, ITEC made a number of acquisitions to complement its technical position in the imaging market. CSI, a producer of color management software was acquired in a stock transaction. McMican, a two-year-old manufacturer of digital memory products for data storage and exchange between digital cameras and imaging systems was acquired in a stock transaction. ITEC also acquired the assets of AMT, the European sales and distribution subsidiary of Singapore-based Lam Soon. AMT had been ITEC's master stocking distributor of printers and supplies in the EC and on the European Continent. The Company's future performance will depend in part on its ability to integrate and grow these acquired businesses. Acquisitions involve a number of risks, including: the integration of acquired products and technologies in a timely manner; the integration of businesses and employees with the Company's business; the management of geographically-dispersed operations; adverse effects on the Company's reported operating results from acquisition-related charges and amortization of goodwill; potential increases in stock compensation expense and increased compensation expense resulting from newly-hired employees; the diversion of management attention; the assumption of unknown liabilities; potential disputes with the sellers of one or more acquired entities; the inability of the Company to maintain customers or goodwill of an acquired business; the need to divest unwanted assets or products; and the 8 possible failure to retain key acquired personnel. Client satisfaction or performance problems with an acquired business could also have a material adverse effect on the reputation of the Company as a whole, and any acquired business could significantly under perform relative to the Company's expectations. The Company is currently facing all of these challenges and its ability to meet them over the long term has not been established. As a result, there can be no assurance that the Company will be able to integrate acquired businesses, products or technologies successfully or in a timely manner in accordance with its strategic objectives, which could have a material adverse effect on the Company. In order to grow its business, the Company may continue to acquire businesses that it believes are complementary. The successful implementation of this strategy depends on the Company's ability to identify suitable acquisition candidates, acquire such companies on acceptable terms, integrate their operations and technology successfully with those of the Company, retain existing customers and maintain the goodwill of the acquired business. There can be no assurance that the Company will be able to identify additional suitable acquisition candidates, acquire any such candidates on acceptable terms, integrate their operations or technology successfully, or retain customers or maintain the goodwill of the acquired business. Moreover, in pursuing acquisition opportunities, the Company may compete for acquisition targets with other companies with similar growth strategies. Some of these competitors may be larger and have greater financial and other resources than the Company. Competition for these acquisition targets likely could also result in increased prices of acquisition targets and a diminished pool of companies available for acquisition. In addition, the Company would likely face the same integration issues described above with respect to any future acquisitions. If the Company is unable to manage internal or acquisition-based growth effectively, the Company would be materially and adversely affected. Due to all of the foregoing, the Company's execution on an acquisition strategy or any individual completed or future acquisition may have a material adverse effect on the Company. In addition, if the Company issues equity securities as consideration for any future acquisitions, existing stockholders will experience further ownership dilution and such equity securities could have rights, preferences, privileges or other rights superior to those of the Common Stock. See "--Future Capital Needs," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The success of the Company is dependent, in part, on its ability to attract and retain qualified management and technical personnel. Competition for such personnel is intense, and the inability to attract additional key employees or the loss of one or more key employees could adversely affect the Company. There can be no assurance that the Company will retain its key personnel. COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES ITEC presently outsources the production of most of its manufactured products through a number of vendors located in California. These vendors assemble products, utilizing components purchased by the Company from other sources or from their own internal inventory. The terms of supply contracts are negotiated separately in each instance. The Company believes that its present vendors have sufficient capacity to meet projected market demand for the Company's products or that alternate production sources are available without undue disruption. ITEC has not experienced any difficulty over the past several years in engaging contractors or in purchasing components. ITEC's contract vendors generally perform multi-step quality control testing prior to shipping their products to the Company. ITEC, in turn, includes appropriate software, performs additional tests on the products, then packages and ships products into the distribution channels. In addition to buying such items as printed circuit boards and other components from outside vendors, the Company purchases and/or licenses software programs, including operating systems and intellectual property modules (pre-written software code to execute a specifically defined operation). ITEC purchases these products from vendors who have licenses to sell such software to the Company from the originators of such software, and has, from time to time, directly licensed system software that is either embedded or otherwise incorporated in certain ITEC products. While most components are available locally from multiple vendors, certain components used in the Company's products are only available from single sources. Although alternate suppliers are readily available for many of these components, for some components the process of qualifying replacement suppliers, replacing tooling or ordering and receiving replacement components could take several months and cause substantial disruption to the Company's operations. Any significant increase in component prices or decrease in component availability could have a material adverse effect on the Company. 9 POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS The Company's software products, hardware designs, and circuit layouts are copyrighted. However, copyright protection does not prevent other companies from emulating the features and benefits provided by the Company's software, hardware designs or the integration of the two. The Company protects its software source code as trade secrets and makes its Company proprietary source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints. In many product hardware designs, the Company develops ASICs which encapsulate proprietary technology and are installed on the circuit board. This can serve to significantly reduce the risk of duplication by competitors, but in no way ensures the complete lack of potential for a competitor to replicate a feature or the benefit in a similar product. The Company currently holds no patents. Because computer and printer imaging technology is such a rapidly changing business environment, the Company believes the effectiveness of patents, trade secrets, and copyright protection are less important in influencing long term success than the experience of the Company's technical team, contractual relationships, and a continuous focus on technical advancement. The Company has obtained U.S. registration for several of its trade names or trademarks, including: PCPI, NewGen, ColorBlind, LaserImage, ColorImage, ImageScript, ImageFont, ImagePress, and ImageNet. These trade names are used to distinguish the Company's products in the marketplace. Pending trademarks for which registration is currently being sought include: dfilm, Xtinguisher, ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP. From time to time, certain competitors have asserted patent rights relevant to the Company's business. The Company expects that this will continue. The Company carefully evaluates each assertion relating to its products. If the Company is not successful in establishing that asserted rights have not been violated, the Company could be prohibited from marketing the products that incorporate such technology. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against the Company. If the Company's products should be found to infringe upon the intellectual property rights of others, the Company could be enjoined from further infringement and be liable for any damages. The Company relies on a combination of trade secret, copyright and trademark protection and non-disclosure agreements to protect its proprietary rights. There can be no assurance, however, that the measures adopted by the Company for the protection of its intellectual property will be adequate to protect its interests, or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. INTERNATIONAL OPERATIONS The Company conducts business globally. Accordingly, the Company's future results could be adversely affected by a variety of uncontrollable and changing factors including foreign currency exchange rates; regulatory, political or economic conditions in a specific country or region; trade protection measures and other regulatory requirements; government spending patterns; and natural disasters, among other factors. In Fiscal 1998, the Company experienced contract cancellations and the write-off of significant receivables related to continuing economic deterioration in foreign countries, particularly in Asian countries. Any or all of these factors could have a material adverse impact on the Company's future international business in these or other countries and on the Company's financial condition and results of operations. DEPENDENCE ON EXPORT SALES The Company intends to pursue international markets as key avenues for growth and to increase the percentage of sales generated in international markets. In Fiscal 1998, 1997, and 1996, sales outside the United States represented approximately 56%, 57% and 81% of the Company's net sales, respectively. In 1998, the Company established a European Headquarters to facilitate its European sales operations. Located in Bracknell, Berkshire, near London, ITEC Europe provides both sales and support functions to customers within the United Kingdom, EC and Eastern European Block for ITEC's printer and imaging products. In addition, at the close of Fiscal 1998, ITEC acquired the European-based assets and operations of AMT. AMT was the European sales and distribution arm of Singapore-based Lam Soon, manufacturer of dot matrix, laser and inkjet printers and plotters for specialized applications. The Company expects export sales to continue to represent a significant portion of its sales. International sales and operations are subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, currency exchange fluctuations, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations and collecting accounts receivable. In addition, the laws of certain countries do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. As the Company continues to expand its international business, there can be no assurance that these factors will not have an adverse effect on the Company. RELIANCE ON INDIRECT DISTRIBUTION The Company's products are marketed and sold through an established distribution channel of VARs, manufacturer's representatives, retail vendors, and systems integrators. ITEC has a network of dealers and distributors in the United States and Canada, in the EC and on the European Continent, as well as a growing number of resellers in Africa, Asia, the Middle East, Latin America, and Australia. ITEC supports its worldwide distribution network and end-user customers through centralized manufacturing, distribution, and repair operations headquartered in San Diego, which serve North and South America, the Pacific Rim and Asia. In addition, ITEC Europe Ltd., located in a suburb of London, manages distribution and service for customers in Europe, Africa and the Middle East. As of June 30, 1998, the Company directly employed 32 individuals involved in marketing and sales activities. The sales and marketing operation is headquartered in ITEC's Silicon Valley offices in Northern California. The Company's sales are principally made through distributors which may carry competing product lines. Such distributors could reduce or discontinue sales of the Company's products which could have a material adverse effect on the Company's financial condition and results of operations. There can be no assurance that these independent distributors will devote the resources necessary to provide effective sales and marketing support of the Company's products. In addition, the Company is dependent upon the continued viability and financial stability of these distributors, many of which are small organizations with limited capital. These distributors, in turn, are substantially dependent on general economic conditions and other unique factors affecting the Company's markets. The Company believes that its future growth and success will continue to depend in large part upon its distribution channels. There can be no assurance that actual bad debts from the Company's distributors will not exceed recorded allowances resulting in a material adverse effect on the Company's financial condition and results of operations. To expand its distribution channels, the Company has entered into select OEM arrangements that allow it to address specific market segments or geographic areas. In order to prevent inventory write-downs, to the extent that OEM customers do not purchase products as anticipated, the Company may need to convert such products to make them salable to other customers. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock historically has fluctuated significantly. The Company believes that factors such as general stock market trends, announcements of developments related to the Company's business, fluctuations in the Company's operating results, general conditions in the computer 10 peripheral market and the markets served by the Company or in the worldwide economy, a shortfall in revenue or earnings from securities analysts' expectations, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in patents or other intellectual property rights and developments in the Company's relationships with its customers and suppliers could cause a further significant fluctuation in the price of the Company's Common Stock. In addition, in recent years the stock market in general, and the market for shares of technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations that are unrelated to the Company's operating performance. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has procured a new business system that is year 2000 compliant and plans are to implement the new system in Quarters three and four of the 1999 fiscal year ending June 30, 1999. Management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in other computer systems improvements to be year 2000 compliant. The Company plans to devote the necessary resources to resolve significant year 2000 issues in a timely manner; however, if the Company, its customers, vendors or others with whom it does significant business are unable to resolve external processing issues in a timely manner, it could result in material adverse effect on the Company. The Company has performed an analysis of all of its products manufactured after January 1, 1997 and has determined that all such products are year 2000 compliant. This analysis covered the Company's printer controller technology, laser and dye-sublimation printers, as well as software products and computer and digital camera memory modules. The Company's printers do not currently contain any internal clock devises that monitor or recognize the change of the date and therefore the change of year from 1999 to 2000 should not effect their operation. However, software drivers are used to modify and direct the output and performance of these printers. While these drivers do not generate time-specific codes, they mirror time codes resident in the applicable operating system. In the event a modification is required to a software driver to accommodate year 2000 modifications instituted by a manufacturer of a software package, computer platform or operating system that the Company is currently supporting, the Company currently plans to update that driver free-of-charge and make it available to customers for down-loading from the Internet. ABSENCE OF DIVIDENDS No cash dividends have been paid on the Company's Common Stock to date and the Company does not anticipate paying cash dividends in the foreseeable future. ITEM 2. PROPERTIES ITEC owns no real property. The Company leases approximately 14,000 square feet of space in a facility located at 11031 Via Frontera, San Diego, California 92127, at a monthly lease rate of approximately $10,750. This facility houses corporate management and engineering offices. That lease expires on January 31, 1999. In addition, the Company leases approximately 12,000 square feet of space in a nearby facility that houses manufacturing, operations and finance located at 10966 Via Frontera, San Diego, California 92127, at a monthly lease rate of approximately $7,600. The lease expires on May 31, 1999. ITEC operates a software research and development center in Cardiff, California. The Company leases approximately 3700 square feet of space located at 120 Birmingham Drive, Cardiff, California 92007, at a monthly lease rate of approximately $6,400. The lease expires on November 30, 1998. Adjacent to that 11 facility, at 2053 San Elijo Avenue, Cardiff, California 92007, the Company leases approximately 2600 square feet of space at a monthly lease rate of approximately $2800. The lease expires on June 30, 1999. ITEC operates a memory product development and sales office in Newport Beach, California. The Company leased approximately 1,200 square feet of space located at 120 Newport Center Drive, Suite 245, Newport Beach California. The monthly lease rate is approximately $2,400. The lease expires on October 31, 1999. In Northern California, ITEC leases approximately 5,000 square feet of space in a facility located at 3350 Scott Boulevard, Building No. 7, Santa Clara, California 95054, at a monthly lease rate of $5,800. This facility houses sales and marketing staff. The lease expires on June 30, 2002. ITEC's European headquarters, ITEC Europe Ltd., leases approximately 3,000 square feet in a facility located outside London, England, The address is ITEC House, Unit 9 Milbanke Court, Milbanke Way, Bracknell Berkshire RG12 1RP. This facility houses sales, distribution and technical support personnel. The monthly lease rate is U.S. $5,600 and it expires on March 31, 2003. On April 22, 1998, the Company announced the closure of ITEC's printer manufacturing, distribution and sales operations in Costa Mesa, California. That facility encompassed approximately 27,000 square feet of space located at 3545-A Cadillac Avenue, Costa Mesa, California 92626. The plant was closed at lease expiration on July 31, 1998. The monthly lease rate was $13,900. The equipment and operations at the Costa Mesa site were relocated to a facility adjacent to the corporate headquarters in San Diego. ITEM 3. LEGAL PROCEEDINGS The Company, because of the nature of its business, is from time to time threatened or involved in legal actions. The Company, does not believe any of the legal actions now pending against the Company will result in a material adverse effect on the Company and, further, does not consider that any such proceedings fall outside ordinary, routine litigation incidental to the business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market, and quoted on The Nasdaq Small Cap Market (symbol: ITEC). The following table sets forth the high and low bid quotations of the Company's Common Stock for the periods indicated as reported by The Nasdaq Small Cap Market or NASD electronic bulletin board. Prices shown in the table represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission, and do not necessarily represent actual transactions and reflect the 1-for-5 reverse stock split effectuated by the Company on February 24, 1997.
High Low ------------------------------------------------------- Year ended June 30, 1996 First quarter $ 2.50 $ 1.25 Second quarter 2.65 .90 Third quarter 4.70 1.90 Fourth quarter 12.80 3.75 Year ended June 30, 1997 First quarter $ 11.88 $ 7.50 Second quarter 10.00 4.69 Third quarter 5.94 4.37 Fourth quarter 7.13 3.25 Year ended June 30, 1998 First quarter $ 7.19 $ 5.50 Second quarter 6.69 4.25 Third quarter 4.63 2.75 Fourth quarter 4.19 2.25
The number of holders of record of the Company's Common Stock, $.005 par value, was approximately 3,000 at June 30, 1998. ITEC has never declared, or paid, any cash dividends on ITEC's Common Stock. ITEC currently intends to retain earnings, if any, after any payment of dividends on its 5% Convertible Preferred Stock, for use in its business and therefore, does not anticipate paying any cash dividends on ITEC's Common Stock. Holders of the 5% Convertible Preferred Stock are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $50.00 per share, payable semi-annually, and commencing on October 15, 1986. ITEC has never declared, or paid any cash dividends on ITEC's 5% Convertible Preferred Stock. Dividends in arrears at June 30, 1998 were $497,000. 13 ITEM 6. SELECTED FINANCIAL DATA The consolidated statement of operations data with respect to the years ended June 30, 1998, 1997 and 1996 and the consolidated balance sheet data at June 30, 1998, and 1997, set forth below are derived from the consolidated financial statements of the Company included in Item 8 below, which have been audited by Boros & Farrington APC, independent accountants. The selected consolidated financial data set forth (in thousands, except per share data) should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 beow, and the Company's consolidated financial statements and the notes thereto contained in Item 8 below. Historical results are not necessarily indicative of future results of operations. Statement of operations data:
1998 1997 1996* ---------------------------- NET REVENUES Sales of Product 30,740 26,081 9,522 Engineering Fees 2,327 5,860 2,379 License Fees and Royalties 1,350 296 603 ---------------------------- Net Total Revenues 34,417 32,237 12,504 COSTS & EXPENSES Cost of Products Sold 22,536 17,022 7,942 Selling, General and Administrative 10,269 10,460 3,849 Cost of Engineering & Purchased R&D 2,475 4,243 2,135 Amortization of Capitalized Software - - 233 Special Charges 8,941 - 2,058 ---------------------------- ---------------------------- INCOME (LOSS) FROM OPERATIONS (9,804) 512 (3,713) ---------------------------- NET INCOME (LOSS) (10,163) 723 (3,665) EARNING (LOSS) PER COMMON SHARE Basic $(0.90) $0.07 $(0.77) Diluted $(0.90) $0.06 $(0.77) ----------------------------
* EXCLUDES $116 OF EXTRAORDINARY GAIN ON CONVERSION OF NOTES PAYABLE Balance Sheet Data:
1998 1997 -------------------------- Cash $ 3,023 $ 255 Working capital 315 4,818 Total assets 20,961 14,075 Long-term obligations 1,828 228 Preferred stock 2,780 420 Total shareholders' equity 4,604 7,877
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Imaging Technologies Corporation develops, manufactures, and distributes high-quality digital imaging solutions. The Company produces a wide range of printer and imaging products for use in graphics and publishing, digital photography as well as other niche business and technical markets. Beginning with a core technology in the design and development of controllers for non-impact printers and multifunction peripherals, the Company has expanded its product offerings to include monochrome and color printers, external print servers, digital image storage devices, and software to improve the accuracy of color reproduction. ITEC has acquired four separate businesses during the past eighteen months that have expanded the Company's strategic position in the digital imaging market. In addition, the Company has altered its focus away from some of its traditional revenue sources and has been required to make expenditures to support these changes. As of the end of Fiscal 1998, the Company's business continues to be in a significant transitional phase and there are important short-term operational and liquidity challenges. Accordingly, year-to-year financial comparisons may be of limited usefulness now and for the next several quarters due to these important changes in the Company's business. Historically, a portion of the Company's income was derived from non-recurring engineering fees and royalty income from a relatively small number of OEM customers. Over the past three years, the Company has experienced shortfalls in income as a result of engineering contracts with OEM manufacturers for products that were never completed by the OEM, were never introduced into the market and shipped or were cancelled by the customer before ITEC completed the deliverables portion of the contract. The timing and amount of income from these customers ultimately depended on sales levels and shipping schedules for the OEM products into which the Company's products were incorporated. The Company had no control over the shipping date or volumes of products shipped by its OEM customers, and there was no assurance that any OEM would continue to ship products that incorporate the Company's technology. Failure of these OEMs to achieve significant sales of products incorporating the Company's technology and fluctuations in the timing and volume of such sales had in a materially adverse effect on the Company. The Company's current strategy is to develop and commercialize its own technology. The Company intends to increase penetration of its current target markets and to continue pursuing clearly defined commercial market opportunities that enable it to leverage its core technologies. The Company has established a number of strategic partnerships with industry leaders, such as Adobe Systems and NEC Electronics for product development, marketing and sales. Through these strategic partnerships, ITEC seeks to obtain specific market knowledge and enhanced understanding of market demands and needs, access to funding for continued product development, product and customer validation and a channel for market penetration. To execute successfully its current strategy, the Company will need to improve its working capital position. The report of the Company's independent auditors accompanying the Company's June 30, 1998 financial statements includes an explanatory paragraph indicating there is a substantial doubt about the Company's ability to continue as a going concern, due primarily to the decreases in the Company's working capital and net worth. To address the Company's working capital needs, on September 17, 1998, the Company raised an aggregate of $4.38 million through the issuance of shares of its Common Stock and subordinated notes to several private investors. While this financing improved the Company's working capital position, the Company needs to raise additional funds to operate its business effectively. The Company has recently engaged a financial advisor to assist with additional fund raising efforts and the Company intends to attempt to raise additional funds in the near future. There can be no assurance, however, that the Company will be able to complete any additional debt or equity financings on favorable terms or at all, or that any such financings, if completed, will be adequate to meet the Company's capital requirements. Any additional equity or convertible debt financings could result in substantial dilution to the Company's stockholders. If adequate funds are not available, the Company may be required to delay, reduce or eliminate some or all of its planned activities. The Company's inability to fund its capital requirements would have a material adverse effect on the Company. See "--Liquidity and Capital Resources" and "Item 1. Business--Risks and Uncertainties--Future Capital Needs." CORPORATE RESTRUCTURING Beginning in April 1998, the Company implemented a plan to realign the management and create a divisional structure within the organization. ITEC consolidated all of its independent operating subsidiaries under a single financial and operational structure. The Company undertook this restructuring based in part upon its belief that by breaking down the barriers between the subsidiaries and organizing the Company around functions the Company would be able to improve the effectiveness of its established sales channels and to enhance cross-selling opportunities. The Company also believes that this structure will improve the management and commercialization of its diverse technology base. In addition to the structural realignment, ITEC closed the 27,000 square-foot printer manufacturing and distribution facility it operated in Costa Mesa, California, at lease end, and relocated those operations to a new 12,000-square-foot facility adjacent to the Corporate Headquarters in San Diego. The Company also relocated most of its marketing and sales activities from Costa Mesa to ITEC's existing operation in the San Jose region of Northern California. By streamlining operations and locating manufacturing and distribution in one centralized plant, the Company expects to eventually realize an annualized savings of approximately $1.5 to $2 million, primarily as a result of workforce reductions, decreased factory space requirements and the elimination of redundant operations. 14 STRATEGIC ACQUISITIONS In Fiscal 1998, the Company made several strategic acquisitions to reinforce its technology position and expand sales channels. ITEC purchased privately held McMican Corporation. The new division operates as the Storage Products division of ITEC, producing specialized memory modules. McMican's "dfilm-TM-" line of data storage products feature Flash memory modules for high-speed transfer of stored images and data. "dfilm-TM-" modules have applications in portable digital cameras and many other portable devices such as handheld personal computers running the Windows CE-Registered Trademark- operating system. In fiscal 1998 ITEC merged with Color Solutions, Inc., a three-year-old software development firm located in Cardiff, California. Color Solutions' ColorBlind-Registered Trademark- software allows users to precisely profile peripherals such as scanners, monitors, digital cameras, printers and other specialized color digital devices, all based on internationally-accepted ICC color standards. Color management is a key element for the printing and graphics industry, but also color reproduction in the textile, motion picture, and ceramics industries. At the close of Fiscal 1998, ITEC acquired the assets of AMT, the European sales and distribution subsidiary of Singapore-based Lam Soon. Lam Soon is worldwide manufacturer of dot matrix, inkjet and specialized laser printers. AMT had been ITEC's master stocking distributor of printers and supplies in the EC and on the European Continent. AMT's European operations are being integrated into ITEC's recently established European Headquarters operation, ITEC Europe, located near London. SPECIAL CHARGES In the fourth quarter of fiscal 1998, the Company wrote-off contract and license receivables of approximately $5.2 million that are due from OEMs and co-developers who have been adversely affected by the downturn in the technology segment of the market and the economic crisis in Asia. In addition, the Company began to implement a restructuring plan aimed at streamlining operations and reducing costs. The restructuring plan seeks to combine and coordinate the efforts of the Company's subsidiaries, eliminate redundant functions, promote operating efficiencies, and focus resources on the new product lines. These actions resulted in a net charge of approximately $3.8 million including $1.7 million relating to redundant compensation costs; $1.5 million relating to the write-down of inventory, licenses, and other assets that are not central to the Company's core business; and $0.3 million relating to the consolidation of facilities. 15 RESULTS OF OPERATIONS REVENUES Revenues were $34.4 million, $32.2 million and $12.5 million for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. Sales of product were $30.7 million, $26.1 million and $9.5 million for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The increase in product sales from 1997 to 1998 was due primarily to an increase in sales of printer products, and the increase from 1996 to 1997 was due primarily to the Company's merger with NewGen, which commenced operations in 1997. Engineering fees were $2.3 million, $5.9 million and $2.4 million for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The decrease in 1998 compared to 1997 was primarily the result of the Company's change in strategic direction, focusing more on internal product development and sales and less on engineering for third parties. The increase in 1997 as compared to 1996 was primarily the result of several large OEM contracts in 1997. License fees and royalties were $1.4 million, $.3 million and $.6 million for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The increase from 1997 to 1998 was due primarily to the sales of a license to AMT of $1.3 million. The decrease in 1997 as compared to 1996 was primarily the result of declining royalties on older technology products. COST OF PRODUCTS SOLD Cost of products sold were $22.5 million or 73% of product sales, $17.0 million or 65% of product sales and $7.9 million or 83% of product sales for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The percentage increase in 1998 as compared to 1997 was primarily due to price reductions on older printer products and increased sales of lower margin memory products. The 1996 cost of product sold related primarily to the Prima division which has remained relatively constant as a percentage. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $10.3 million or 30% of total revenues, $10.5 million or 32% of total revenues and $3.8 million or 31% of total revenues for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. Selling, general and administrative expenses consisted primarily of salaries and commissions of sales and marketing personnel, salaries and related costs for general corporate functions, including finance, accounting, facilities and legal, advertising and other marketing related expenses, and fees for professional services. The decrease both in absolute dollars and as a percentage of net revenues in selling, general and administrative expenses in 1998 as compared to 1997 was due primarily to the reclassification of redundant costs to restructuring charges. The increase both in absolute dollars and as a percentage of net revenues in selling, general and administrative expenses in 1997 as compared to 1996 was due primarily to the additional personnel acquired in the merger with NewGen in 1997. COST OF ENGINEERING AND PURCHASED R&D Cost of engineering and purchased R&D was $2.5 million or 106% of engineering revenues, $4.2 million or 72% of engineering revenues and $2.1 million or 90% of engineering revenues for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. As a percentage of engineering revenues, the increase in fiscal 1998 over 1997 results from cost overruns on contracts that were terminated. The decrease from fiscal 1996 to 1997 results from several large OEM contracts. 16 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations primarily through cash generated from operations, debt financing, and from the sale of equity securities. In August 1997, the Company completed a private placement of 500 shares of Series C Convertible Preferred Stock providing aggregate proceeds of $5.0 million. A portion of the shares were converted by the holders and on September 18, 1998, the Company redeemed all 237 outstanding shares of the Series C Convertible Preferred Stock. The Company paid $2.23 million in cash, issued $1.0 million in subordinated promissory notes and warrants to purchase 300,000 shares of Common Stock to the holders of the Series C Convertible Preferred Stock in connection with the redemption. The Company has received and anticipates that it will continue to receive the majority of its cash from collections of accounts receivable from its customers, distributors and OEMs. These groups generally have a history of timely payments; however, an increasing amount of international sales can increase accounts receivable balances due to traditionally slower payments by international customers. In addition, the economies of certain foreign countries, particularly in Asia, have weakened recently creating greater risk of nonpayment for the Company from these areas. Any failure of the Company's customers, distributors or OEMs to pay, or any significant delay in the payment of, a material portion of the amounts owing to the Company could have a material adverse effect on the Company. As of June 30, 1998, the Company had working capital of $0.3 million a decrease of $4.5 milion as compared to June 30, 1997. The decrease is primarily the result of the private placement of increased borrowings during fiscal 1998. The Company's other principal source of liquidity at June 30, 1998, were lines of credit with Imperial Bank aggregating $7 million. Borrowing under the lines of credit at June 30, 1998 totaled $2 million. The Company also has a term loan with Imperial Bank, the principal balance of which at June 30, 1998, was $2.5 million. The lines of credit and the term loan bear interest at Imperial Bank's prime rate plus 0.75% per annum. The applicable interest rate at June 30, 1998, was 9.25%. The Company's obligations under the lines of credit and the term loan are secured by all of the Company's accounts receivable, inventories, and other assets. In September 1998, Imperial Bank ceased funding under the lines of credit and notified the Company that it intended to terminate its banking relationship with the Company. After further discussions, the Company and Imperial Bank have agreed on the principal terms of a Forbearance Agreement pursuant to which Imperial Bank would resume funding to the Company under the lines of credit and the Company would repay all outstanding indebtedness owed to Imperial Bank by January 15, 1999. The Forbearance Agreement is subject to further negotiation and the approval of senior Management at Imperial Bank and the Company's Board of Directors and there can be no assurance that such approvals will be obtained. Although the Company is in discussions with several lenders regarding new financing for the Company, there can be no assurance that the Company will secure new financing by January 15, 1999, if ever. The failure of Imperial Bank to continue to provide funding to the Company under the lines of credit or the failure of the Company to secure sufficient new financing to repay all indebtedness owed to Imperial Bank on or before January 15, 1999, would have a material adverse effect on the Company. As of June 30, 1998, the Company also had a line of credit with the Bank of Yorba Linda with a principal balance of $.4 million. The loan bears interest at prime plus 3% per annum and matured on August 13, 1998. The Company currently plans to refinance this obligation as part of the new financing it is attempting to secure. There can be no assurance, however, that the Company will be able to secure new financing to repay the Bank of Yorba Linda loan, and the Company's failure to do so could have a material adverse effect on the Company. Net cash used in operating activities increased to $7.1 million during the year ended June 30, 1998, from $4.0 million and $1.3 million during the years ended June 30, 1997 and 1996, respectively. The increase 17 from 1998 as compared to 1997 resulted primarily from the operating loss and special charges. The increase from 1997 as compared to 1996 resulted primarily from improved operating results. Net cash used in investing activities increased to $3.8 million during the year ended June 30, 1998, from $2.2 million and $0.5 million during the years ended June 30, 1997 and 1996, respectively. The increase from 1998 as compared to 1997 resulted primarily from capitalized software. The increase from 1997 as compared to 1996 resulted primarily from increased purchases of property and equipment and capitalized software. The Company has no material commitments for capital expenditures. The Company's 5% convertible preferred stock (which ranks prior to the Company's common stock), carries cumulative dividends, when and as declared, at an annual rate of $50.00 per share. The aggregate amount of such dividends in arrears at June 30, 1998, was approximately $497,000. The Company's capital requirements depend on numerous factors, including market acceptance of the Company's products, the scope and success of the Company's product development efforts, the resources the Company devotes to marketing and selling its products, and other factors. The Company anticipates that its capital requirements will increase in future periods as it continues to develop new products and increases its sales and marketing efforts. The report of the Company's independent auditors accompanying the Company's June 30, 1998 financial statements includes an explanatory paragraph indicating there is a substantial doubt about the Company's ability to continue as a going concern, due primarily to the decreases in the Company's working capital and net worth. To address the Company's working capital needs, on September 17, 1998, the Company raised an aggregate of $4.38 million through the issuance of shares of its Common Stock and subordinated notes to several private investors. While this financing improved the Company working capital position, the Company needs to raise additional funds to operate its business effectively. The Company has recently engaged a financial advisor to assist with additional fund raising efforts and the Company intends to attempt to raise additional funds in the near future. There can be no assurance, however, that the Company will be able to complete any additional debt or equity financings on favorable terms or at all, or that any such financings, if completed, will be adequate to meet the Company's capital requirements. Any additional equity or convertible debt financings could result in substantial dilution to the Company's stockholders. If adequate funds are not available, the Company may be required to delay, reduce or eliminate some or all of its planned activities. The Company's inability to fund its capital requirements would have a material adverse effect on the Company. See "Item 1. Business--Risks and Uncertainties--Future Capital Needs." 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of independent accountants 20 Consolidated balance sheets as of June 30, 1998 and 1997 21 Consolidated statements of operations for the years ended June 30, 1998, 1997, and 1996 22 Consolidated statements of shareholders' equity for the years ended June 30, 1998, 1997, and 1996 23 Consolidated statements of cash flows for the years ended June 30, 1998, 1997, and 1996 24 Notes to consolidated financial statements 25
19 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IMAGING TECHNOLOGIES CORPORATION We have audited the consolidated balance sheets of Imaging Technologies Corporation and its subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Imaging Technologies Corporation and its subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Note 1 to the financial statements describes various factors that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BOROS & FARRINGTON APC San Diego, California October 5, 1998 20 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1998 1997 Current assets Cash $ 3,023 $ 255 Accounts receivable, net 4,133 7,635 Inventories 6,287 2,348 Prepaid expenses and other 1,401 550 --------- --------- Total current assets 14,844 10,788 Property and equipment, net 1,525 1,668 Prepaid licenses 635 697 Capitalized software, net 3,655 549 Other 302 373 --------- --------- $ 20,961 $ 14,075 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Borrowings under bank lines of credit $ 5,203 $ 955 Short-term debt 1,998 200 Current portion of long-term debt 903 144 Deferred revenue - 356 Accounts payable 5,027 2,876 Accrued expenses 1,398 1,439 --------- --------- Total current liabilities 14,529 5,970 Long-term debt, less current portion 1,828 228 --------- --------- Total liabilities 16,357 6,198 --------- --------- Commitments and contingencies (note 11) Shareholders' equity Series A preferred stock, $1,000 par value, 7,500 shares authorized, 420.5 shares issued and outstanding 420 420 Series C preferred stock, $1,000 par value, 1,200 shares authorized, 236 shares issued and outstanding 2,360 - Preferred stock, $1,000 par value, 2,383 shares authorized, no shares issued and outstanding - - Common stock, $0.005 par value, 100,000,000 shares authorized; 12,402,256 shares issued and outstanding 62 53 Paid-in capital 35,859 31,368 Shareholder loans (110) (140) Accumulated deficit (33,987) (23,824) --------- --------- Total shareholders' equity 4,604 7,877 --------- --------- $ 20,961 $ 14,075 --------- --------- --------- ---------
See notes to consolidated financial statements. 21 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1998, 1997, AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997 1996 Revenues Sales of products $ 30,740 $26,081 $ 9,522 Engineering fees 2,327 5,860 2,379 Licenses and royalties 1,350 296 603 -------- ------- ------- 34,417 32,237 12,504 -------- ------- ------- Costs and expenses Costs of products sold 22,536 17,022 7,942 Selling, general, and administrative 10,269 10,460 3,849 Cost of engineering fees 2,475 4,243 2,135 Amortization of capitalized software costs - - 233 Special charges Write-off of contract and license receivables 5,157 - - Restructuring costs 3,784 - 2,058 -------- ------- ------- 44,221 31,725 16,217 -------- ------- ------- Income (loss) from operations (9,804) 512 (3,713) -------- ------- ------- Other income (expense) Interest, net (341) (87) (60) Other - 64 (4) -------- ------- ------- (341) (23) (64) -------- ------- ------- Income (loss) before income taxes and extraordinary items (10,145) 489 (3,777) Income tax benefit (expense) (18) 234 (4) -------- ------- ------- Income (loss) before extraordinary item (10,163) 723 (3,781) Extraordinary gain on conversion of notes payable (0.02 per share) - - 116 -------- ------- ------- Net income (loss) $(10,163) $ 723 $(3,665) -------- ------- ------- -------- ------- ------- Earnings (loss) per common share Basic $ (0.90) $ 0.07 $ (0.77) -------- ------- ------- -------- ------- ------- Diluted $ (0.90) $ 0.06 $ (0.77) -------- ------- ------- -------- ------- ------- Weighted average common shares 11,295 8,698 4,997 -------- ------- ------- -------- ------- ------- Weighted average common shares - assuming dilution 11,295 10,623 4,997 -------- ------- ------- -------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 22 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 1998, 1997, AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A SERIES B SERIES C PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK CAPITAL BALANCE, JULY 1, 1995 $ 2,318 $ 1,162 $ - $22 $18,206 Issuance of common stock Conversion of notes payable (58,862 shares) - - - - 102 Conversion of accounts payable (176,001 shares) - - - 1 310 Exercise of options and warrants (1,243,007 shares) - - - 6 3,362 Private sale (1,801,334 shares) - - - 9 2,516 Sale of warrants - - - - 513 Net loss - - - - - ------- ------- ------- --- ------- BALANCE, JUNE 30, 1996 2,318 1,162 - 38 25,009 Issuance of common stock Conversion of preferred stock (556,601 shares) (1,898) (1,162) - 3 3,056 Business mergers and acquisitions (2,150,000 shares) - - - 11 2,547 Exercise of options and warrants (162,993 shares) - - - 1 256 Private sale (100,000 shares) - - - - 500 Net income - - - - - ------- ------- ------- --- ------- BALANCE, JUNE 30, 1997 420 - - 53 31,368 Issuance of preferred stock (500 shares) - - 5,000 - (211) Issuance of common stock Conversion of preferred stock (958,598 shares) - - (2,640) 5 2,617 Conversion of note payable (64,516 shares) - - - - 100 Business acquisitions (240,000 shares) - - - 1 349 Exercise of options and warrants (554,530 shares) - - - 3 1,636 Collection of shareholder loans - - - - - Net loss - - - - - ------- ------- ------- --- ------- BALANCE, JUNE 30, 1998 $ 420 $ - $ 2,360 $62 $35,859 ------- ------- ------- --- ------- ------- ------- ------- --- -------
SHAREHOLDER ACCUMULATED LOANS DEFICIT TOTAL BALANCE, JULY 1, 1995 $ - $(20,882) $ 826 Issuance of common stock Conversion of notes payable (58,862 shares) - - 102 Conversion of accounts payable (176,001 shares) - - 311 Exercise of options and warrants (1,243,007 shares) (8) - 3,360 Private sale (1,801,334 shares) - - 2,525 Sale of warrants - - 513 Net loss - (3,665) (3,665) -------- -------- -------- BALANCE, JUNE 30, 1996 (8) (24,547) 3,972 Issuance of common stock Conversion of preferred stock (556,601 shares) - - (1) Business mergers and acquisitions (2,150,000 shares) (82) - 2,476 Exercise of options and warrants (162,993 shares) (50) - 207 Private sale (100,000 shares) - - 500 Net income - 723 723 -------- -------- -------- BALANCE, JUNE 30, 1997 (140) (23,824) 7,877 Issuance of preferred stock (500 shares) - - 4,789 Issuance of common stock Conversion of preferred stock (958,598 shares) - - (18) Conversion of note payable (64,516 shares) - - 100 Business acquisitions (240,000 shares) - - 350 Exercise of options and warrants (554,530 shares) (53) - 1,586 Collection of shareholder loans 83 - 83 Net loss - (10,163) (10,163) -------- -------- -------- BALANCE, JUNE 30, 1998 $ (110) $(33,987) $ 4,604 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements. 23 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998, 1997, AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997 1996 Cash flows from operating activities Net income (loss) $(10,163) $ 723 $(3,665) Adjustments to reconcile net income (loss) to net cash from operating activities Non-cash special charges 7,073 - 2,058 Extraordinary gain on conversion of notes payable - - (116) Depreciation and amortization 657 909 428 Changes in operating assets and liabilities Accounts receivable (973) (3,893) (476) Inventories (3,263) (202) 112 Prepaid expenses and other (413) 61 (156) Accounts payable and accrued expenses 338 (1,602) 191 Deferred revenue (356) (32) 361 -------- -------- ------- Net cash from operating activities (7,100) (4,036) (1,263) -------- -------- ------- Cash flows from investing activities Prepaid licenses (274) (641) (169) Capitalized software (3,106) (526) - Capital expenditures (413) (1,009) (311) Other - (36) (50) -------- -------- ------- Net cash from investing activities (3,793) (2,212) (530) -------- -------- ------- Cash flows from financing activities Capital contributions (NewGen) - 1,002 - Cash acquired from business acquisitions 40 - - Net borrowings under bank lines of credit 3,915 340 (151) Net borrowings under short-term notes payable 1,000 - (400) Net proceeds from issuance of common stock 1,586 707 5,927 Net proceeds from issuance of preferred stock 5,000 - - Stock issuance costs (229) - - Sale of warrants - - 513 Collection of shareholder loans 83 - - Issuance of long term debt 2,500 143 - Repayment of long-term debt (234) (83) (27) -------- -------- ------- Net cash from financing activities 13,661 2,109 5,862 -------- -------- ------- Net increase (decrease) in cash 2,768 (4,139) 4,069 Cash, beginning of year 255 4,394 325 -------- -------- ------- Cash, end of year $ 3,023 $ 255 $ 4,394 -------- -------- ------- -------- -------- -------
See notes to consolidated financial statements. 24 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Imaging Technologies Corporation, formerly Personal Computer Products, Inc., a Delaware corporation, and its subsidiaries ("ITEC" or the "Company") (1) develop and license laser printer technology; (2) manufacture, market, and distribute laser printer controllers and accessories; (3) market and distribute internationally a variety of personal computer accessory products; and (4) market and distribute high resolution imaging and color digital proofing products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of ITEC and its active subsidiaries, PCPI Technologies, Inc. ("PCPI"), Prima Inc. doing business as Prima International ("Prima"), NewGen Imaging Systems, Inc. ("NewGen"), AMT Accel UK Ltd. ("AMT"), McMican Corporation doing business as ITEC Memory ("McMican"), and Color Solutions, Inc. ("CSI"). All significant inter-company accounts and transactions have been eliminated. GOING CONCERN CONSIDERATIONS. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. At June 30, 1998, and for the year then ended, the Company experienced a net loss and a significant decline in working capital and net worth which raised substantial doubt about its ability to continue as a going concern. The losses have resulted primarily from losses on contract cancellations and the resulting lack of expected royalty income because the OEMs such as Panasonic, Apple Computer, Mita, Minolta, and Canon have failed to bring the end products to market. In addition, the Company has experienced relatively high operating costs due in part to redundancies and inefficiencies resulting from recent mergers and acquisitions. The Company is taking a new strategic direction whereby it will manufacture imaging products under its own name. To this end the Company has acquired increased manufacturing, selling, and distribution capabilities through key mergers and acquisitions. The Company is in the process of consolidating and restructuring these operations to conform to the new strategic plan. While management believes that these new products will be well received by the market, the Company must obtain additional funds to provide adequate working capital and finance operations. Management expects to raise these funds through a combination of debt and equity financing and is actively pursuing such matters. However, no assurance can be given that the financing will be obtained and that the Company will achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. INVENTORIES Inventories are valued at the lower of cost or market; cost being determined by the first-in, first-out method. PREPAID LICENSES Up-front payments for licenses of software are recorded as prepaid licenses. Amortization of prepaid licenses is recorded on a straight-line basis over estimated useful lives generally ranging from three to five years, commencing from the date the underlying technology is available for use by the Company. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation, including amortization of assets recorded under capitalized leases, is generally computed on a straight-line basis over the estimated useful lives of assets ranging from three to seven years. Amortization of leasehold improvements is provided over the initial term of the lease, on a straight-line basis. Maintenance, repairs, and minor renewals and betterments are charged to expense. REVENUE RECOGNITION Revenue from the sale of products is recognized as of the date shipments are made to customers. Revenue from long-term software and technology license fees is recognized once the collection is made, or is "probable" as 25 prescribed in AICPA Statement of Position 91-1 "Software Revenue Recognition," and there are no further contractual obligations under the license agreement. Royalties are recognized upon the sale of such products by the licensee. The Company currently has development contracts with original equipment manufacturers ("OEMs") to adapt the Company's software products to the OEMs' hardware products. Revenues under these contracts, including the guaranteed portion of license fees, are recognized based on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. Upon cancellation or termination of a contract, the OEM is billed for the entire guaranteed amount of contract revenue, and a provision for loss is established based on management's estimate of collectability. The Company provides for any anticipated losses on such contracts in the period in which such losses are first determinable. Unbilled receivables arise when the revenue recognized on a contract exceeds billing due to timing differences related to billing milestones as specified in the contracts. Deferred revenue represents billings in excess of costs and earned revenues on such contracts. ADVERTISING COSTS The Company expenses advertising and promotion costs as incurred. During fiscal 1998, 1997 and 1996, the Company incurred advertising and promotion costs of approximately $660, $1,056 and $215 thousand, respectively. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. Such costs have been immaterial for fiscal 1998, 1997 and 1996 as the Company has focused engineering resources on the development of technologies, which have technological feasibility, for use in OEM and Company products. CAPITALIZED SOFTWARE AND DEVELOPMENT COSTS The Company has developed software technology and capitalized certain qualifying costs pursuant to the provisions of Statement of Financial Accounting Standards No. 86 "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". The capitalized software development costs are related to software contained in laser printer controllers. Capitalized software includes emulations of existing software printer control languages currently in the marketplace, as well as software included in laser printer controllers for existing laser printers. The Company's software emulation products are generally offered in different combinations that are designed to provide more value than its competitors' products. Its printer controller products are generally designed to allow existing laser printers to operate at higher performance levels than originally configured. While the Company believes its new products will be accepted in the marketplace and that it will recover its investment in capitalized software, the ultimate realization of this investment is dependent on such acceptance and the abilities of the Company and/or OEM's to successfully market these new products. Costs incurred prior to the establishment of technological feasibility, or subsequent to the release to customers, are expensed as incurred. Capitalized software costs are amortized on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the estimated economic life of the product, generally three years. Amortization begins when the product is available for general release to customers. REVERSE STOCK SPLIT Effective February 24, 1997, the Company effected a 1 for 5 reverse stock split. Accordingly, all historical share and per share data have been restated to give effect for the reverse stock split. 25 EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) available to common shareholders (the "numerator") by the weighted average number of common shares outstanding (the "denominator") during the period. Diluted earnings (loss) per common share ("Diluted EPS") is similar to the computation of Basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt. The computation of diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net earnings (loss) per share. The following is a reconciliation of Basic EPS to Diluted EPS:
EARNINGS (LOSS) SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT JUNE 30, 1996 Net loss $ (3,665) Preferred dividends (174) --------- Basic and diluted EPS $ (3,839) 4,997 $(0.77) --------- ------ --------- ------ JUNE 30, 1997 Net income $ 723 Preferred dividends (126) --------- Basic EPS 597 8,698 $ 0.07 Effect of options and warrants - 1,837 Effective of convertible notes payable 7 64 Effect of convertible preferred stock 68 24 --------- ------ Diluted EPS $ 672 10,623 $ 0.06 --------- ------ --------- ------ JUNE 30, 1998 Net loss $ (10,163) Preferred dividends (21) --------- Basic and diluted EPS $ (10,184) 11,295 $(0.90) --------- ------ --------- ------
STOCK ISSUANCE COSTS Stock issuance costs including distribution fees, due diligence fees, wholesaling costs, legal and accounting fees, and printing are capitalized before the sale of the related stock and then charged against gross proceeds when the stock is sold. DEBT ISSUANCE COSTS Debt issuance costs are capitalized and amortization is provided over the life of the related debt using the straight-line method. STOCK-BASED COMPENSATION In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation (FAS 123"), which the Company adopted in fiscal 1997, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock option plans. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation is recognized. Information regarding the Company's pro forma disclosure of stock-based compensation pursuant to FAS 123 may be found in Note 8. FOREIGN CURRENCY TRANSLATION The Company translates the assets and liabilities of its foreign sales subsidiaries at the year-end exchange rates. Any gains and losses from the translations are credited or charged to "accumulated translation adjustment" in shareholders' equity. Such amounts were immaterial in fiscal 1998, 1997, and 1996. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed for recoverability and valuation allowances are provided, as necessary. 26 FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The carrying value of the financial instruments on the consolidated balance sheets are considered reasonable estimates of the fair value. RECENT ACCOUNTING PRONOUNCEMENTS In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which supersedes Statement of Position 91-1, "Software Revenue Recognition". SOP 97-2, and amendments thereto, provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. Retroactive application of the provisions of SOP 97-2 is prohibited. Management is currently evaluating the requirements of SOP 97-2 and the impact that adoption of SOP 97-2 will have on the financial statements of the Company. Such adoption, however, may delay the timing of revenue recognition on certain of the Company's contracts. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. An enterprise that has no items of other comprehensive income in any period presented is not required to report comprehensive income. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management does not believe that the adoption of SFAS 130 will have a material impact on the Company's financial statements. In June 1997, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. AFAS 131 is effective for fiscal years beginning after December 15, 1997. Management plans to adopt this accounting standard in fiscal 1999. Management has not yet assessed the impact that the adoption of SFAS 131 will have on the Company's financial statements. RECLASSIFICATIONS Certain prior year financial statement classifications have been reclassified to conform with the current year's presentation. NOTE 2. SPECIAL CHARGES WRITE-OFF OF CONTRACT AND LICENSE RECEIVABLES In the fourth quarter of fiscal 1998, the Company wrote-off contract and license receivables of $5,157 thousand that are due from OEMs and co-developers who have been adversely affected by the downturn in the technology segment of the market and the economic crisis in Asia. The following summarizes the nature and effect of these write-offs. AMT ACCEL UK, LTD. AMT is a European sales subsidiary formerly owned by Singapore-based Lam Soon, manufacturer of dot matrix, laser and inkjet printer and plotters for specialized application, printer manufacturer headquartered in Singapore. The Company sold to AMT an exclusive license to distribute in the United Kingdom and Europe certain Company products in return for guaranteed payments of $1.25 million. AMT and its parent company began experiencing financial difficulties and were unable to meet their obligations to the Company under the licensing agreement. Effective May 31, 1998, the Company reached a settlement with the parent whereby the Company acquired the net assets of AMT totaling $359 thousand and released AMT's parent from its contract obligations, resulting in a write-off of $891 thousand. SOFTWARE TECHNOLOGY, INC. STI is a Korean corporation who manufactures and distributes computer related products in the Asia. STI has been a longstanding customer of the Company and has acted as co-developer and representative on various projects. STI owes the Company $954 thousand, but it is unable to pay at this time due to the sharp decline in the Korean economy, which has had a significant adverse impact on its operations and financial condition. As a result, the Company wrote-off in the fourth quarter the amounts due from STI. MITA DIGITAL DESIGN, INC. AND NIPPO LTD. The Company developed for Mita a controller board that was to be used by Mita in a new multifunctional product. Mita has refused to pay amounts totaling $954 thousand under the agreement. According to a recent press release, Mita's parent company in Japan has filed for protection under bankruptcy laws. Based on this announcement, the Company believes that Mita does not currently have 27 sufficient resources to complete and market the new product and is therefor seeking to avoid its contract obligations. The company has entered into a settlement agreement with Mita which the Company currently values at $328 thousand. As a result, the remaining balance of $626 was written-off in the fourth quarter. Nippo is a Japanese corporation who acted as a co-developer on the Mita project in exchange for a share of product royalties and distribution rights. Nippo owes the Company $964 thousand under the co-development agreement, but it has refused to pay and has abandoned the laser printer business altogether. As a result, the Company wrote-off the receivable in the fourth quarter. MINOLTA COMPANY LTD. The Company had a contract with Minolta, a Japanese corporation, to develop a controller for a color laser printer product to be manufactured and sold by Minolta. Minolta terminated the contract and is disputing contract receivables of $260 thousand. In the fourth quarter, the Company wrote-off the amount due from Minolta. TOHOKU RICOH CO., LTD. Tohoku Ricoh is a Japanese corporation that entered into a technology development agreement with the Company providing for guaranteed payments of $674 thousand. Tohoku Ricoh has cancelled the contract and is disputing the amount of the guarantee. The Company believes that it is owed the full guaranteed contract amount and is pursuing collection. However, as a result of this dispute, the Company wrote-off in the fourth quarter the amount due from Tohoku Ricoh. OTHER CONTRACT RECEIVABLES. In the fourth quarter, the Company wrote-off additional contract receivables totaling $788 thousand that are past due. RESTRUCTURING OF OPERATIONS In the fourth quarter of fiscal 1998, the Company began to implement a restructuring plan aimed at streamlining operations and reducing costs. The restructuring plan seeks to combine and coordinate the efforts of the Company's subsidiaries, eliminate redundant functions, promote operating efficiencies, and focus resources on the new product lines. These actions resulted in a net charge of $3,784 thousand including $1,692 thousand relating to redundant compensation costs; $1,480 thousand relating to the write-down of inventory, licenses, and other assets that are not central to the Company's core business; and $296 thousand relating to the consolidation of facilities. In fiscal 1996, the Company reassessed the future benefit of certain "older-technology" product lines. As a result, the Company took a non-cash write-down of an aggregate of $2,058 thousand which including capitalized software of $937 thousand, prepaid licenses and royalties of $583 thousand, inventories of $204 thousand, and certain pre-paid assets of $334 thousand to reduce these assets to their net realizable value. NOTE 3. BUSINESS COMBINATIONS AMT AND MCMICAN CORPORATION Effective May 31, 1998, the Company acquired the net assets of AMT as consideration for the settlement of a license fee receivable (see Note 2). AMT, as a foreign sales subsidiary located in the United Kingdom, markets the Company's products in the European market. Effective November 24, 1997, the Company purchased the total outstanding shares of the privately-held McMican Corporation, doing business as ITEC Memory ("McMican") for 200 thousand shares of unregistered ITEC common stock. McMican produces specialized memory modules for handheld personal computers, digital cameras, and printers. The above transactions were accounted for as purchases; accordingly, the results of AMT's and McMican's operations have been included in consolidated operations from the date of acquisition. The following are the un-audited pro forma results of operations of the Company as though AMT and McMican were acquired on July 1, 1995. The proforma summary does not necessarily reflect the results of operations as they would have been had AMT and McMican been combined with the Company as of the beginning of the years ended June 30:
1998 1997 1996 Revenues $ 40,228 $ 38,811 $ 17,517 -------- -------- -------- -------- -------- -------- Net income (loss) $ (9,906) $ 1,127 $ (3,455) -------- -------- -------- -------- -------- --------
NEWGEN SYSTEMS ACQUISITION CORPORATION AND COLOR SOLUTIONS, INC. Effective November 30, 1997, Color Solutions, Inc. ("CSI") was merged into a newly created, wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, 850 thousand shares of unregistered ITEC common stock were exchanged for all of the outstanding shares of CSI. On November 30, 1997, CSI began operating as a wholly-owned subsidiary of the Company. 28 Effective February 14, 1997, the Company issued 2,150 thousand shares of unregistered ITEC common stock in exchange for all of the outstanding shares of NewGen Systems Acquisition Corporation ("NSAC"). NSAC was then merged into a newly created, wholly-owned subsidiary of the Company, NewGen Imaging Systems, Inc. ("NewGen") and was accounted for as a pooling of interests. NewGen commenced operations in July 1996 and, accordingly, no restatement of prior financial statements is required. The above mergers were accounted for as a pooling of interests. Details of the results of operations of the previously separate companies for the periods prior to combination are as follows for the years ended June 30:
1998 1997 1996 Revenues ITEC $ 33,028 $ 23,443 $ 11,621 CSI 1,389 1,604 883 NewGen - 7,190 - -------- -------- -------- Combined $ 34,417 $ 32,237 $ 12,504 -------- -------- -------- -------- -------- -------- Extraordinary item ITEC $ - $ 116 CSI - NewGen - - - -------- -------- -------- Combined $ - $ 116 -------- -------- -------- -------- -------- -------- Net Income (loss) ITEC $(10,163) $ 2,388 $ (3,613) CSI - (115) (52) NewGen - (1,550) - -------- -------- -------- Combined $(10,163) $ 723 $ (3,665) -------- -------- -------- -------- -------- --------
NewGen's net loss of $1,550 thousand during fiscal 1997 included non-recurring charges of $1,157 thousand including purchased research and development of $780 thousand and the write-down of prepaid licenses and royalties totaling $349 thousand. NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS The following summarizes certain financial statement captions at June 30:
1998 1997 Accounts receivable Trade $ 5,068 $ 3,663 Contract 458 4,979 ------- ------- 5,526 8,642 Less allowance for doubtful accounts (1,393) (1,007) ------- ------- $ 4,133 $ 7,635 ------- ------- ------- ------- Inventories Materials and supplies $ 2,081 $ 1,475 Finished goods 4,206 873 ------- ------- $ 6,287 $ 2,348 ------- ------- ------- ------- Property and equipment Computers and other equipment $ 2,529 $ 2,069 Office furniture and fixtures 516 487 Leasehold improvements 103 78 ------- ------- 3,148 2,634 Less accumulated depreciation and amortization (1,623) (966) ------- ------- $ 1,525 $ 1,668 ------- ------- ------- ------- Accrued liabilities Compensation and vacation $ 694 $ 681 Other 704 758 ------- ------- $ 1,398 $ 1,439 ------- ------- ------- -------
30 NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
1998 1997 1996 Non-cash financing activities Conversion of preferred stock into common stock $ 2,640 $3,060 $ - Conversion of notes payable into common stock 100 1,582 198 Conversion of accounts payable and accrued liabilities into notes payable 987 227 54 Conversion of accounts payable and accrued liabilities into common stock - - 319 Stock issued for loans 53 50 8 Fixed assets acquired under capital leases 4 7 28 Conversion of accrued interest into common stock - - 12 Net assets acquired in business combinations Accounts receivable 1,489 - - Inventories 1,923 - - Prepaid and other 51 - - Property and equipment 97 - - Borrowings under bank line of credit (333) - - Accounts payable and accrued liabilities (2,639) - - Supplemental disclosure of cash flow information Cash paid during the year for interest 370 111 62 Cash paid during the year for income taxes 5 9 4
NOTE 6. SHORT-TERM DEBT LINES OF CREDIT At June 30, 1998, the Company has lines of credit agreements with a bank which provide for borrowings of up to $7.5 million and expire on September 30, 1999. Borrowings under the lines bear interest at the bank's prime interest rate plus 0.75%, are restricted to finance certain eligible inventory and accounts receivable, and are collateralized by substantially all assets of the Company. The agreements provide, among other requirements and covenants, that the Company shall maintain a ratio of trading assets (accounts receivable and inventory) to trading liabilities (accounts payable and bank lines outstanding) of at least 1.3 to 1, a ratio of debt to equity of not greater than 1.75 to 1, and minimum debt coverage of 2.5 to 1. In addition, the Company shall maintain minimum trading capital of $6 million and minimum tangible net worth of $12.5 million. At June 30, 1998, the Company was not in compliance with certain of these covenants. The Company previously had a line of credit with Coast Savings which was terminated in July 1998. The Company has an additional line of credit available to a subsidiary which provides for borrowing of up to $388 thousand and expired on August 15, 1998. Borrowings under the line bear interest at prime plus 3% and are guaranteed by the Parent Company. NOTES PAYABLE The following summarizes short-term notes payable at June 30:
1998 1997 Payable to suppliers, 7-8% $ 998 $100 Payable to a former director; 7%, convertible into common stock at $1.55 per share - 100 Payable to a director, 10%, convertible on or after December 31, 1998 into common stock at the lesser of $2.36 per share or 85% of the volume weighted trade price on the date of conversion 1,000 - ------ ---- $1,998 $200 ------ ---- ------ ----
31 NOTE 7. LONG-TERM DEBT The following summarizes long-term debt at June 30:
1998 1997 Note payable to bank in monthly installments of $80 through June 2001 including interest at prime plus 0.75%; secured by substantially all assets of the Company $2,500 $ - Notes payable to suppliers in monthly installments through September 2001 including interest at 7-12%; secured by accounts receivable and equipment 214 338 Capital lease obligations, 9-20% 17 34 ------ ------- 2,731 372 Less current portion 903 144 ------ ------- $1,828 $ 228 ------ ------- ------ ------- MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS: YEAR ENDING JUNE 30: 1999 $ 903 2000 870 2001 949 2002 9 ------ $2,731 ------ ------
NOTE 8. SHAREHOLDERS' EQUITY 5% SERIES A CONVERTIBLE PREFERRED STOCK Holders of the 5% convertible preferred stock ("Series A") are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $50.00 per share, payable semi-annually. The 5% convertible preferred stock is convertible, at any time, into shares of the Company's common stock, at a price of $17.50 per common share. This conversion price is subject to certain anti-dilution adjustments, in the event of certain future stock splits or dividends, mergers, consolidations or other similar events. In addition, the Company shall reserve, and keep reserved, out of its authorized but un-issued shares of common stock, sufficient shares to effect the conversion of all shares of the 5% convertible preferred stock. In the event of any involuntary or voluntary liquidation, dissolution, or winding up of the affairs of the Company, the 5% convertible preferred stockholders shall be entitled to receive $1,000 per share, together with accrued dividends, to the date of distribution or payment, whether or not earned or declared. The 5% convertible preferred stock is callable, at the Company's option, at call prices ranging from $1,050 to $1,100 per share. No call on the 5% convertible preferred stock was made during fiscal 1998, 1997, or 1996. 5% SERIES B CONVERTIBLE PREFERRED STOCK In January, 1995, the Company designated 117 shares of previously undesignated Preferred Stock as 5% Series B Convertible Preferred Stock, par value $1,000 per share with a face value of $10,000 per share ("Series B"). Each share may be converted into 1,905 shares of the Company's common stock at the conversion rate of $5.25. The holders of the Series B have a liquidation preference of $10,000 per Series B share over the common shareholders but are junior to the liquidation preference of the existing 5% Convertible Preferred Stock shareholders. Holders of the Series B are entitled to receive, when and as declared by the Board of Directors, but only out of amounts legally available for the payment thereof, cumulative cash dividends at the annual rate of $500 per share, payable annually. SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK On August 21, 1997, the Company closed a private placement of its newly designated Series C Redeemable Convertible Preferred Stock ("Series C Shares") in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"). In the initial closing of $5 million, ITEC issued 500 Series C Shares and warrants to purchase up to 200,000 shares of the Company's common stock. After satisfying certain holding periods, each of the newly issued Series C Shares is convertible, at the option of its holder, into shares of Common Stock of the Company based upon a conversion price equal to $9.00 or if lower, the lowest closing market price of the Company's Common Stock during the 7 trading days prior to the conversion date. The warrants have an exercise price of $7.50 per share. Subject to 32 certain additional conditions, the Company had the right to call for a second round of financing up to an aggregate amount of $5 million, beginning on and including January 1, 1998 and ending June 30, 1998. This additional round of financing would have involved the issuance of up to an additional 500 Series C Shares and warrants for the purchase of up to 200,000 shares of Common Stock. Additionally, purchasers of the Series C Shares were entitled to purchase additional Series C Shares up to 40% of the number of Series C Shares held by each investor on December 31, 1997. During fiscal 1998, 264 shares of Series C Shares were converted into 958,598 shares of common stock. On September 25, 1998, the Company redeemed all outstanding shares of the Series C Convertible Preferred Stock. See Note 12. CONVERSION OF PREFERRED STOCK During fiscal 1997, the Company extended an offer to holders of the Company's Series A and Series B to convert the accumulated dividends of approximately $1,789 thousand and $116 thousand, respectively, into unregistered shares of the Company's common stock at a conversion rate of $7.50. Under the terms of the offer, Series A shareholders converted 1,897.5 shares and approximately $1,381 thousand of the accumulated dividend and Series B shareholders converted 116.2 shares and approximately $116 thousand of the accumulated dividend into unregistered shares of the Company's common stock. As of June 30, 1998, the accumulated dividend in arrears was approximately $497 thousand on the Series A. COMMON STOCK WARRANTS The Company, from time-to-time, grants warrants to employees, directors, outside consultants and other key persons, to purchase shares of the Company's common stock, at an exercise price equal to no less than the fair market value of such stock on the date of grant. The terms and vesting of these warrants are determined by the Board of Directors on a case-by-case basis. The following is a summary of the warrant activity:
PRICE UNDERLYING PER COMMON SHARE SHARES June 30, 1995 $3.00-$7.50 604 Granted $1.00-$5.00 3,443 Exercised $1.50-$3.10 (1,227) Canceled $3.00-$3.75 (351) ------ June 30, 1996 $1.00-$7.50 2,469 Granted $5.00-$6.25 845 Exercised $1.00-$3.75 (91) ------ June 30, 1997 $1.00-$7.50 3,223 Granted $2.25-$7.50 1,930 Exercised $1.00-$5.50 (524) Canceled $4.00-$6.25 (145) ------ June 30, 1998 4,484 ------ ------ Exercisable at June 30, 1998 $1.00-$7.50 3,039 ------ ------
In July 1995, the Company issued to one of its then officers five-year warrants to purchase an aggregate of 30,000 shares of common stock at $1.00 per share, the fair market value of the Company's stock on the date the warrants were granted. During fiscal 1998 and 1997, the former officer exercised warrants to purchase 10,000 and 20,000 shares, respectively. In September 1995, two-year warrants to purchase 40,000 shares of the Company's unregistered common stock at $2.50 per share were issued to an investor group that provided the Company loan financing in consideration for $6 thousand and a six month extension to their existing loan. These warrants were exercised in fiscal 1998. In September 1995, the Company issued to each of two investors groups that provided a loan financing, two-year warrants to purchase 6,185 shares (an aggregate of 12,370 shares) of the Company's unregistered common stock at $2.50 per share. Warrants to purchase 3,093 were exercisable immediately and the remaining 3,092 warrants were exercisable after six months for each investor group. All of these warrants were issued in exchange for cash consideration of approximately $2 thousand which management believes approximates their fair market value. These warrants were exercised in fiscal 1998. In October 1995, the Board of Directors authorized the exercise price for employee options and warrants to be reduced to the then current market value. Accordingly, an aggregate of 350,607 warrants were canceled and reissued at an exercise price $1.00 per share. In addition, the Company issued to three of its officers and its two 33 outside directors warrants to purchase an aggregate of 415,460 shares of the Company's common stock. Warrants for 20,000 shares were exercised in fiscal 1997 and 226,666 shares in fiscal 1998. In October 1995, the Company issued as part of a financing, five-year warrants to purchase 50,000 unregistered shares of the Company's common stock at $1.25 per share. These warrants remain outstanding at June 30, 1998. Between January and April 1996, the Company issued to various consultants warrants to purchase an aggregate of 544,000 shares of the Company's common stock at prices ranging from $1.50 to $5.00 per share. As of June 30, 1998 and 1997, warrants to purchase 20,000 shares, which expire in January 2001, remained outstanding and are exercisable at the price of $5.00 per share. In January 1996, the Company sold to its Chairman for $500 thousand a five-year warrant to purchase 2,000,000 unregistered shares of its common stock at the rate of $5.00 per share. The warrant contains certain anti-dilution provisions should the Company issue equity instruments at less than 50% of the exercise price. Subsequently, in connection with a private placement with various private investors of approximately $2.5 million, the exercise price of this warrant was reduced to $3.00 per share in accordance with the warrants anti-dilution provision. During fiscal 1997 and 1996, warrants to purchase 684,667 shares were exercised and as of June 30, 1998, warrants to purchase 1,315,333 shares were outstanding. In June 1997, the Company issued to six of its officers and its two outside directors warrants to purchase an aggregate of 725,000 shares of the Company's common stock at an exercise price of $6.25 per share vesting monthly over 44 months. During fiscal 1998, warrants for 65,000 shares were cancelled. In July 1997, the Company issued to a co-developer and sales representative three-year warrants to purchase 270,000 shares of its common stock at an exercise price of $5.00 per share and 100,000 shares at $5.50 per share. During fiscal 1998, warrants for 100,000 shares were exercised at $5.00 per share. In August 1997, the Company issued three-year warrants to purchase 200,000 shares of its common stock at an exercise price of $7.50 per share in connection with the issuance of the Series C Preferred Stock. In fiscal 1998, the Company issued to officers of the Company ten-year warrants to purchase 930,000 shares of its common stock at exercise prices ranging from $3.00 to $4.00 per share. During fiscal 1998, warrants for 80,000 shares were cancelled. In addition, the Company issued to key employees four-year warrants to purchase 270,000 shares of its common stock at an exercise price of $2.25 per share In June 1998, the Company issued to directors and advisors of the Company ten-year warrants to purchase 160,000 shares of its common stock at an exercise price of $2.25 per share. In June 1998, the Company issued five-year warrants to purchase 60,000 shares of its common stock at an exercise price of $2.50 per share. During fiscal 1998, the Company issued to suppliers of the Company warrants to purchase 40,000 shares of its common stock at exercise prices ranging from $3.00 to $4.25 per share. COMMON STOCK OPTION PLANS In July 1984 ("1984 Plan"), November 1987 ("1988 Plan") and September, 1996 ("1997 Plan"), the Company adopted stock option plans, under which incentive stock options and non-qualified stock options may be granted to employees, directors, and other key persons, to purchase shares of the Company's common stock, at an exercise price equal to no less than the fair market value of such stock on the date of grant, with such options exercisable in installments at dates typically ranging from one to not more than ten years after the date of grant. Under the terms of the 1988 and 1997 Plans, loans may be made to option holders which permit the option holders to pay the option price, upon exercise, in installments. A total of 212,000 and 1,000,000 shares of common stock are authorized for issuance under the 1988 and 1997 Plans, respectively. No shares are available for future issuance under the 1984 Plan due to the expiration of the plan during 1994. As of June 30, 1998, options to acquire 2,000 shares were outstanding under the 1984 Plan and options to acquire 670,000 shares remained available for grant under the 1988 and 1997 Plans. In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans ("Outside Plan"), granted to employees, directors and other key persons of ITEC or its subsidiaries options to purchase shares of the Company's common stock, at an exercise price equal to no less than the fair market value of such stock on the date of grant. Options are exercisable in installments at dates typically ranging from one to not more than ten years after the date of grant. 34 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:
1984, 1988, AND 1997 PLANS OTHER OPTIONS PRICE UNDERLYING PRICE UNDERLYING PER COMMON PER COMMON SHARE SHARES SHARE SHARES JUNE 30, 1995 $2.50-$5.10 72 $1.65-$3.60 265 Granted $1.00-$5.00 33 $1.00 334 Exercised $1.00 (8) $1.00 (8) Cancelled $1.60-$5.10 (61) $1.00-$3.60 (278) --- ---- JUNE 30, 1996 $1.00-$5.10 36 $1.00 313 Granted $3.60-$8.45 104 - Exercised $1.00-$2.10 (5) $1.00 (78) Cancelled $1.00-$7.95 (13) - --- ---- JUNE 30, 1997 $1.00-$8.45 122 $1.00 235 Granted $1.95-$4.88 373 - Exercised $1.00-$3.45 (5) $1.00 (37) Cancelled $1.00-$8.45 (94) $1.00 (3) --- ---- JUNE 30, 1998 $1.00-$8.45 396 $1.00 195 --- ---- --- ---- EXERCISABLE AT JUNE 30, 1998 48 178 --- ---- --- ----
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option plans. The Company has opted under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to disclose its stock-based compensation with no financial effect. The pro forma effects of applying SFAS 123 in this initial phase-in period are not necessarily representative of the effects on reported net income or loss for future years. Had compensation expense for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS 123, the Company's pro forma net income (loss) and net income (loss) per share would have been as follows for the years ended June 30: 35
1998 1997 1996 Net income (loss) As reported $(10,163) $ 723 $(3,665) Pro forma $(11,154) $ 518 $(3,730) Basic earnings (loss) per share As reported $ (0.90) $0.07 $ (0.77) Pro forma $ (0.99) $0.05 $ (0.78)
The weighted average fair value of the options granted during fiscal years 1998, 1997, and 1996 is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair values and weighted average assumptions used in calculating the fair values were as follows for the years ended June 30:
1998 1997 1996 Fair value of options granted $2.37 $5.45 $0.78 Risk free interest rate 6% 7% 7% Expected life (years) 3 5 5 Expected volatility 95% 95% 95% Expected dividends - - -
EXTRAORDINARY GAINS During fiscal 1996, the Company recognized extraordinary gains on certain issuances of common stock of app1roximately $116,000, representing the difference in the aggregate conversion price and the market value of the shares on the conversion date. NOTE 9. SIGNIFICANT CUSTOMERS, REVENUE DATA, AND CONCENTRATION OF CREDIT RISK As of and during the years ended June 30, 1998 and 1997, no customer accounted for more than 10% of consolidated accounts receivable or total consolidated revenues. As of and during the year ended June 30, 1996, Narbon Technologies accounted for 27% of consolidated accounts receivable and 4% of total consolidated revenues; Canon USA accounted for 11% of consolidated accounts receivable and 3% of total consolidated revenues; and Computer 2000 accounted for 8% of consolidated accounts receivable and 17% of total consolidated revenues. The majority of the Company's product sales in fiscal 1998, 1997, and 1996 were to European distributors (denominated in U.S. dollars) in the computer peripherals and accessories market, including imaging and data storage devices and printers, through its wholly-owned subsidiaries. A significant portion of contract revenue is derived from OEMs and co-developers who are headquartered in the Asia. Revenues from foreign customers as a percentage of total consolidated revenues were 56% in fiscal 1998, 57% in fiscal 1997, and 81% in fiscal 1996, as reflected in the following table for the years ended June 30:
1998 1997 1996 Europe $13,912 $12,221 $ 6,750 Asia 4,189 4,438 2,887 Others 1,223 1,764 452 ------- ------- ------- $19,324 $18,423 $10,089 ------- ------- ------- ------- ------- -------
The Company typically has not required collateral for its sales. However, it has required letters of credit or prepayment from time-to-time as deemed necessary. NOTE 10. INCOME TAXES The Company's provision for income taxes is accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under the SFAS 109 asset and liability method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is then provided for deferred tax assets which are more likely than not to not be realized. The benefit (provision) for income taxes is as follows for the years ended June 30: 36
1998 1997 1996 Current - State $ (18) $ (5) $ (4) Deferred benefit - 241 - ------- ------ ------ $ (18) $ 236 $ (4) ------- ------ ------ ------- ------ ------
The components of deferred income taxes are as follows at June 30:
1998 1997 Deferred tax assets Federal net operating loss carryforwards $ 8,793 $ 4,728 State net operating loss carryforwards 834 225 Book reserves and accrued liabilities 490 349 Federal general business credits and other tax credits 517 517 State R&D and other credits 102 102 -------- ------- 10,736 5,921 Valuation allowance (10,495) (5,680) -------- ------- $ 241 $ 241 -------- ------- -------- -------
The Company's federal and state net operating loss carryforwards expire in various years through 2013. Additionally, the Company's federal and state research and development credits expire in various years through 2009. During 1991 the Company sustained a change in ownership as defined in Section 382 of the Internal Revenue Code; as a result, an annual limitation of approximately $350 thousand was imposed on the utilization of the net operating loss carryforwards generated prior to the date of change. In addition, Section 383 places a limitation on the usage of tax credits generated prior to such a change. Subsequent to the date of the ownership change in 1991, there have been numerous additional equity issuances; as a result, the Company may have experienced, or could experience in the future, similar ownership changes, which could result in additional limitations on the annual utilization of the Company's net operating loss carryforwards and tax credits generated prior to the new change in ownership. The provision for income taxes results in an effective rate which differs from the federal statutory rate. A reconciliation between the actual tax provision and taxes computed at the statutory rate is as follows for the years ended June 30:
1998 1997 1996 Benefit (provision) at federal statutory income tax rate $ 3,449 $ (246) $ 1,286 Utilization of Federal net operating loss carryforward - 485 - Losses for which no current benefit is available (3,449) - (1,286) State income taxes (18) (5) (4) ------- ------ ------- $ (18) $ 234 $ (4) ------- ------ ------- ------- ------ -------
NOTE 11. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases certain equipment under non-cancelable capital leases, which are included in property and equipment. At June 30, 1998 and 1997, the cost of such equipment was $56 and $117 thousand and the related accumulated amortization was $37 and $54 thousand, respectively. Future commitments under capital lease obligations are included with long-term debt in Note 7. The Company and its subsidiaries lease operating facilities under lease agreements that expire at various dates through March 2003. Total rental expense was approximately $574 thousand in fiscal 1998, $509 in fiscal 1997, and $252 in fiscal 1996. Future minimum lease payments under these long-term non-cancelable operating leases are as follows:
YEAR ENDING JUNE 30, 1999 $393 2000 142 2001 146 2002 149 2003 50 ---- $880 ---- ----
37 LEGAL MATTERS The Company, because of the nature of its business, is from time to time threatened or involved in legal actions. The Company does not consider that any of these legal actions now pending will result in a material adverse effect on the consolidated financial position or results of operations of the Company and, further, does not consider that any such proceedings fall outside ordinary, routine litigation incidental to the business of the Company. NOTE 12. RELATED PARTY TRANSACTIONS A former director receives compensation as a consultant to the Company on corporate matters and investment banking issues under an agreement expiring in June 2002. These consulting fees amounted to $120 thousand in fiscal 1998, $120 thousand in fiscal 1997, and $108 thousand in 1996. Effective July 1, 1998, the annual consulting fee under the agreement has been reduced to $56 thousand. During fiscal 1996, approximately $81 thousand of accrued consulting fees and $27 thousand of accrued directors fees owed to this former director were converted into unregistered shares of the Company's common stock. During fiscal 1998, as consideration for services provided relating to the private placement of the Series C Preferred Stock, this former director received commissions and expense reimbursement totaling $200 thousand of which $100 thousand was paid in cash and $100 thousand was used to exercise warrants for 100,000 shares at a price of $1.00 per share. As shown in Note 6, one of the Company's former directors loaned to the Company an aggregate of $100 thousands with interest at the rate of 7% per year. In June 1998, the note was converted into 64,516 shares of the Company's common stock. In June 1998, a director of the Company loaned $1 million to the Company under a 10% note payable due on or after December 31, 1998 and convertible into the Company's common stock at the lesser of $2.36 per share or 85% of the volume weighted trade price on the date of conversion. As further described in Note 13, subsequent to June 30, 1998, a group of several private investors, one of whom is a director of the Company, provided the Company with funding totaling $4,380 thousand. NOTE 13. EVENTS SUBSEQUENT TO JUNE 30, 1998 On September 25, 1998, the Company redeemed all outstanding shares of the Series C Convertible Preferred Stock (Series C Shares). Owners of the Series C Shares received $2.23 million in cash, $1 million in subordinated notes and Warrants to purchase 300,000 shares of Common Stock (100,000 shares at the exercise price of $4.00, and 200,000 shares at an exercise price of $2.025). The Company financed the redemption through a $4.38 million private placement of newly issued shares of common stock and subordinated notes. The $4.38 million in funding came from several private investors, one of whom is a director of the Company. In exchange, the Company issued a total of 500,000 shares of the Company's common stock at a price of $2.50 per share and subordinated promissory notes in the amount of $3.13 million. All of the promissory notes bear interest at 16% per year. A portion of the notes, $675 thousand, mature in two years and are convertible, at the option of each investor, at any time into shares of Company common stock at $2.025 per share (subject to adjustment under certain circumstances). The remaining notes, $2.45 million, mature in one year and are not convertible. The Company also issued warrants to the investors as part of the financing. The warrants authorize the purchase of 490,000 shares of common stock at an exercise price of $2.025 per share. This price is based on the average of the closing bid prices for ITEC's common stock for the five trading days ended September 14, 1998. 38 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 39 PART III Pursuant to General Instruction G(3) to Form 10-K, the information required by Items 10, 11, 12, and 13 of Part III is incorporated by reference from the Company's definitive Proxy Statement with respect to its 1998 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A within 120 days after June 30, 1998. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Form 10-K: (1) FINANCIAL STATEMENTS The financial statements of the Company are included herein as required under Item 8 of this Annual Report on Form 10-K. See Index to Financial Statements on page 19. (2) FINANCIAL STATEMENT SCHEDULES: Financial Statement Schedules have been omitted because they are not applicable or not required or the information required to be set forth therein is included in the financial statements or notes thereto. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year ended June 30, 1998. (c) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Form 10-K.
# DESCRIPTION OF EXHIBIT PAGE - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- 3(a) Certificate of Incorporation of the Company, as amended, and currently in effect. See also Item 4(a). (Incorporated by reference to Exhibit 3(a) to 1988 Form 10-K.). . . . . . . . . . * 3(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed February 8, 1995, as amended, and currently in effect. (Incorporated by reference to Exhibit 3(b) to 1995 Form 10-K.). . . . . . . . . . . . . . . . . . . . . . . . . . . * 3(c) Certificate of Amendment of Certificate of Incorporation of the Company, filed May 23, 1997, as amended, and currently in effect. (Incorporated by reference to 1997 Form 10-K.). . . . . * 3(d) By-Laws of the Company, as amended, and currently in effect. (Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K). . * 4(a) Amended Certificate of Designation of Imaging Technologies Corporation with respect to the 5% Convertible Preferred Stock. (Incorporated by reference to Exhibit 4(d) to 1987 Form 10-K.) . * 4(b) Amended Certificate of Designation of Imaging Technologies Corporation with respect to the 5% Series B Convertible Preferred Stock. (Incorporated by reference to Exhibit 4(b) to 1988 Form 10-K.). . . . . . . . . . . . . . . . . . . . . . . * 4(c) Certificate of Designations, Preferences and Rights of Series C Convertibles Preferred Stock of Imaging Technologies Corporation filed on August 21, 1997 . . . . . . . . . . . . . ** 10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by reference to Form S-8 Filed October 26, 1984, File No. 2-93993.) . . . . . . . . . . . . . . . . . . . . . . . . . * 10(a.2) Forms of standard Non-Qualified and Incentive Stock Option Agreement for 1984 Stock Option Plan. (Incorporated by reference to Form S-8 filed October 26, 1984, File No. 2-93993.) . . . . . . . . . . . . . . . . . . . . . . . . . * 10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by reference to Exhibit 10(g) in 1989 Form 10-K.) . . . . . . . . . * 10(b.2) Amendment and Restatement of 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K.) . . . . . . . . . . . . . . . . . . . . . . . . . . * 10(b.3) Forms of standard Non-Qualified and Incentive Stock Option Agreement for 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10(e) to 1991 Form 10-K) . . . . . . . . . * 10(c) Standard Industrial Lease Multi-Tenant - Modified Net dated January 24, 1996 between the Company and Bernardo View, Ltd.; addendum I to lease; addendum II to lease; Addendum III to Lease. (Incorporated by reference to Exhibit 10(c) to 1996 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . * 40 # DESCRIPTION OF EXHIBIT PAGE - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- 10(d) Reference is made to the various stock options and warrants granted in 1996 to directors and executive officers as described in Notes 6 and 7 to the 1996 financial statements. (Incorporated by reference to Forms S-8 dated February 12, 1996, File Nos. 333-00871, 333-00873 and 333-00879). . . . . . . * 10(e.1) Executive Employment Agreement, as amended, between the Company and Edward W. Savarese, dated July 1, 1990 and amended as of February 25, 1994. (Incorporated by reference to Exhibit 10(k) to 1994 Form 10-KSB). . . . . . . . . . . . . . * 10(e.2) Compensation Agreement between the Company and Edward W. Savarese, dated November 16, 1992. (Incorporated by reference to Exhibit 10(af) to 1993 Form 10-KSB.) . . . . . . . . . . . . * 10(e.3) Amendment to Employment Agreement between the Company and Edward W. Savarese dated April 1, 1998. . . . . . . . . . . . . ** 10(e.4) Amendment to Employment Agreement between the Company and Edward W. Savarese dated June 12, 1998. . . . . . . . . . . . . ** 10(f) Compensation Agreement between the Company and Harry J. Saal dated November 16, 1992. (Incorporated by reference to Exhibit 10(ad) to 1993 Form 10-KSB.) . . . . . . . . . . . . . . . . . . * 10(g.1) Compensation Agreement between the Company and Irwin Roth dated November 16, 1992. (Incorporated by reference to Exhibit 10(ag) to 1993 Form 10-KSB.) . . . . . . . . . . . . . . . . . . * 10(g.2) Consulting Agreement, dated April 1, 1994, between the Company and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to 1994 Form 10-KSB.) . . . . . . . . . . . . . . . . . . . . . . . * 10(g.3) Amendment to Consulting Agreement dated June 12, 1998 between the Company and Irwin Roth. . . . . . . . . . . . . . . . . . . ** 10(h) Acquisition Agreement for acquisition of Prima International subsidiary on October 1, 1993. (Incorporated by reference to Exhibit 2.1 to Amendment No. 1 to Form 8K/A dated October 14, 1993.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * 10(i.1) Third Party Development Partner License Agreement, effective October 22, 1993, between the Company and Adobe Systems Incorporated. (Incorporated by reference to Exhibit 10(ai) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . * 10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the Postscript Support Source and Object Code Distribution License Agreement between Adobe Systems Incorporated and the Company. (Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . * 10(j) ITEC/APS License Agreement, dated March 28, 1994, between the Company and Integrated Device Technology, Inc. (Incorporated by reference to Exhibit 10(ak) to 1994 Form 10-KSB) . . . . . . * 10(k) International Sales Representative Agreement, dated October 15, 1993, between the Company and Nippo Ltd. (Incorporated by reference to Exhibit 10(ao) to 1994 Form 10-KSB). . . . . . . . * 10(l) Consulting Agreement dated September 17, 1993 between the Company and Marius A. Robinson. (Incorporated by reference to Exhibit 10(aq) to 1994 Form 10-KSB). . . . . . . . . . . . . . . * 10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10(ar) to 1994 Form 10-KSB). . . . . . . . * 41 # DESCRIPTION OF EXHIBIT PAGE - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- 10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common Stock of the Company at $1.50 per share, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10 (as) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . * 10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common Stock of the Company at $1.00 per share, dated September 17, 1993, between the Company and Robinson International, Ltd. (Incorporated by reference to Exhibit 10( at) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . * 10(n) ITEC/MEI License Agreement, dated September 30, 1994 between the Company and Matsushita Electric Industrial Co., Ltd. (Incorporated by reference to Exhibit 10(aac) to 1994 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . * 10(o) Form of standard Warrant Agreement dated January 3, 1996 issued to Harry J. Saal as described in Note 6 to the 1996 financial statements. (Incorporated by reference to Exhibit 10(o) to 1996 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . * 10(p) Form of standard Warrant and Consulting Agreement issued to consultants as described in Note 6 to the 1996 financial statements. (Incorporated by reference to Form S-8 dated May 9, 1996, File Number 333-03375). . . . . . . . . . . . . . . * 10(q) Compensation Agreement between the Company and Brian Bonar dated September 1, 1994. (Incorporated by reference to Exhibit 10(q) to 1996 Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . * 10(q.1) Amendment to Employment Agreement between the Company and Brian Bonar dated April 1, 1998. . . . . . . . . . . . . . . . . . . . ** 10(r) Promissory Note between Imperial Bank and the Company dated June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . ** 10(s) Security and Loan Agreement and Addendum thereto (Eximbank Facility) between Imperial Bank and the Company, dated June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ** 10(t) Security and Loan Agreement and Addendum thereto (Foreign Insured A/R Line) between Imperial Bank and the Company, dated June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . ** 10 u) Security and Loan Agreement and Addendum thereto (Domestic Line) between Imperial Bank and the Company, dated June 23, 1998. . . ** 10(v) Amended and Restated Agreement and Plan of Merger and Plan of Reorganization dated February 12, 1997, between and among NewGen Systems Acquisition Corporation, NewGen Imaging Technologies Corporation and Personal Computer Products, Incorporated. (Incorporated by reference to form 8-K dated April 28, 1998). . * 10(w) Warrant to purchase stock between Imperial Bank and the Company dated June 23, 1998. . . . . . . . . . . . . . . . . . . ** 10(x) Securities Purchase Agreement between Buyers and the Company dated August 21, 1997. . . . . . . . . . . . . . . . . . . . . . ** 10(y) Registration Rights Agreement between Buyers and the Company dated August 21, 1997. . . . . . . . . . . . . . . . . . . . . . ** 10(z) Form of Warrant to purchase Common Stock between buyers and the Company dated August 21, 1997. . . . . . . . . . . . . . . . . . ** 10(aa) Promissory Note between DataProducts Corporation and the Company dated June 30, l998. . . . . . . . . . . . . . . . . . . . . . . ** 10(ab) Stock Purchase Agreement between the Company and Stockholders of New Media, Incorporated dated November 28, 1997. . . . . . . ** 42 # DESCRIPTION OF EXHIBIT PAGE - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- 10(ac) Agreement and Plan of Merger and Plan of Reorganization between the Company and Color Solutions, Incorporated dated November 30, l997. . . . . . . . . . . . . . . . . . . . . . . . * 21 List of Subsidiaries of the Company. . . . . . . . . . . . . . . ** 23 Consent of Independent Accountants . . . . . . . . . . . . . . . **
Exhibits 10(a.1), (a.2), (b.1), (b.2), (b.3), (d), (e.1), (e.2), (e.3), (e.4), (f), (g.1), (g.2), (g.3), (q), and (q.1) are management contracts or compensatory plans or arrangements. The Company will furnish a copy of any exhibit to a requesting stockholder upon payment of the Company's reasonable expenses in furnishing such exhibit. * Exhibit is incorporated by reference only and a copy in not included in this filing. ** Filed Herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized Date: October 13, 1998 IMAGING TECHNOLOGIES CORPORATION By: /s/ BRIAN BONAR -------------------------------- Brian Bonar President, and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian Bonar and Michael K. Clemens, and each of them acting individually as his attorney-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Harry J. Saal Chairman of the Board of Directors October 13, 1998 - ------------------------ Harry J. Saal /s/ Brian Bonar President and Chief Executive October 13, 1998 - ------------------------ Officer Brian Bonar (Principal Executive Officer) /s/ Michael K. Clemens Senior Vice President, and October 13, 1998 - ------------------------ Chief Financial Officer Michael K. Clemens (Principal Financial and Accounting Officer) /s/ David M. Carver Director October 13, 1998 - ------------------------ David M. Carver /s/ A.L. Dubrow Director October 13, 1998 - ------------------------ A.L. Dubrow /s/ Warren T. Lazarow Director October 13, 1998 - ------------------------ Warren T. Lazarow /s/ Stephen A. MacDonald Director October 13, 1998 - ------------------------ Stephen A. MacDonald
43 EX-4.(C) 2 EXHIBIT 4(C) PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "IMAGING TECHNOLOGIES CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF AUGUST, A.D. 1997, AT 10:30 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS FOR RECORDING. /s/ Edward J. Freel ----------------------------------------- EDWARD J. FREEL, SECRETARY OF STATE 2008678 8100 [Seal] AUTHENTICATION: 8616920 971280088 DATE: 08-21-97 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK OF IMAGING TECHNOLOGIES CORPORATION Imaging Technologies Corporation (the "COMPANY"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation, as amended, of the Company, and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company at a meeting duly held, adopted resolutions (i) authorizing a series of the Company's previously authorized preferred stock, par value $1,000 per share, and (ii) providing for the designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of One Thousand Two Hundred (1,200) shares of Series C Redeemable Convertible Preferred Stock of the Company, as follows: RESOLVED, that the Company is authorized to issue 1,200 shares of Series C Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), par value $1,000 per share, which shall have the following powers, designations, preferences and other special rights: (1) DIVIDENDS. The Preferred Shares shall not bear any dividends. (2) HOLDER'S CONVERSION OF PREFERRED SHARES. A holder of Preferred Shares shall have the right, at such holder's option, to convert the Preferred Shares into shares of the Company's common stock, $.005 par value per share (the "COMMON STOCK"), on the following terms and conditions: (a) CONVERSION RIGHT. Subject to the provisions of Section 2(k) below, at any time or times on or after the date which is 46 days after the Issuance Date (as defined below), any holder of Preferred Shares shall be entitled to convert any whole number of Preferred Shares into fully paid and nonassessable shares (rounded to the nearest whole share in accordance with Section 2(i) below) of Common Stock, at the Conversion Rate (as defined below); provided, however, that in no event shall any holder be entitled to convert Preferred Shares in excess of that number of Preferred Shares which, upon giving effect to such conversion, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed 4.9% of the outstanding shares of the Common Stock following such conversion. For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Preferred Shares with respect to which the determination of such proviso is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) conversion of the remaining, nonconverted Preferred Shares beneficially owned by the holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the holder and its affiliates. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The holder may waive the foregoing limitations by written notice to the Company upon not less than 61 days prior notice (with such waiver taking effect only upon the expiration of such 61 day notice period). (b) CONVERSION RATE. The number of shares of Common Stock issuable upon conversion of cach of the Preferred Shares pursuant to Sections (2)(a), 2(g) and 2(h) shall be determined according to the following formula (the "CONVERSION RATE"): (.06)(N/365)(10,000) + 10,000 ------------------------------- Conversion Price For purposes of this Certificate of Designations, the following terms shall have the following meanings: (i) "CONVERSION PRICE" means, as of any Conversion Date (as defined below) or other date of determination, the lower of the Fixed Conversion Price and the Floating Conversion Price, each in effect as of such date and subject to adjustment as provided herein; (ii) "FIXED CONVERSION PRICE" means 150% of the Market Price ON the date of issuance of the applicable Preferred Shares, subject to adjustment as provided herein; (iii) "FLOATING CONVERSION PRICE* means, as of any date of determination, the amount obtained by multiplying the Conversion Percentage in effect as of such date by the Market Price as of such date; (iv) "CONVERSION PERCENTAGE" means (A) 100 % for the period beginning on the Issuance Date and ending on and including the date which is 90 days after the -2- Issuance Date, (B) 95% for the period beginning on and including the date which is 91 days after the Issuance Date and ending on and including the date which is 180 days after the Issuance Date and (C) 90% for the period beginning on and including the date which is 181 days after the Issuance Date and ending on and including the date which is five years after the Issuance Date, subject in cach case to adjustment as provided herein; (v) "MARKET PRICE" means, with respect to any security for any date, the lowest Closing Bid Price (as defined below) for such security during the seven consecutive trading days immediately preceding such date; (vi) "CLOSING BID PRICE" means, for any security as of any date, the last closing bid price for such security on The Nasdaq SmallCap Market as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if The Nasdaq SmallCap Market is not the principal trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of Preferred Shares. If the Company and the holders of Preferred Shares are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(f)(iii) below with the term "Closing Bid Price" being substituted for the term "Market Price." (All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period). (vii) "N" means the number of days from, but excluding, the Issuance Date through and including the Conversion Date for the Preferred Shares for which conversion is being elected; and (viii) "ISSUANCE DATE" means, with respect to each Preferred Share, the date of issuance of the applicable Preferred Share. (c) EFFECT OF FAILURE TO OBTAIN AND MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. If the registration statement (the "REGISTRATION STATEMENT") covering the resale of the shares of Common Stock issuable upon conversion or exercise of the Preferred Shares and the Warrants (as defined in the Securities Purchase Agreement), respectively, and required to be filed by the Company pursuant to the Registration Rights Agreement between the Company and the Buyers referred to therein (THE "REGISTRATION RIGHTS AGREEMENT") is not (i) filed within 45 days or the first Issuance Date of any Preferred Shares (the "SCHEDULED FILING DATE"), (ii) declared effective by the United States Securities and Exchange Commission (the "SEC") on or before 150 days after the first Issuance Date for any Preferred Shares (the -3- "SCHEDULED EFFECTIVE DATE"), or (iii) if after the Registration Statement has been declared effective by the SEC, sales cannot be made pursuant to the Registration Statement (whether because of a failure to keep the Registration Statement effective, to disclose such information as is necessary for sales to be made pursuant to the Registration Statement, to register sufficient shares of Common Stock or otherwise), then, as partial relief for the damages to any holder by reason of any such delay in or reduction of its ability to sell the underlying shares of Common Stock (which remedy shall not be exclusive of any other remedies available at law or in equity), the Conversion Percentage and the Fixed Conversion Price shall be adjusted as follows: (A) CONVERSION PERCENTAGE. The Conversion Percentage in effect at such time shall be reduced by a number of percentage points equal to the product of (I) .06 and (II) the sum of (x) the number of days after the Scheduled Filing Date that the relevant Registration Statement is filed with the SEC, (y) the number of days after the Scheduled Effective Date and prior to the date that the relevant Registration Statement is declared effective by the SEC (without double-counting any number of days after the Scheduled Filing Date that the relevant Registration Statement is filed, if applicable) and (z) the number of days that sales cannot be made pursuant to the Registration Statement in accordance with the Registration Rights Agreement after the Registration Statement has been declared effective. (For example, if the Registration Statement becomes effective 30 days after the Scheduled Effective Date, the Conversion Percentage would be 88.2% percent until any subsequent adjustment; if thereafter sales could not be made pursuant to the Registration Statement for a period of 40 additional days, the Conversion Percentage would then be 85.8%); and (B) FIXED CONVERSION PRICE. The Fixed Conversion Price in effect at such time shall be reduced by an amount equal to the product of (I) the Fixed Conversion Price in effect as of the Issuance Date and (II) .0006 multiplied by (III) the sum of (x) the number of days after the Scheduled Filing Date that the relevant Registration Statement is filed with the SEC, (y) the number of days after the Scheduled Effective Date and prior to the date that the relevant Registration Statement is declared effective by the SEC (without double-counting any number of days after the Scheduled Filing Date that the relevant Registration Statement is filed, if applicable) and (z) the number of days that sales cannot be made pursuant to the Registration Statement in accordance with the Registration Rights Agreement after the Registration Statement has been declared effective. (For example, assuming for purposes of this Section 3(c)(B) only that the Fixed Conversion Price equals $9.00, if the Registration Statement becomes effective 30 days after the Scheduled Effective Date, the Fixed Conversion Price would be $8.982 until any subsequent adjustment; if thereafter sales could not be made pursuant to the Registration Statement for a period of 40 additional days, the Fixed Conversion Price would then be $8.958.) (d) ADJUSTMENT TO CONVERSION PRICE -- DILUTION AND OTHER EVENTS. In order to prevent dilution of the rights granted under this Certificate of Designations, the Conversion Price will be subject to adjustment from time to time as provided in this Section 2(d). -4- (i) ADJUSTMENT OF FIXED CONVERSION PRICE UPON ISSUANCE OF COMMON STOCK. If and whenever on or after the date of issuance of the Preferred Shares, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than shares of Common Stock deemed to have been issued by the Company in connection with an Approved Stock Plan (as defined below)) for a consideration per share less than the Fixed Conversion Price in effect immediately prior to such time (the "APPLICABLE PRICE"), then immediately after such issue or sale, the Fixed Conversion Price shall be reduced to an amount equal to the product of (x) the Fixed Conversion Price in effect immediately prior to such issue or sale and (y) the quotient determined by dividing (1) the sum of (I) the product of the Applicable Price and the number of shares of Common Stock Deemed Outstanding (as defined below) immediately prior to such issue or sale, and (II) the consideration, if any, received by the Company upon such issue or sale, by (2) the product of (I) the Applicable Price and (II) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. For purposes of determining the adjusted Fixed Conversion Price under this Section 2(d)(i), the following shall be applicable: (A) ISSUANCE OF OPTIONS. If the Company in any manner grants any rights or options to subscribe for or to purchase Common Stock (other than pursuant to an Approved Stock Plan or upon conversion of the Preferred Shares) or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "OPTIONS" and such convertible or exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Applicable Price, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of this Section 2(d)(i)(A), the "price per share for which Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities" is determined by dividing (I) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Company upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (II) the total maximum number of shares of Common Stock issuable upon exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No adjustment of the Fixed Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (B) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuabIe upon such conversion or exchange is less than the Applicable -5- Price, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of this Section 2(d)(i)(B), the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (I) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (II) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No adjustment of the Fixed Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Fixed Conversion Price had been or are to be made pursuant to other provisions of this Section 2(d)(i), no further adjustment of the Fixed Conversion Price shall be made by reason of such issue or sale. (C) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Fixed Conversion Price in effect at the time of such change shall be readjusted to the Fixed Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold; provided that no adjustment shall be made if such adjustment would result in an increase of the Fixed Conversion Price then in effect. (D) CERTAIN DEFINITIONS. For purposes of determining the adjusted Fixed Conversion Price under this Section 2(d)(i), the following terms have meanings set forth below: (I) "APPROVED STOCK PLAN" shall mean any contract, plan or agreement which has been approved by the Board of Directors of the Company, pursuant to which the Company's securities may be issued to any employee, officer, director, consultant or other service provider. (II) "COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any shares of Common Stock issuable upon conversion of the Preferred Shares. -6- (E) EFFECT ON FIXED CONVERSION PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Fixed Conversion Price under this Section 2(d)(i), the following shall be applicable: (I) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Market Price of such securities for the twenty (20) consecutive trading days immediately preceding the date of receipt. In case any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of a majority of the Preferred Shares then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (The "VALUATION EVENT"), the fair value of such consideration will be determined within forty-eight (48) hours of the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company. The determination of such appraiser shall be deemed binding upon all parties absent manifest error. (II) INTEGRATED TRANSACTIONS. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $.01. (III) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock. (IV) RECORD DATE. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. -7- (ii) ADJUSTMENT OF FIXED CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Fixed Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into smaller number of shares, the Fixed Conversion Price in effect immediately prior to such combination will be proportionately increased. (iii) ADJUSTMENT OF FLOATING CONVERSION PRICE UPON ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells Convertible Securities that are convertible into Common Stock at a price which varies with the market price of the Common Stock (the formulation for such variable price being herein referred to as the "VARIABLE PRICE") and such Variable Price is not calculated using the same formula used to calculate the Floating Conversion Price in effect immediately prior to the time of such issue or sale, the Company shall provide written notice thereof via facsimile and overnight courier to each holder of the Preferred Shares ("VARIABLE NOTICE") on the date of issuance of such Convertible Securities. If the holders of Preferred Shares representing at least two-thirds (2/3) of the Preferred Shares then outstanding provide written notice via facsimile and overnight courier (the "VARIABLE PRICE ELECTION NOTICE") to the Company within five (5) business days of receiving a Variable Notice that such holders desire to replace the Floating Conversion Price then in effect with the Variable Price described in such Variable Notice, the Company shall prepare and deliver to each holder of the Preferred Shares via facsimile and overnight courier a copy of an amendment to this Certificate of Designations (the "VARIABLE PRICE AMENDMENT") that substitutes the Variable Price for the Floating Conversion Price (together with such modifications to this Certificate of Designations as may be required to give full effect to the substitution of the Variable Price for the Floating Conversion Price) within five (5) business days after receipt of the requisite number of Variable Price Election Notices set forth above. The Company shall file such Variable Price Amendment with the Secretary of State of the State of Delaware within five (5) business days after delivery of the Variable Price Amendment to the holders of the Preferred Shares; provided that in the event that the Company receives a notice prior to the filing of the Variable Price Amendment from any holder who has delivered a Variable Price Election Notice in connection with such Variable Price Amendment that such holder objects to the form of the Variable Price Amendment, the Company shall not file such Variable Price Amendment until such time as the Variable Price Amendment has been revised to the reasonable satisfaction of such holder and approved in writing by the holders of the Preferred Shares representing at least two-thirds (2/3) of the Preferred Shares then outstanding. Except as provided in the preceding proviso, a holder's delivery of a Variable Price Election Notice shall serve as the consent required to amend this Certificate of Designations pursuant to Section 14 below. (iv) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any recapitalization, reorganization, reclassification, consolidation, merger, sale -8- of all or substantially all of the Company's assets to another Person (as defined below) or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior to the consummation of any Organic Change, the Company will make appropriate provision (in form and substance satisfactory to the holders of a majority of the Preferred Shares then outstanding) to insure that each of the holders of the Preferred Shares will thereafter have the right to acquire and receive in lieu of or addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Preferred Shares had such Organic Change not taken place (without taking into account any limitations or restrictions on the timing or amount of conversions). In any such case, the Company will make appropriate provision (in form and substance satisfactory to the holders of a majority of the Preferred Shares then outstanding) with respect to such holders' rights and interests to insure that the provisions of this Section 2(d) and Section 2(e) below will thereafter be applicable to the Preferred Shares (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Company, an immediate adjustment of the Fixed Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, if the value so reflected is less than the Fixed Conversion Price in effect immediately prior to such consolidation, merger or sale). The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes, by written instrument (in form and substance satisfactory to the holders of a majority of the Preferred Shares then outstanding), the obligation to deliver to each holder of Preferred Shares such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. "PERSON" shall mean an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (v) CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 2(d) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Preferred Shares; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 2(d). -9- (vi) NOTICES. (A) Immediately upon any adjustment of the Conversion Price, the Company will give written notice thereof to each holder of Preferred Shares, setting forth in reasonable detail and certifying the calculation of such adjustment. (B) The Company will give written notice to each holder of Preferred Shares at least twenty (20) days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Organic Change, dissolution or liquidation; provided that in no event shall such notice be provided to such holder prior to such information being made known to the public. (C) The Company will also give written notice to each holder of Preferred Shares at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place; provided that in no event shall such notice be provided to such holder prior to such information being made known to the public. (e) PURCHASE RIGHTS. In addition to any adjustments of the Conversion Price pursuant to Section 2(d) above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "PURCHASE RIGHTS"), then the holders of Preferred Shares will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of the Preferred Shares (without taking into account any limitations or restrictions on the timing or amount of conversions) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (f) MECHANICS OF CONVERSION. Subject to the Company's inability to fully satisfy its obligations under a Conversion Notice (as defined below) as provided for in Section 6 below: (i) HOLDER'S DELIVERY REQUIREMENTS. To convert Preferred Shares into full shares of Common Stock on any date (the "CONVERSION DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., Central Time on such date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit I (the "CONVERSION NOTICE"), to the Company or its designated transfer agent (the "TRANSFER AGENT"), and (B) surrender to a common carrier for delivery to the Company or the Transfer Agent as soon as practicable following such date, the original certificates representing the Preferred Shares being converted (or an indemnification undertaking with respect to such shares in the -10- case of their loss, theft or destruction) (the "PREFERRED STOCK CERTIFICATES") and the originally executed Conversion Notice. (ii) COMPANY'S RESPONSE. Upon receipt by the Company of a facsimile copy of a Conversion Notice, the company shall immediately send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder. Upon receipt by the Company or the Transfer Agent of the Preferred Stock Certificates to be converted pursuant to a Conversion Notice, together with the originally executed Conversion Notice, the Company or the Transfer Agent (as applicable) shall, on the next business day following the date of receipt (or the second business day following the date of receipt if received after 11:00 a.m. local time of the Company or Transfer Agent, as applicable), (I) issue and surrender to a common carrier for overnight delivery to the address as specified in the Conversion Notice, a certificate, registered in the name of the holder or its designee, for the number of shares of Common Stock to which the holder shall be entitled, or (II) credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's or its designee's balance account with The Depository Trust Company. If the number of Preferred Shares represented by the Preferred Stock Certificate(s) submitted for conversion is greater than the number of Preferred Shares being converted, then the Company or Transfer Agent, as the case may be, shall, as soon as practicable and in no event later than two business days after receipt of the Preferred Stock Certificate(s) and at its own expense, issue and deliver to the holder a new Preferred Stock Certificate representing the number of Preferred Shares not converted. (iii) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Market Price or the arithmetic calculation of the Conversion Rate, the Company shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile as soon as possible, but in no event later than two (2) business days after receipt of such holder's Conversion Notice. If such holder and the Company are unable to agree upon the determination of the Market Price or arithmetic calculation of the Conversion Rate within one (1) business day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall within one (1) business day submit via facsimile (A) the disputed determination of the Market Price to an independent, reputable investment bank or (B) the disputed arithmetic calculation of the Conversion Rate to its independent, outside accountant. The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent manifest error. (iv) RECORD HOLDER. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of Preferred Shares shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date. -11- (v) COMPANY'S FAILURE TO TIMELY CONVERT. If within ten (10) business days of the Company's or the Transfer Agent's receipt of the Preferred Stock Certificates to be converted and the originally executed Conversion Notice the Company shall fail to issue a certificate to a holder or credit the holder's balance account with The Depository Trust Company for the number of shares of Common Stock to which such holder is entitled upon such holder's conversion of Preferred Shares or to issue a new Preferred Stock Certificate representing the number of Preferred Shares to which such holder is entitled pursuant to Section 2(f)(ii), in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement between the Company and the initial holders of the Preferred Shares (the "SECURITIES PURCHASE AGREEMENT") (including indemnification pursuant to Section 8 thereof), the Company shall pay additional damages to such holder on each date after such tenth (10th) business day that such conversion is not timely effected in an amount equal to 1.0% of the product of (A) the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 2(f)(ii) and to which such holder is entitled and, in the event the Company has failed to deliver a Preferred Stock Certificate to the holder on a timely basis pursuant to Section 2(f)(ii), the number of shares of Common Stock issuable upon conversion of the Preferred Shares represented by such Preferred Stock Certificate, as of the last possible date which the Company could have issued such Preferred Stock Certificate to such holder without violating Section 2(f)(ii) and (B) the Closing Bid Price of the Common Stock on the last possible date which the Company could have issued such Common Stock and such Preferred Stock Certificate, as the case may be, to such holder without violating Section 2(f)(ii). (g) MANDATORY CONVERSION. If any Preferred Shares remain outstanding on the Mandatory Conversion Date (as defined below), then all such Preferred Shares shall be converted as of such date in accordance with this Section 2 as if the holders of such Preferred Shares had given the Conversion Notice on the Mandatory Conversion Date. All holders of Preferred Shares shall thereupon surrender all Preferred Stock Certificates, duly endorsed for cancellation, to the Company or the Transfer Agent and on the Mandatory Conversion Date all Preferred Shares, whether or not the Preferred Stock Certificates therefor are surrendered, shall be cancelled and deemed null and void provided that the Company has complied with its obligations under this Section 2(g). "MANDATORY CONVERSION DATE" means the date which is five years after the applicable Issuance Date. (h) CONVERSION AT THE OPTION OF THE COMPANY. At any time or times on or after the Issuance Date, the Company shall have the right, in its sole discretion, to require that any or all of the outstanding Preferred Shares be converted ("CONVERSION AT COMPANY'S ELECTION") at the Conversion Rate; provided that the Conditions to Conversion at the Option of the Company (as set forth below) are satisfied. The Company shall exercise its right to Conversion at Company's Election by providing each holder of Preferred Shares written notice ("NOTICE OF CONVERSION AT COMPANY'S ELECTION") at least 30 days prior to the date selected by the Company for conversion ("COMPANY'S ELECTION CONVERSION DATE"). If the Company elects to require conversion of some, but not all, of the Preferred Shares, the Company shall convert an amount from -12- each holder of Preferred Shares equal to such holder's pro rata amount (based on the number of Preferred Shares held by such holder relative to the number of Preferred Shares outstanding on Company's Election Conversion Date) of all Preferred Shares the Company is requiring to be converted. The Notice of Conversion at Company's Election shall indicate (x) the number of Preferred Shares the Company has selected for conversion, (y) the Company's Election Conversion Date, which date shall be not less than 30 or more than 40 days after each holder's receipt of such notice, and (z) each holder's pro rata share of outstanding Preferred Shares. All Preferred Shares selected for conversion in accordance with the provision of this Section 2(h) shall be converted as of the Company's Election Conversion Date in accordance with this Section 2 as if the holders of such Preferred Shares selected by the Company to be converted had given the Conversion Notice on the Company's Election Conversion Date. All holders of Preferred Shares shall thereupon and within two business days the Company's Election Conversion Date surrender all Preferred Stock Certificates selected for conversion, duly endorsed for cancellation, to the Company or the Transfer Agent. "CONDITIONS TO CONVERSION AT THE COMPANY'S ELECTION" means the following conditions: (i) on each day during the 20 consecutive trading days immediately preceding the date of the Company's Notice of Conversion at the Company's Election, the last reported sale price (as reported by Bloomberg) of the Common Stock is at least 200% of the last reported sale price (as reported by Bloomberg) as of the applicable Issuance Date of the Preferred Shares being converted; (ii) on each day during the period beginning on the date of the Notice of Conversion at the Company's Election and ending on and including the Company's Election Conversion Date, the last reported sale price (as reported by Bloomberg) of the Common Stock is at least 170% of the last reported sale price (as reported by Bloomberg) as of the applicable Issuance Date of the Preferred Shares being converted; (iii) the Company shall not have previously given Notice of Conversion at Company's Election; (iv) the Company's stockholders shall have approved the issuance of the Securities (as defined below) on or prior to the date of the Company's Notice of Conversion at Company's Election; (v) on each day during the period beginning 20 days prior to the Notice of Conversion at the Company's Election and ending on and including the Company's Election Conversion Date, the Registration Statement shall be effective and available for the sale of no less than 125% of the sum of (A) the number of Conversion Shares then issuable upon the conversion of all outstanding Preferred Shares, including the Conversion Shares to be issued pursuant to this Conversion at the Company's Election, (B) the number of Warrant Shares (as defined in the Securities Purchase Agreement) then issuable upon exercise of all outstanding Warrants and (C) the number of Conversion Shares and Warrant Shares that are then held by the holders of the Preferred Shares, (vi) on each day during the period beginning 20 days prior to the date of the Company's Notice of Conversion at Company's Election and ending on and including the Company's Election Conversion Date, the Common Stock is designated for quotation on The Nasdaq SmallCap Market or the Nasdaq National Market or a national securities exchange and is not suspended from trading; (vii) during the period beginning 20 days prior to the date of the Company's Notice of Conversion at Company's Election and ending on and including the Company's Election Conversion Date, the Average Daily Trading Dollar Volume (as defined below) is not less than $250,000; (viii) during the period beginning on the Initial Issuance Date and ending on and including the -13- Company's Election Conversion Date, the Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of this Certificate of Designations and Sections 2(a) and 2(b) of the Warrants, respectively; and (ix) the Company otherwise has satisfied its obligations and is not in default under this Certificate of Designations, the Securities Purchase Agreement and the Registration Rights Agreement. For purposes of this Section 2(h), "AVERAGE DAILY TRADING DOLLAR VOLUME" means the average during any period of the number of shares of Common Stock sold on each trading day multiplied by such day's weighted-average trading price as reported by Bloomberg; provided, however, that for purposes of determining the Average Daily Trading Dollar Volume, block trades in excess of 30,000 shares of Common Stock shall be counted as the sale of only 30,000 shares of Common Stock. Notwithstanding the above, any holder of Preferred Shares may convert such shares (including Preferred Shares selected for conversion) into Common Stock pursuant to Section 2(a) on or prior to the date immediately preceding the Company's Election Conversion Date (and, after such holder's receipt of the Notice of Conversion at Company's Election, without regard to the conversion limitations set forth in Section 2(k) below). (i) FRACTIONAL SHARES. The Company shall not issue any fraction of a share of Common Stock upon any conversion. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one Preferred Share by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of a fraction of a share of Common Stock. If, after the aforementioned aggregation, the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. (j) TAXES. The Company shall pay any and all taxes which may be imposed upon it with respect to the issuance and delivery of Common Stock upon the conversion of the Preferred Shares. (k) CONVERSION RESTRICTIONS. Other than a conversion pursuant to Section 2(g) or 2(h), the right of a holder of Preferred Shares to convert Preferred Shares pursuant to this Section 2 shall be limited as set forth below. Without the prior consent of the Company, a holder of Preferred Shares shall not be entitled convert an aggregate number of Preferred Shares from the Issuance Date of such Preferred Shares through the date of this determination in excess of the number of Preferred Shares which when divided by the number of Preferred Shares purchased by such holder on such Issuance Date would exceed (i) 0.20 for the period beginning on the date which is 46 days after the Issuance Date and ending on and including the date which is 90 days after the Issuance Date, (ii) 0.40 for the period beginning on and including the date which is 91 days after the Issuance Date and ending on and including the date which is 135 days after the Issuance Date, (iii) 0.60 for the period beginning on the date which is 136 days after the Issuance Date and ending on and including the date which is 180 days after the Issuance Date, (iv) 0.80 for the period beginning on and including the date which is 181 -14- days after the Issuance Date and ending on and including the date which is 225 days after the Issuance Date and (v) 1.00 for the period beginning on and including the date which is 226 days after the Issuance Date and ending on and including the date which is five years after the Issuance Date. Notwithstanding the foregoing, the conversion restriction set forth in this Section 2(k) shall not apply (x) if there shall have occurred a Material Adverse Change (as defined below), (y) with respect to any conversion of Preferred Shares at a Conversion Price which is equal to the Fixed Conversion Price then in effect or (z) the Company has delivered a Put Share Notice (as defined under the Securities Purchase Agreement). For purposes of this Section 2(k), "MATERIAL ADVERSE CHANGE" means any change, event, result or happening involving, directly or indirectly, the Company or any of its subsidiaries resulting in a material adverse effect on the business, prospects, financial condition or results or operations of the Company and its subsidiaries, taken as a whole, including, without limitation, an event constituting a Major Business Event (as defined in the Securities Purchase Agreement) or a Triggering Event shall have occurred. (l) ADJUSTMENT OF CONVERSION RESTRICTIONS UPON ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells Convertible Securities that are convertible into Common Stock and are subject to restrictions on the amount of shares that can be converted (the restriction on conversions being herein referred to as, the "CONVERSION RESTRICTIONS") and such Conversion Restriction is not formulated with using the same time periods and percentages used in Section 2(k), the Company shall provide written notice thereof via facsimile and overnight courier to each holder of the Preferred Shares ("CONVERSION RESTRICTION NOTICE") on the date of issuance of such Convertible Securities. If the holders of Preferred Shares representing at least two-thirds (2/3) of the Preferred Shares then outstanding which remain subject to the restrictions in Section 2(k) provide written notice via facsimile and overnight courier (the "CONVERSION RESTRICTION ELECTION NOTICE") to the Company within five (5) business days of receiving a Conversion Restriction Notice that such holders desire to replace the conversion restrictions set forth in Section 2(k) then in effect with the Conversion Restriction described in such Conversion Restriction Notice, the Company shall prepare and deliver to each holder of the Preferred Shares via facsimile and overnight courier a copy of an amendment to this Certificate of Designations (the "CONVERSION RESTRICTION AMENDMENT") that substitutes the Conversion Restriction for conversion restrictions set forth in Section 2(k) (together with such modifications to this Certificate of Designations as may be required to give full effect to the substitution of the Conversion Restriction for the conversion restrictions set forth in Section 2(k)) within five (5) business days after receipt of the requisite number of Conversion Restriction Election Notices set forth above. The Company shall file such Conversion Restriction Amendment with the Secretary of State of the State of Delaware within five (5) business days after delivery of the Conversion Restriction Amendment to the holders of the Preferred Shares; provided that in the event that the Company receives a notice prior to the filing of the Conversion Restriction Amendment from any holder who has delivered a Conversion Restriction Election Notice in connection with such Conversion Restriction Amendment that such holder objects to the form of the Conversion Restriction Amendment, the Company shall not file such Conversion Restriction Amendment until such time as the -15- Conversion Restriction Amendment has been revised to the reasonable satisfaction of such holder and approved in writing by the holders of the Preferred Shares representing at least two-thirds (2/3) of the Preferred Shares then outstanding. Except as provided in the preceding proviso, a holder's delivery of a Conversion Restriction Election Notice shall serve as the consent required to amend this Certificate of Designations pursuant to Section 14 below. (3) REDEMPTION AT OPTION OF HOLDERS. (a) REDEMPTION OPTION UPON MAJOR TRANSACTION. In addition to all other rights of the holders of Preferred Shares contained herein, simultaneous with the occurrence of a Major Transaction (as defined below), each holder of Preferred Shares shall have the right, at such holder's option, to require the Company to redeem all or a portion of such holder's Preferred Shares at a price per Preferred Share equal to greater of (i) Liquidation Value (as defined in Section 10 below) and (ii) the product of (A) the Conversion Rate at such time and (B) the Closing Bid Price on the date of the public announcement of such Major Transaction or the next date on which the exchange or market on which the Common Stock is traded is open if such public announcement is made (X) after 12:00 p.m., Central Time, time on such date or (Y) on a date on which the exchange or market on which the Common Stock is traded is closed ("MAJOR TRANSACTION REDEMPTION PRICE"). (b) REDEMPTION OPTION UPON TRIGGERING EVENT. In addition to all other rights of the holders of Preferred Shares contained herein, after a Triggering Event (as defined below), each holder of Preferred Shares shall have the right, at such holder's option, to require the Company to redeem all or a portion of such holder's Preferred Shares at a price per Preferred Share equal to the greater of (i) $12,500 and (ii) the product of (A) the Conversion Rate at such time and (B) the Closing Did Price calculated as of the date immediately preceding such Triggering Event on which the exchange or market on which the Common Stock is traded is open ("TRIGGERING EVENT REDEMPTION PRICE" and, collectively with "MAJOR TRANSACTION REDEMPTION PRICE," the "REDEMPTION PRICE"); provided, however, that in the case of Triggering Event described in Section 3(d)(iii) below, the Triggering Event Redemption Price shall equal the greater of (i) the Liquidation Value and (ii) the product of (A) the Conversion Rate at such time and (B) the Closing Bid Price calculated as of the date immediately preceding such Triggering Event on which the exchange or market on which the Common Stock is traded is open. The Company hereby warrants and agrees that the Fixed Conversion Price for any Preferred Shares that are not redeemed after the occurrence of a Triggering Event described in Section 3(d)(iii) below shall be reset to equal the lesser of (x) 150% of the Market Price on the date of issuance of the applicable Preferred Shares, subject to adjustment, and (y) 150% of the Market Price on the date immediately following such Triggering Event on which the exchange or market on which the Common Stock is traded is open. -16- (c) "MAJOR TRANSACTION". A "MAJOR TRANSACTION" shall be deemed to have occurred at such time as any of the following event: (i) the consolidation, merger or other business combination of the Company with or into another Person (other than pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company) pursuant to which either (x) the continuing or surviving entity is not a public company or (y) the stockholders of the Company existing at the time of such consolidation, merger or other business combination cannot elect a majority of the directors of the continuing or surviving entity immediately following such consolidation, merger or business combination. (ii) the sale or transfer of all or substantially all of the Company's assets pursuant to which either (x) the purchasing entity is not a public company or (y) the stockholders of the Company existing at the time of such sale cannot elect a majority of the directors of the purchasing entity immediately following such sale; or (iii) a purchase, tender or exchange offer made to and accepted by the holders of more than 10% of the outstanding shares of Common Stock which requires or receives the consent of the Company's Board of Directors. (d) "TRIGGERING EVENT". A "TRIGGERING EVENT" shall be deemed to have occurred at such time as any of the following events: (i) the failure of the Registration Statement to be declared effective by the SEC on or prior to the date that is 240 days after the Initial Issuance Date; (ii) while the Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of the Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to the holder of the Preferred Shares for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten consecutive trading days, provided that the cause of such lapse or unavailability is not due to factors solely within the control of such holder of Preferred Shares; (iii) the failure of the Common Stock to be listed on the Nasdaq National Market, The Nasdaq SmallCap Market, The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. for a period of seven consecutive days (provided that such failure shall not constitute a Triggering Event if the Company delists the Common Stock at the election of the holders of Preferred Shares pursuant to Section 3(g) below); or -17- (iv) the Company's notice to any holder of Preferred Shares, including by way of public announcement, at any time, of its intention not to comply with proper requests for conversion of any Preferred Shares into shares of Common Stock, including due to any of the reasons set forth in Section 6(a) below. (e) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON MAJOR TRANSACTION. No sooner than 15 days nor later than 10 days prior to the consummation of a Major Transaction, but not prior to the public announcement of such Major Transaction, the Company shall deliver written notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR TRANSACTION") to each holder of Preferred Shares. At any time after receipt of a Notice of Major Transaction, the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding may require the Company to redeem all of the holder's Preferred Shares then outstanding by delivering written notice thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the Company, which Notice of Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the number of Preferred Shares that such holders are voting in favor of redemption and (ii) the applicable Major Transaction Redemption Price, as calculated pursuant to Section 3(a) above. (f) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT. Within one (1) day after the occurrence of a Triggering Event, the Company shall deliver written notice thereof via facsimile and overnight courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares. At any time after receipt of a Notice of Triggering Event, the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding may require the Company to redeem all of the Preferred Shares by delivering written notice thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at Option of Buyer Upon Triggering Event shall indicate (i) the number of Preferred Shares that such holders are voting in favor of redemption and (ii) the applicable Triggering Event Redemption Price, as calculated pursuant to Section 3(b) above. (g) PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt of a Notice(s) of Redemption at Option of Buyer Upon Major Transaction or a Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the case may be, from the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding, the Company shall immediately notify each holder by facsimile of the Company's receipt of such requisite notices necessary to affect a redemption and each holder of Preferred Shares shall thereafter promptly send such holder's Preferred Stock Certificates to be redeemed to the Company or its Transfer Agent. The Company shall deliver the applicable Redemption Price to such holder within five days after the Company's receipt of the requisite notices required to affect a redemption; provided, however, that the Major Transaction Redemption Price must be delivered to such holder prior to, or simultaneously with, the occurrence of a Major Transaction; provided further that a holder's Preferred Stock Certificates shall have been so delivered to the Company or its Transfer Agent; provided further that if the Company is unable to redeem all of the -18- Preferred Shares, the Company shall redeem an amount from each holder of Preferred Shares equal to such holder's pro-rata amount (based on the number of Preferred Shares held by such holder relative to the number of Preferred Shares outstanding) of all Preferred Shares being redeemed. The Company hereby covenants and agrees that a Major Transaction shall not be consummated until the Company redeems all of the Preferred Shares submitted for redemption pursuant to a Major Transaction. If the Company shall fail to redeem all of the Preferred Shares submitted for redemption pursuant to a Triggering Event (other than pursuant to a dispute as to the arithmetic calculation of the Triggering Event Redemption Price), in addition to any remedy such holder of Preferred Shares may have under this Certificate of Designations and the Securities Purchase Agreement, the Triggering Event Redemption Price payable in respect of such unredeemed Preferred Shares shall bear interest at the rate of 1.0% per month (prorated for partial months) until paid in full. Until the Company pays any unpaid applicable Redemption Price in full to each holder, holders of at least two-thirds (2/3) of the Preferred Shares then outstanding, including shares of Preferred Shares submitted for redemption pursuant to this Section 3 and for which the applicable Redemption Price has not been paid, shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption, require the Company to promptly return to each holder all of the Preferred Shares that were submitted for redemption by such holder under this Section 3 and for which the applicable Redemption Price has not been paid, by sending written notice thereof to the Company via facsimile (the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of such Void Optional Redemption Notice(s) and prior to payment of the full applicable Redemption Price to each holder, (i) the Notice(s) of Redemption at Option of Buyer Upon Triggering Event or the Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the case may be, shall be null and void with respect to those Preferred Shares submitted for redemption and for which the applicable Redemption Price has not been paid, (ii) the Company shall immediately return any Preferred Shares submitted to the Company by each holder for redemption under this Section 3(i) and for which the applicable Redemption Price has not been paid, (iii) the Fixed Conversion Price of such returned Preferred Shares shall be adjusted to the lesser of (A) the Fixed Conversion Price as in effect on the date on which the Void Optional Redemption Notice(s) is delivered to the Company and (B) the lowest Closing Bid Price during the period beginning on the date on which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as the case may be, is delivered to the Company and ending on the date on which the Void Optional Redemption Notice(s) is delivered to the Company; provided that no adjustment shall be made if such adjustment would result in an increase of the Fixed Conversion Price then in effect, and (iv) the Conversion Percentage in effect at such time shall be reduced by a number of percentage points equal to the product of (A) .25 and (B) the number of days in the period beginning on the date on which the Notice(s) of Redemption at Option of Buyer Upon Major Transaction or the Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the case may be, is delivered to the Company and ending on the date on which the Void Optional Redemption Notice(s) is delivered to the Company. In addition, if a redemption voided pursuant to this Section 3(i) was caused by a Triggering Event involving the Company's inability to issue Conversion Shares because -19- of the Exchange Cap (as defined in Section 13), and if so directed by the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding, including shares of Preferred Shares submitted for redemption pursuant to this Section 3 with respect to which the applicable Redemption Price has not been paid, in a Void Mandatory Redemption Notice, the Company shall immediately delist the Common Stock from such exchange and have the Common Stock, at such holders' option, listed on The Nasdaq SmallCap Market or traded on the electronic bulletin board or the "pink sheets". Notwithstanding the foregoing, in the event of a dispute as to the determination of the Closing Bid Price or the arithmetic calculation of the Redemption Price, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Closing Bid Price" being substituted for the term "Market Price" and the term "Redemption Price" being substituted for the term "Conversion Rate". Payments provided for in this Section 3 shall have priority to payments to other stockholders in connection with a Major Transaction. (4) COMPANY'S RIGHT TO REDEEM AT ITS ELECTION. Notwithstanding Section 2(g) or anything herein to the contrary but subject to Sections 4(d) and 4(e) below, on the date which is two years after the Issuance Date, but only on such date, the Company shall have the right, in its sole discretion, to redeem ("REDEMPTION AT THE COMPANY'S ELECTION"), from time to time, any or all of the Preferred Shares at the Redemption Price at the Company's Election (as defined below). If the Company elects to redeem some, but not all, of the Preferred Shares, the Company shall redeem an amount from each holder of Preferred Shares equal to such holder's pro-rata amount (based on the number of Preferred Shares held by such holder relative to the number of Preferred Shares outstanding) of all Preferred Shares being redeemed. (a) REDEMPTION PRICE AT THE COMPANY'S ELECTION. The "REDEMPTION PRICE AT THE COMPANY'S ELECTION" shall be an amount per Preferred Share equal to the product of (i) 1.1 multiplied by (ii) the sum of (A) (.06)(P/365)(10,000) plus (B) 10,000; where "P" means the number of days from, but excluding, the Issuance Date through and including the Date of Redemption at the Company's Election (as defined in Section 4(b)). (b) MECHANICS OF REDEMPTION AT THE COMPANY'S ELECTION. The Company shall effect each such redemption no sooner than 20 trading days nor later than 40 trading days after delivering written notice of its Redemption at the Company's Election via facsimile and overnight courier ("NOTICE OF REDEMPTION AT THE COMPANY'S ELECTION") to (i) each holder of the Preferred Shares and (ii) the Transfer Agent. Such Notice of Redemption at the Company's Election shall indicate (A) the number of shares of Preferred Shares that have been selected for redemption, (B) the date that such redemption is to become effective (the "DATE OF REDEMPTION AT THE COMPANY'S ELECTION") AND (C) the applicable Redemption Price at the Company's Election. Notwithstanding the above, any holder may convert into Common Stock pursuant to Section (2)(a) above, on or prior to the date immediately preceding the Date of Redemption at the Company's Election, any Preferred Shares that such holder is otherwise entitled to convert (and, after such holder's receipt of the Notice of Redemption at the Company's Election, without regard to the conversion limitations set -20- forth in Section 2(k)), including Preferred Shares that have been selected for Redemption at the Company's Election pursuant to this Section 4. (c) PAYMENT OF REDEMPTION PRICE. Each holder submitting Preferred Shares being redeemed under this Section 4 shall send such holder's Preferred Stock Certificates so redeemed to the Company or its Transfer Agent within five (5) business days after the Date of Redemption at the Company's Election, and the Company shall pay the applicable Redemption Price at the Company's Election to that holder in cash within three business days after such holder's Preferred Stock Certificates are so delivered to the Company or its Transfer Agent. If the Company shall fail to pay the applicable Redemption Price at the Company's Election to such holder on a timely basis as described in this Section 4(c), in addition to any remedy such holder of Preferred Shares may have under this Certificate of Designations and the Securities Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.5% per month until paid in full. Notwithstanding the foregoing, if the Company fails to pay the applicable Redemption Price at the Company's Election to a holder within the time period described in this Section 4 due to a dispute as to the arithmetic calculation of the Redemption Price at the Company's Election, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Redemption Price at the Company's Election" being substituted for the term "Conversion Rate." (d) COMPANY MUST HAVE IMMEDIATELY AVAILABLE FUNDS OR CREDIT FACILITIES. The Company shall not be entitled to send any Notice of Redemption at the Company's Election pursuant to Section 4(b) above and begin the redemption procedure under this Section 4, unless it has: (i) the full amount of the Redemption Price at the Company's Election in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) credit facilities, with a bank or similar financial institutions that are immediately available and unrestricted for use in redeeming the Preferred Shares, in the full amount of the Redemption Price at the Company's Election; (iii) a written agreement with a standby underwriter or qualified buyer ready, willing and able to purchase from the Company a sufficient number of shares of stock to provide proceeds necessary to redeem any stock that is not converted prior to a Redemption at the Company's Election; or (iv) a combination of the items set forth in the preceding clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price at the Company's Election. (e) CERTAIN CONDITIONS DURING NOTICE PERIOD. The Company shall not be entitled to redeem the Preferred Shares on a Date of Redemption at the Election of the Company. unless each of the following conditions are satisfied as of the date of the -21- Notice of Redemption at the Company's Election and on each day from such date until and including the later of the Date of Redemption at the Company's Election and the date on which the Company pays the applicable Redemption Price: (i) The Company's stockholders shall have approved the issuance of the Securities (as defined below) on or prior to the Date of Redemption at the Company's Election; (ii) The Registration Statement shall be effective and available for the sale of no less than 125% of the sum of (A) the number of Conversion Shares then issuable upon the conversion of all outstanding Preferred Shares, including the Conversion Shares to be issued pursuant to this Conversion at the Company's Election, (B) the number of Warrant Shares then issuable upon exercise of all outstanding Warrants and (C) the number of Conversion Shares and Warrant Shares that are then held by the holders of the Preferred Shares; (iii) The Common Stock is designated for quotation on the Nasdaq National Market or a national securities exchange and is not suspended from trading; (iv) The Average Daily Trading Dollar Volume (as defined in Section 2(h)) is not less than $250,000; (v) The Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of this Certificate of Designations and Sections 2(a) and 2(b) of the Warrants, respectively; and (vi) the Company otherwise has satisfied its obligations and is not in default under this Certificate of Designations, the Securities Purchase Agreement and the Registration Rights Agreement. (5) COMPANY'S RIGHT TO REDEEM IN LIEU OF CONVERSION. (a) Notwithstanding Section 2 or anything herein to the contrary but subject to Section 5(e) below, at any time after the Issuance Date, the Company may elect to redeem Preferred Shares submitted for conversion in lieu of converting such Preferred Shares, provided that the Conversion Rate for such Preferred Shares on the date submitted for conversion is less than $5.00 per share (a "COMPANY REDEMPTION IN LIEU OF CONVERSION"). If the Company elects to redeem some, but not all, of the Preferred Shares submitted for conversion, the Company shall redeem an amount from each holder of Preferred Shares submitted for conversion on the applicable date a number of Preferred Shares equal to such holder's pro-rata amount (based on the number of Preferred Shares held by such holder relative to the number of Preferred Shares outstanding) of all Preferred Shares submitted for conversion which the Company elects to redeem, -22- (b) REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF CONVERSION. The "REDEMPTION PRICE OF COMPANY REDEMPTION IN LIEU OF CONVERSION" shall be an amount per Preferred Share equal to the product of (i) the Conversion Rate of the Preferred Shares on the date such Preferred Shares are submitted for conversion and (ii) the last reported sale price of the Common Stock (as reported by Bloomberg) on the date the applicable Preferred Shares are submitted for conversion. (e) MECHANICS OF COMPANY REDEMPTION IN LIEU OF CONVERSION. The Company shall exercise its right to redeem by delivering written notice by facsimile and overnight courier ("NOTICE OF COMPANY REDEMPTION IN LIEU OF CONVERSION") to (i) each holder of the Preferred Shares and (ii) the Transfer Agent. Such Notice of Company Redemption in Lieu of Conversion at the Company's Election shall indicate (A) the maximum, if any, aggregate Redemption Price of Company Redemption in Lieu of Conversion which the Company is willing to expend for Company Redemption in Lieu of Conversion, (B) confirm the time period during which the Company may effect Company Redemption in Lieu of conversion, which period shall begin on and include the date which is five business days after the date of receipt by all of the holders' of the Notice of Redemption in Lieu of Conversion and shall end on and include the date which is 30 calendar days after the fifth business day following the date of receipt by all of the holders of the Notice of Redemption in Lieu of Conversion (the "REDEMPTION IN LIEU OF CONVERSION PERIOD"). The Company may terminate a Redemption in Lieu of Conversion Period at any time with respect to Preferred Shares which have not been submitted for conversion by delivering written notice of such termination to each holder of Preferred Shares by facsimile and overnight courier. Any Preferred Shares submitted for conversion after the termination of the Redemption in Lieu of Conversion Period or the redemption price of which is in excess of the maximum aggregate Redemption Price of Company Redemption in Lieu of Conversion shall be converted in accordance with Section 2. (d) PAYMENT OF REDEMPTION PRICE. The Company shall pay the applicable Redemption Price of Company Redemption in Lieu of Conversion to the holder of the Preferred Shares being redeemed in cash within a number of days after the termination or expiration of the Redemption in Lieu of Conversion Period equal to (i) five days if the number of Preferred Shares presented for conversion and subject to redemption is less than or equal to 200 Preferred Shares, (ii) 10 days if the number of Preferred Shares presented for conversion and subject to redemption is greater than 200 but less than or equal to 400 Preferred Shares, (iii) 15 days if the number of Preferred Shares presented for conversion and subject to redemption is greater than 400 but less than or equal to 600 Preferred Shares, (iv) 25 days if the number of Preferred Shares presented for conversion and subject to redemption is greater than 600 but less than or equal to 800 Preferred Shares and (v) 35 days if the number of Preferred Shares presented for conversion and subject to redemption is greater than 800. If the Company shall fail to pay the applicable Redemption Price of Company Redemption in Lieu of Conversion to such holder on a timely basis as described in this Section 5(d), in addition to any remedy such holder of Preferred Shares may have under this Certificate of Designations and the Securities Purchase Agreement, such unpaid amount shall bear -23- interest at the rate of 2.5% per month until paid in full. Until the Company pays such unpaid applicable Redemption Price of Company Redemption in Lieu of Conversion full to each holder, each holder of Preferred Shares submitted for redemption pursuant to this Section 5 and for which the applicable Redemption Price of Company Redemption in Lieu of Conversion has not been paid, shall have the option (the "VOID COMPANY REDEMPTION OPTION") to, in lieu of redemption, require the Company to promptly return to each holder all of the Preferred Shares that were submitted for redemption by such holder under this Section 5 and for which the applicable Redemption Price of Company Redemption in Lieu of Conversion has not been paid, by sending written notice thereof to the Company via facsimile (the "VOID COMPANY REDEMPTION NOTICE"). Upon the Company's receipt of such Void Company Redemption Notice(s) and prior to payment of the full applicable redemption price to each holder, (i) the Company's Redemption in Lieu of Conversion shall be null and void with respect to those Preferred Shares submitted for redemption and for which the applicable redemption price has not been paid, (ii) the Company shall immediately return any Preferred Shares submitted to the Company by each holder for redemption under this Section 5 and for which the applicable Redemption Price of Company Redemption in Lieu of Conversion has not been paid and (iii) the Fixed Conversion Price of such returned Preferred Shares shall be adjusted to the lesser of (A) the Conversion Rate applicable to such conversion on the date on which such Preferred Shares were originally presented for conversion and (B) the Conversion Rate which would have been effect if such Preferred Shares were presented for conversion on the business day immediately following the last day on which the Company could have effected a timely Company Redemption in Lieu of Conversion. Notwithstanding the foregoing, if the Company fails to pay the applicable Redemption Price of Company Redemption in Lieu of Conversion to a holder within the time period described in this Section 5(d) due to a dispute as to the arithmetic calculation of the Redemption Price of Company Redemption in Lieu of Conversion, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Redemption Price of Company Redemption in Lieu of Conversion" being substituted for the term "Conversion Rate." If the Company fails to timely effect a Company Redemption in Lieu of Conversion in accordance with this Section 5, the Company shall not be allowed to submit another Notice of Company Redemption in Lieu of Conversion without the prior written consent of the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding. (e) COMPANY MUST HAVE IMMEDIATELY AVAILABLE FUNDS OR CREDIT FACILITIES. The Company shall not be entitled to send any Notice of Company Redemption in Lieu of Conversion pursuant to Section 5(b) above and begin the redemption procedure under this Section 5, unless it has: (i) the full amount of the Redemption Price of Company Redemption in Lieu of Conversion in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) credit facilities, with a bank or similar financial institutions that are immediately available and unrestricted for use in redeeming the Preferred Shares, in the full amount of the Redemption Price of Company Redemption in Lieu of Conversion; -24- (iii) a written agreement with a standby underwriter or qualified buyer ready, willing and able to purchase from the Company a sufficient number of shares of stock to provide proceeds necessary to redeem any stock that is not converted prior to a Company Redemption in Lieu of Conversion; or (iv) a combination of the items set forth in the preceding clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price of Company Redemption in Lieu of Conversion. (6) INABILITY TO FULLY CONVERT. (a) HOLDER'S OPTION IF COMPANY CANNOT FULLY CONVERT. If, upon the Company's receipt of a Conversion Notice, the Company can not issue shares of Common Stock registered for resale under the Registration Statement for any reason, including, without limitation, because the Company (x) does not have a sufficient number of shares of Common Stock authorized and available, (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or its Securities, including without limitation the Exchange Cap, from issuing all of the Common Stock which is to be issued to a holder of Preferred Shares pursuant to a Conversion Notice or (z) fails to have a sufficient number of shares of Common Stock registered for resale under the Registration Statement, then the Company shall issue as many shares of Common Stock as it is able to issue in accordance with such holder's Conversion Notice and pursuant to Section 2(f) above and, with respect to the unconverted Preferred Shares, the holder, solely at such holder's option, can elect to: (i) require the Company to redeem from such holder those Preferred Shares for which the Company is unable to issue Common Stock in accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the Redemption Price as of such Conversion Date; (ii) if the Company's inability to fully convert Preferred Shares is pursuant to Section 6(a)(z) above, require the Company to issue restricted shares of Common Stock in accordance with such holder's Conversion Notice and pursuant to Section 2(f) above; (iii) void its Conversion Notice and retain or have returned, as the case may be, the nonconverted Preferred Shares that were to be converted pursuant to such holder's Conversion Notice; or (iv) if the Company's inability to fully convert Preferred Shares is pursuant to the Exchange Cap described in Section 6(a)(y) above, require the Company to issue shares of Common Stock in accordance with such holder's Conversion Notice and pursuant to Section 2(f) above at a Conversion Price equal to the Market Price of the -25- Common Stock for the five consecutive trading days preceding such holder's Notice in Response to Inability to Convert (as defined below). (b) MECHANICS OF FULFILLING HOLDER'S ELECTION. The Company shall immediately send via facsimile to a holder of Preferred Shares, upon receipt of a facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 6(a) above, a notice of the Company's inability to fully satisfy such holder's Conversion Notice (the "INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Company is unable to fully satisfy such holder's Conversion Notice, (ii) the number of Preferred Shares which cannot be converted and (iii) the applicable Mandatory Redemption Price. Such holder must within five (5) business days of receipt of such Inability to Fully Convert Notice deliver written notice via facsimile to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT") of its election pursuant to Section 6(a) above. (c) PAYMENT OF REDEMPTION PRICE. If such holder shall elect to have its shares redeemed pursuant to Section 6(a)(i) above, the Company shall pay the Mandatory Redemption Price in cash to such holder within thirty (30) days of the Company's receipt of the holder's Notice in Response to Inability to Convert. If the Company shall fail to pay the applicable Mandatory Redemption Price to such holder on a timely basis as described in this Section 6(c) (other than pursuant to a dispute as to the determination of the arithmetic calculation of the Redemption Price), in addition to any remedy such holder of Preferred Shares may have under this Certificate of Designations and the Securities Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.5% per month (prorated for partial months) until paid in full. Until the full Mandatory Redemption Price is paid in full to such holder, such holder may void the Mandatory Redemption with respect to those Preferred Shares for which the full Mandatory Redemption Price has not been paid and receive back such Preferred Shares. Notwithstanding the foregoing, if the Company fails to pay the applicable Mandatory Redemption Price within such thirty (30) days time period due to a dispute as to the determination of the arithmetic calculation of the Redemption Rate, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Redemption Price" being substituted for the term "Conversion Rate". (d) PRO-RATA CONVERSION AND REDEMPTION. In the event the Company receives a Conversion Notice from more than one holder of Preferred Shares on the same day and the Company can convert and redeem some, but not all, of the Preferred Shares pursuant to this Section 6, the Company shall convert and redeem from each holder of Preferred Shares electing to have Preferred Shares converted and redeemed at such time an amount equal to such holder's pro-rata amount (based on the number of Preferred Shares held by such holder relative to the number of Preferred Shares outstanding) of all Preferred Shares being converted and redeemed at such time. (7) REISSUANCE OF CERTIFICATES. In the event of a conversion or redemption pursuant to this Certificate of Designations of less than all of the Preferred Shares represented by a particular Preferred Stock Certificate, the Company shall promptly -26- cause to be issued and delivered to the holder of such Preferred Shares a preferred stock certificate representing the remaining Preferred Shares which have not been so converted or redeemed. (8) RESERVATION OF SHARES. The Company shall, so long as any of the Preferred Shares are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Preferred Shares then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 150% of the number of shares of Common Stock for which the Preferred Shares are at any time convertible; provided further that such shares of Common Stock so reserved shall be allocated for issuance upon conversion of Preferred Shares pro rata among the holders of Preferred Shares based on the number of Preferred Shares held by such holder relative to the total number of authorized Preferred Shares. (9) VOTING RIGHTS. Holders of Preferred Shares shall have no voting rights, except as required by law, including but not limited to the General Corporation Law of the State of Delaware, and as expressly provided in this Certificate of Designations. (10) LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Preferred Shares shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders (the "PREFERRED FUNDS"), before any amount shall be paid to the holders of any of the capital stock of the Company of any class junior in rank to the Preferred Shares in respect of the preferences as to the distributions and payments on the liquidation, dissolution and winding up of the Company, an amount per Preferred Share equal to the sum of (i) $10,000 and (ii) an amount equal to the product of (.06) (N/365) ($10,000) (such sum being referred to as the "LIQUIDATION VALUE"); provided that, if the Preferred Funds are insufficient to pay the full amount due to the holders of Preferred Shares and holders of shares of other classes or series of preferred stock of the Company that are of equal rank with the Preferred Shares as to payments of Preferred Funds (the "PARI PASSU SHARES"), then each holder of Preferred Shares and Pari Passu Shares shall receive a percentage of the Preferred Funds equal to the full amount of Preferred Funds payable to such holder as a liquidation preference, in accordance with their respective Certificate of Designations, Preferences and Rights, as a percentage of the full amount of Preferred Funds payable to all holders of Preferred Shares and Pari Passu Shares. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Neither the consolidation or merger of the Company with or into any other Person, nor the sale or transfer by the Company of less than substantially all of its assets, shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. No holder of Preferred Shares shall be entitled to receive any amounts with respect thereto upon any liquidation, dissolution or winding up of the Company other than the amounts provided for herein. -27- (11) PREFERRED RANK. All shares of Common Stock shall be of junior rank to all Preferred Shares in respect to the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Company. The rights of the shares of Common Stock shall be subject to the preferences and relative rights of the Preferred Shares. Without the prior express written consent of the holders of not less than two-thirds (2/3) of the then outstanding Preferred Shares, the Company shall not hereafter authorize or issue additional or other capital stock that is of senior or equal rank to the Preferred Shares in respect of the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Company. Without the prior express written consent of the holders of not less than two-thirds (2/3) of the then outstanding Preferred Shares, the Company shall not hereafter authorize or make any amendment to the Company's Certificate of Incorporation or bylaws, or file any resolution of the board of directors of the Company with the Delaware Secretary of State containing any provisions, which would adversely affect or otherwise impair the rights or relative priority of the holders of the Preferred Shares relative to the holders of the Common Stock or the holders of any other class of capital stock. In the event of the merger or consolidation of the Company with or into another corporation, the Preferred Shares shall maintain their relative powers, designations and preferences provided for herein and no merger shall result inconsistent therewith. (12) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO OTHER CAPITAL STOCK. Until all of the Preferred Shares have been converted or redeemed as provided herein, the Company shall not, directly or indirectly, redeem, or declare or pay any cash dividend or distribution on, its Common Stock without the prior express written consent of the holders of not less than two-thirds (2/3) of the then outstanding Preferred Shares. (13) LIMITATION ON NUMBER OF CONVERSION SHARES. The Company shall not be obligated to issue, in the aggregate, more than 1,975,120 shares of Common Stock (such amount to be proportionately and equitably adjusted from time to time in the event of stock splits, stock dividends, combinations, reverse stock splits, reclassification, capital reorganizations and similar events relating to the Common Stock) (the "EXCHANGE CAP") upon conversion of the Preferred Shares, if issuance of a larger number of shares of Common Stock would constitute a breach of the Company's obligations under the rules or regulations of The Nasdaq Stock Market, Inc. or any other principal securities exchange or market upon which the Common Stock is or becomes traded. The Exchange Cap shall be allocated among the Preferred Shares pro rata based on the total number of authorized Preferred Shares. (14) VOTE TO CHANGE THE TERMS OF PREFERRED SHARES. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of the holders of not less than two-thirds (2/3) of the then outstanding Preferred Shares, shall be required for any change to this Certificate of Designations or the Company's Certificate of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Preferred Shares. -28- (15) LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the Preferred Shares, and, in the case of loss, theft or destruction, of any indemnification undertaking by the bolder to the Company and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock certificate(s) of like tenor and date; provided, however, the Company shall not be obligated to re-issue preferred stock certificates if the holder contemporaneously requests the Company to convert such Preferred Shares into Common Stock. -29- IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by Dr. Edward W. Savarese, its Chief Executive Officer as of the 21st day of August, 1997. IMAGING TECHNOLOGIES CORPORATION By: /s/ Edward W. Savarese ------------------------------ Name: Dr. Edward W. Savarese Its: Chief Executive Officer EX-10.(E3) 3 EXHIBIT 10(E3) AMENDMENT TO EMPLOYMENT AGREEMENT AS AMENDED APRIL 1, 1998 1) Change title of Chief Executive Officer to Executive Vice President for Strategic Business Affairs. 2) 300,000 shares as previously granted for future performance vesting monthly over four (4) years. 3) Target bonus for the 1st 3 Quarters @ $60,0000 (annualized) and the 4th Quarter at $15,000 (annualized). Thereafter at $15,000 annually and/or may be determined by the Board of Directors. A bonus will not be paid if the company does less than 75% of plan pre-tax/interest. Between 75% and 100% of plan, the bonus is paid pro-rata. Above plan, the company will accrue 5% of the incremental pre-tax profits, all or some of which the Board will distribute in its discretion. Imaging Technologies Corporation By: /s/ [ILLEGIBLE] /s/ Brian Bonar ---------------------------------- Title: Chairman CEO ------------------------------- /s/ Edward W. Savarese ------------------------------------- Edward W. Savarese EX-10.(E4) 4 EXHIBIT 10(E4) AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT This Amendment to Executive Employment Agreement ("Amendment") is made and entered into by and between Edward W. Savarese ("Employee") and Imaging Technologies Corporation (the "Company") on June 12, 1998. 1. Executive and Company are parties to an Executive Employment Agreement ("Agreement") entered into as of July 1, 1990 and amended as of February 25, 1994, January 22, 1997, and April 1, 1998. 2. In consideration of the mutual covenants and agreements set forth below, Executive and the Company agree as follows: (a) Executive resigns from his position as a Director of the Board of the Company effective as of the date of this Amendment. (b) Employee shall no longer be Executive Vice-President for Strategic Business Affairs. Employee shall be employed as the Manager of Business Development. (c) COMPENSATION. Paragraph 3.1 of the Executive Employment Agreement as amended is further amended to provide that for all services Employee may render to the Company during the Term of this Agreement as amended, Employee will be compensated as follows: 07-01-98/06-30-02 Years 9-12 - $188,750 Such annual salary shall be payable in equal bi-monthly installments, subject to income tax, withholding and other payroll tax deductions required by applicable state and federal law. (d) TERMINATION WITHOUT CAUSE. Paragraph 5.6 of the Executive Employment Agreement as amended is amended to provide that if the Company terminates Employee's employment at-will, the Company shall nonetheless pay to Employee his salary as provided in paragraph 2(c) of this Amendment, together with any other compensation or benefits due hereunder, for the remainder of the 12-year term; all in a lump sum within 72 hours after such termination, and continue all his fringe benefits for the remainder of the 12-year term. The parties further agree that in the event the Company terminates the Employee's employment at-will, any of the Employee's unvested Warrants shall become immediately vested and the Company shall cause these Warrants to be registered if they have not been previously registered. At his option, the Employee shall be able to -1- use either a portion or the entire lump sum provided for in this paragraph towards the purchase of these Warrants. (e) INDEMNITY AND INSURANCE COVERAGE. The Company agrees to defend and also agrees to indemnify, other than for punitive damages, Employee against any claim, damage, debt, liability, action, cause of action, cost or expense, including attorneys' fees and costs, actually paid or incurred arising out of or in any way connected with Employee's acts or omissions arising out of Employee's service as a Director, officer, or employee of the Company. Company shall continue to include Employee as a named insured on the Company's insurance policy or policies for Director's and Officer's coverage. (f) WARRANTS. Executive shall have the Option, exercisable at any time upon written notice to the Company, to require the Company to advance compensation otherwise payable to Employee in an amount sufficient to fund Employee's purchase of 315,000 shares of the Common Stock of the Company at the current warrant price of $1.00 per share. Except as otherwise set forth in this paragraph (f), the parties agree that nothing in this Amendment affects Employee's rights as a shareholder of the Company, or affects any Warrants previously awarded to the Employee. Company agrees that in exchange for the Employee signing this Amendment, the Company will register all of the Employee's Warrants that have not yet been registered. Company further acknowledges that by signing this Amendment, Employee has completely satisfied his obligation to the Company for the $30,000.00 owed by the Employee for warrants which he previously exercised. (g) The Company and Employee agree that any bonus that has been paid to Employee as of the date of this Amendment shall be considered already earned and shall not be subject to any future adjustment. The Chief Executive Officer of the Company and the Company's Board of Directors shall decide in their sole discretion whether to pay Employee any bonus in the future. Date: June 12, 1998 "COMPANY": IMAGING TECHNOLOGIES CORPORATION By /s/ Brian Bomar ------------------------------------ BRIAN BOMAR CEO ------------------------------------ (Printed Name and Title] Dated: June 12 1998 "EMPLOYEE": /s/ Edward W. Savarese --------------------------------------- EDWARD W. SAVARESE -2- EX-10.(G3) 5 EXHIBIT 10(G3) AMENDMENT TO CONSULTING AGREEMENT This Amendment to the Consulting Agreement ("Amendment") is made and entered into by and between Irwin Roth ("Consultant") and Imaging Technologies Corporation (the "Company") on June 12, 1998. 1. Consultant and Company are parties to a Consulting Agreement ("Agreement") entered into as of April 1, 1994 and amended as of February 25, 1994, January 22, 1997, and April 1, 1998. 2. In consideration of the mutual covenants and agreements set forth below, Consultant and the Company agree as follows: (a) Consultant resigns from his position as a Director of the Board of the Company effective as of the date of this Amendment. (b) COMPENSATION. Paragraph 3 of the Consultant Agreement as amended is further amended to provide that for all services Consultant may render to the Company during the Term of this Agreement as amended, Consultant will be compensated as follows: 07-01-98 / 06-30-02 Each year $55,583 Such cash compensation shall be payable in monthly installments, of $4,631.91, in addition to any compensation as provided in paragraph d. (c) INDEMNITY AND INSURANCE COVERAGE. The Company agrees to defend and also agrees to indemnify, other than for punitive damages, Consultant against any claim, damage, debt, liability, action, cause of action, cost or expense, including attorneys' fees and costs, actually paid or incurred, arising out of or in any way connected with Consultant's acts or omissions arising out of Consultant's service as a Director, officer, or Consultant of the Company. Company shall continue to include Consultant as a named insured on the Company's insurance policy or policies for Director's and Officer's coverage. (d) WARRANTS. Consultant shall have the Option, exercisable at any time upon written notice to the Company, to require the Company to advance compensation otherwise payable to Consultant in an amount sufficient to fund Consultant's purchase of 209,667 shares of the Common Stock of the Company at the current warrant price of $1.00 per share. Except as otherwise set forth in this paragraph (d), the parties agree that nothing in this Amendment affects Consultant's rights as a shareholder of the Company, or affects any Warrants previously awarded to the Consultant. Company agrees that in exchange for the Consultant signing this Amendment, the Company will register all of the Consultant's Warrants that have not yet been registered in a timely manner. Company further acknowledges that by signing this agreement all outstanding warrants will be immediately vested. Date: June 12, 1998 "COMPANY" IMAGING TECHNOLOGIES CORPORATION By /s/ Brian Bonar --------------------------------- BRIAN BONAR CEO ------------------------------------ [Printed Name and Title] Date: June 12, 1998 "CONSULTANT" /s/ Irwin Roth ------------------------------------ IRWIN ROTH EX-10.(Q1) 6 EXHIBIT 10(Q1) AMENDMENT TO EMPLOYMENT AGREEMENT AS AMENDED APRIL 1, 1998 1) Replace Chief Operating Officer by Chief Executive Officer. 2) Salary is raised to $250,000 per year 3) Target bonus for 1st 3 Quarters is $40,000 (annualized) and $50,000 in the 4th Quarter (annualized) and thereafter. A bonus will not be paid if the company does less than 75% of plan pre-tax/ interest. Between 75% and 100% of plan, the bonus is paid pro-rata. Above plan, the company will accrue 5% of the incremental pre-tax profits, all or some of which the Board will distribute at its discretion. 3) 200,000 shares as previously granted for future performance vesting monthly over four (4) years. 4) 250,000 shares for future performance vesting monthly over four (4) years. Imaging Technologies Corporation By: [ILLEGIBLE] --------------------------------------- Title: Chairman ----------------------------------- /s/ Brian Bonar ------------------------------------------ Brian Bonar EX-10.(R) 7 EXHIBIT 10(R) [LOGO] PROMISSORY NOTE - --------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $2,500,000.00 06-23-1998 06-30-2001 624001 JM /s/ JM - --------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - --------------------------------------------------------------------------------------------------------- BORROWER: IMAGING TECHNOLOGIES CORPORATION; ET. AL. LENDER: IMPERIAL BANK 11031 VIA FRONTERA, SUITE 100 SAN DIEGO REGIONAL OFFICE SAN DIEGO, CA 92127-1706 701 B STREET, SUITE 600 SAN DIEGO, CA 92112-4168 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT: $2,500,000.00 INITIAL RATE: 9.250% DATE OF NOTE: JUNE 23,1998
PROMISE TO PAY. IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED and AMT ACCEL UK LIMITED (REFERRED TO IN THIS NOTE INDIVIDUALLY AND COLLECTIVELY AS "BORROWER") JOINTLY AND SEVERALLY PROMISE TO PAY TO IMPERIAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF TWO MILLION FIVE HUNDRED THOUSAND & 00/100 DOLLARS ($2,500,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM JUNE 23, 1998, UNTIL PAID IN FULL. PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX, BORROWER WILL PAY THIS LOAN IN 35 PAYMENTS OF $80,094.69 EACH PAYMENT AND AN IRREGULAR LAST PAYMENT ESTIMATED AT $80,094.64. BORROWER'S FIRST PAYMENT IS DUE JULY 30, 1998, AND ALL SUBSEQUENT PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT WILL BE DUE ON JUNE 30, 2001, AND WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID. PAYMENTS INCLUDE PRINCIPAL AND INTEREST. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the Imperial Bank Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as its Prime Rate of interest from time to time. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INDEX CURRENTLY IS 8.500%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.750 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 9.250%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (b) increase Borrower's payments to cover accruing interest, (c) increase the number of Borrower's payments, and (d) continue Borrower's payments at the same amount and increase Borrower's final payment. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower making fewer payments. LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged 5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within ten (10) days; or (b) if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 5.750 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. (INITIAL HERE [ILLEGIBLE]/GB) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this document ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have 06-23-1998 PROMISSORY NOTE PAGE 2 (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. 2. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. 3. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 4. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, 1280 through 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. SECURITY AND LOAN AGREEMENT. This Note is subject to the provisions of the Security and Loan Agreement and Addendum dated June 23, 1998 and all amendments thereto and replacements therefor. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Each Borrower understands and agrees that, with or without notice to Borrower, Lender may with respect to any other Borrower (a) make one or more additional secured or unsecured loans or otherwise extend additional credit; (b) alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security, with or without the substitution of new collateral; (d) apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreements, as Lender in its discretion may determine; (e) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; and (f) determine how, when and what application of payments and credits shall be made on any other indebtedness owing by such other borrower. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. EACH BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: IMAGING TECHNOLOGIES CORPORATION IMAGING TECHNOLOGIES CORPORATION BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT PRIME INTERNATIONAL, CO-BORROWER BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT NEWGEN SYSTEMS ACQUISITIONS CORPORATION, CO-BORROWER BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT MCMICAN CORPORATION, CO-BORROWER BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT COLOR SOLUTIONS INC., CO-BORROWER BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT 06-23-1998 PROMISSORY NOTE PAGE 3 (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEC EUROPE LIMITED, CO-BORROWER BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT AMT ACCEL UK LIMITED, CO-BORROWER BY: /s/ Brian Bonar ------------------------------- BRIAN BONAR, C.E.O. BY: /s/ Gerry Berg ------------------------------- GERRY BERG, VICE PRESIDENT EX-10.(S) 8 EXHIBIT 10(S) [LOGO] IMPERIAL BANK Member FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE AND/OR INVENTORY) This Agreement is entered into between IMAGING TECHNOLOGIES CORPORATION, ET. AL. (SEE EXHIBIT "A1" ATTACHED HERETO) , A CORPORATIONS (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: * % of Eligible Accounts * % of the Value of Inventory and in no event more than $ 2,500,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account on demand and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of THREE QUARTERS OF ONE percent (0.750%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $250.00 Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Inventory" means all of the Borrower's goods, merchandise and other personal property which are held for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed, or to be used or consumed in Borrower's business, and shall include all property rights, patents, plans, drawings, diagrams, schematics, assembly and display materials relating thereto. C. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. D. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. E. "Value of Inventory" means the value of Borrower's Inventory determined in accordance with generally accepted accounting principles consistently applied excluding, however, the amount of progress payments, pre-delivery payments, deposits and any other sums received by Borrower in anticipation of the sale and delivery of Inventory, all Inventory on consignment or lease to others, and all property on consignment or lease from others to Borrower. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor and all merchandise giving rise thereto, and hereby grants to Bank a continuing security interest in all Borrower's Inventory and in all proceeds and products thereof, whether now owned or hereafter existing or acquired, including all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts and inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. 8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is found or affected; (ii) Borrower is, or at the time the Collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (i) Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon, and reports as to the Inventory and sales thereof; (iii) Permit representatives of Bank to inspect the Inventory and Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location at which the Inventory is or will be kept, other than for temporary processing, storage or similar purposes, and of any removal thereof to a new location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; (viii) Do all acts necessary to maintain, preserve and protect all Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof, and (ix) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commenced by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) immediately take possession of the collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at as option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. 16. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of this Agreement, any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this Agreement, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. 17. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent twenty (20) or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 18. Reference Provision. A. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this document ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP") which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. B. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. C. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. D. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 19. Additional Provisions: *SEE ATTACHED (EXIMBANK FACILITY). /X/ if checked, the Addendum or Exhibit "A" attached (and all amendments thereto and replacements therefor) is incorporated herein by this reference. Executed this 23RD day of JUNE ,1998 ----------------------------------- (Name of Borrower) IMPERIAL BANK BY: ----------------------------------- (Authorized Signature and Title) SEE EXHIBIT "A1" ATTACHED HERETO BY: Michael A. Berrier Vice President BY: ------------------------------------ ----------------------------------- IMPERIAL BANK Title (Authorized Signature and Title) EXHIBIT"A1" Attachment to the Security and Loan Agreement between IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED and IMPERIAL BANK DATED June 23, 1998. Imaging Technologies Corporation By: /s/ Brian Bonar -------------------------------- By: /s/ Gerry Berg Vice Pres -------------------------------- Prima International By: /s/ Brian Bonar -------------------------------- By: /s/ Gerry Berg Vice Pres -------------------------------- Newgen Systems Acquisitions Corporation By: /s/ Brian Bonar -------------------------------- By: /s/ Brian Bonar Vice Pres -------------------------------- Mc McMican Corporation By: /s/ Brian Bonar -------------------------------- By: /s/ Gerry Berg Vice Pres -------------------------------- Color Solutions, Inc. By: /s/ Brian Bonar -------------------------------- By: /s/ Gerry Berg Vice Pres -------------------------------- ITEC Europe Limited By: /s/ Brian Bonar -------------------------------- By: /s/ Gerry Berg Vice Pres -------------------------------- Amt Ascel UK Limited By: /s/ Brian Bonar -------------------------------- By: /s/ Gerry Berg Vice Pres -------------------------------- EXHIBIT "A" (Eximbank Facility) ADDENDUM TO SECURITY AND LOAN AGREEMENT ("Security and Loan Agreement") BETWEEN IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMIT ACCEL UK LIMITED, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., AND IMPERIAL BANK. DATED: JUNE 23, 1998 This Addendum is made and entered into June 23, 1998 between IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION AND COLOR SOLUTIONS, INC. ("Borrowers") hereby jointly and severally, and Imperial Bank ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on September 30, 1999, subject to Bank's right to renew said commitment at its sole discretion. Any renewal of the commitment shall not be binding upon the Bank unless it is in writing and signed by an officer of the Bank. 2. Borrowers represent and warrant that: a. LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrowers, and Borrowers are not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. FINANCIAL CONDITION. The consolidated balance sheet of Borrowers as of March 31, 1998, and the related consolidated profit and loss statement on that date, a copy of which has heretofore been delivered to Bank by Borrowers, and all other statements and data submitted in writing by Borrowers to Bank in connection with this request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrowers as of the date thereof and the results of the operations of Borrowers for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition or business of Borrowers. Borrowers have no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrowers have not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a material adverse effect upon its financial condition, operations or business as now conducted. c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights patents and license rights of others. d. TAX STATUS., Borrowers have no liability for any delinquent state, local or federal taxes, and, if Borrowers have contracted with any government agency, Borrowers have no liability for re-negotiation of profits. 3. Borrowers agree that so long as they are indebted to Bank or so long as Bank has any obligation to extend credit to Borrowers, they WILL NOT, without Bank's WRITTEN CONSENT: a. TYPE OF BUSINESS, MANAGEMENT. Make any substantial change in the character of their business; or make any change in its executive management. b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown in financial statement dated March 31, 1998, excluding those being refinanced by Bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. c. Liens and Encumbrances. Create, incur, assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by them, other than liens for taxes not delinquent and liens in Bank's favor. d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the normal and ordinary course of their business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of their business. e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or sell any assets except in the ordinary and normal course of their business as now conducted; or sell, lease, assign, or transfer any substantial part of their business or fixed assets, or any property or other assets necessary for the continuance of their business as now conducted, including without limitation the selling of any property or other asset accompanied by leasing back of same. 4. Should there be a default under the Security and Loan Agreement, the General Security Agreement or under the Note, all obligations, loans and liabilities of Borrowers to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. 5. Pursuant to the provisions in the Security and Loan Agreement and this exhibit, Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time (eligible Foreign Accounts Receivable shall mean those trade accounts from the sale of items due and payable to Borrower in the United States and any notes, drafts, letters of credit, or insurance proceeds supporting payments thereof, for goods or services which are intended for export). Advance rates for eligible accounts will be as follows:
Foreign ------- Imaging Technology Corp. 90% PCPI Technologies Corp. 90% Prima International Corp. 90% Newgen Imaging Systems Corp. 80%
"Eligible Accounts" shall also NOT include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of any Borrower b. Accounts with respect to which 25% or more of the account debtor's total accounts or obligations outstanding to any Borrower are more than 90 days from invoice date. c. For accounts representing more than 20% of total accounts receivable, the balance in excess of the 20% is not eligible. However, the Bank may deem, at its sole discretion, the entire amount, or any portion thereof, eligible. d. Credit balances greater than 90 days from invoice date. e. Government receivables, unless assigned to the Bank. f. All accounts sold to and purchased from a company of common name/ownership, whereby a potential offset exists. g. Accounts over 90 calendar days from invoice date. h. Consignment or guaranteed sales. i. Bill and hold accounts. j. Equipment rental offsets. k. Collection accounts. 1. C.O.D. accounts more than 30 days from invoice date. m. Any account evidenced by a letter of credit, until the date of shipment of the items covered by such letter of credit; n. Any account which the Bank or EXIMBANK in its reasonable judgement, deems uncollectible for any reason; o. Accounts payable in a currency other than U.S. dollars, except as may be approved in writing by EXIMBANK; p. Accounts from a military buyer, except as may be approved in writing by EXIMBANK; q. Any account due and collectible outside the United States, except as may be approved in writing by EXIMBANK; r. Accounts in the name of a buyer located in a country in which EXIMBANK is legally prohibited from doing business as designated in the country limitation schedule; s. Accounts from buyers in a country where EXIMBANK coverage is not available for commercial reasons as designated in the country limitation schedule (as defined in the EXIMBANK agreement mentioned in 8.n below) unless and only to the extent that such items are to be sold to such country on terms of a letter of credit confirmed by a bank acceptable to EXIMBANK. 6. Borrower may borrow against eligible inventory deemed acceptable to Bank, up to a $1,250,000 sublimit within the line of credit, not to exceed 50% of the balance outstanding on the line of credit, contingent upon Borrowing Base availability, and substantiated by monthly inventory certification submitted by Borrower to Bank. Eligible Inventory shall only include Inventory as Bank in its sole discretion shall determine are eligible from time to time. The advance rates on eligible inventory will be as follows:
Foreign ------- Imaging Technology Corp. 50% PCPI Technologies Corp. 50% Prima International Corp. 50% Newgen Imaging Systems Corp. 60%
Inventory eligible for advance under the Security and Loan agreement shall NOT include the following: a. any Inventory which is not located in the United States; b. any demonstration Inventory or Inventory sold on consignment; c. any Inventory consisting of proprietary software; d. any Inventory which is damaged, obsolete, returned, defective, recalled or unfit for further processing; e. any Inventory which has been previously exported from the United States; f. any Inventory which constitutes defense articles or defense services; g. any Inventory which is to be incorporated into items destined for shipment to a Buyer located in a country in which Eximbank is legally prohibited from doing business as designated in the Country Limitation Schedule; h. any Inventory which is to be incorporated into items destined for shipment to a buyer located in a country in which Eximbank coverage is not available for commercial reasons as designated in the Country Limitation Schedule, unless and only to the extent that such items are to be sold to such country on terms of a Letter of Credit confirmed by a bank acceptable to Eximbank; i. any Inventory which would result in an ineligible Account; j. Inventory reserve amounts; k. Inventory not insured, naming Bank loss payee; 1. Inventory with no liquidation value due to various causes, i.e., service requirements, warranty requirements, etc.; m. Inventory located in areas making it difficult to verify its existence, or which will cause undue expense in liquidation due to transportation costs, or other logistical reasons; n. Inventory other than finished goods (i.e. raw materials and work in process). 7. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a quarterly basis. All financial reports and statements and calculation of financial covenants will be on a consolidated basis. 8. Borrowers affirmatively covenant that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, or so long as Bank has any obligation to extend credit to borrowers, they WILL: a. Have and maintain a minimum effective tangible net worth (meaning net worth plus subordinated debt, less intangible assets including but not limited to goodwill, patents, copyrights, and organization expenses), of not less than $12,500,000 beginning with the period ending 6/30/98. b. Have and maintain a trading ratio trading assets (accounts receivable and inventory) to trading liabilities (accounts payable and bank lines outstanding) of at least 1.30 to 1.00 beginning with the period ending 6/30/98, and thereafter. c. Have and maintain a maximum ratio of total debt (less subordinated debt), to tangible net worth (plus subordinated debt) not to exceed 1.75 to 1.00, beginning with the period ending 6/30/97, and thereafter. d. Have and maintain trading capital (trading assets minus trading liabilities as defined in 8.b above) of not less than $6,000,000 for the period ending 6/30/98, and thereafter. e. Have and maintain a minimum debt service coverage (EBIDA / P&I) of 2.50: 1. f. Borrowers shall maintain all significant bank accounts and banking relationship with Bank. g. Within 10 days from each month-end, deliver to Bank an accounts receivable aging reconciled to the general ledger of Borrower's, a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent, and an inventory certification outlining both inventory composition and activity for the month. All the foregoing will be in form satisfactory to the Bank. Also provide the Bank on a quarterly basis or more frequent if demanded by Bank, a complete address list of all active customers. h. Within 45 days after the end of each quarter end, deliver to Bank a profit and loss statement and a balance sheet in form satisfactory to Bank all certified by an officer of Borrowers. i. Within 90 days after end of Borrower's fiscal year, deliver to Bank the same financial statements as otherwise provided quarterly together with Changes in Financial Position Statement, reviewed by an independent certified public accountant selected by Borrower but acceptable to Bank. j. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. k. INSURANCE Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to the Bank. Bank to be named as loss payee. 1. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental changes upon or against it or any of its properties, and any of its liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any material adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed adequate with respect thereto. m. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times. n. EXIMBANK AGREEMENT. Comply with all terms of the Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement dated as of 6/15/98 executed by Borrower and acknowledged by Bank ("Eximbank Agreement"). 9. INTEREST RATE. The rate of interest applicable to the Loan Accounts shall be .75% above the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the Loan Account is outstanding divided by 360, which shall, for interest computation purposes, be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest, at any time. Notice of such demand may be given verbally or in writing and should be effective upon receipt by Borrower. 10. NOTICE OF DEFAULT. Borrowers shall promptly notify Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and lapse of time would be an event of default. 11. JOINT AND SEVERAL LIABILITY OF BORROWERS. The liability of each Borrower under the Security and Loan Agreement, this Addendum and all other documents executed pursuant to the transaction contemplated herein is join and several. Discharge of any Borrower except for full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of any Collateral, or any impairment or suspension of Bank's rights against any Borrower, or any transfer of a Borrower's interest to another shall not affect the liability of any other Borrower. All Borrowers waive: (a) any right to require the Bank to proceed against any Borrower before any other, or to pursue any other remedy: (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until all obligations of Borrowers to Bank are repaid in full; (d) any and all right of subrogation to Bank until all obligations of Borrowers to Bank are repaid in full. 12. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or delay on the part of Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any not issued in connection with a loan that Bank may make hereunder are cumulative to, not exclusive of, any rights or remedies otherwise available. 13. The terms and conditions of this Addendum and the Security and Loan Agreement extend to all obligations of Borrower to Bank and the Borrower agrees to comply with all such terms and conditions until all obligations of Borrower to Bank are repaid in full. Should there be a default under the Security and Loan Agreement, this Addendum, any General Security Agreement executed by Borrower, under any note executed by Borrower, or under any other obligations of Borrower to Bank, or the provisions of any documents executed by Borrower in relation to any such obligation (and Borrower shall have failed to cure such default within any applicable cure period), all obligations, loans and liabilities of Borrower to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. 14. This Addendum is executed by and on behalf of the parties as of the date first above written. IMAGING TECHNOLOGIES CORPORATION, "BORROWER" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- PRIMA INTERNATIONAL "Borrower" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- NEWGEN SYSTEMS ACQUISITIONS CORPORATION, "BORROWER" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- ITEC EUROPE LIMITED "BORROWER" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- AMT ACCEL UK LIMITED, "Borrower" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- McMICAN CORP., "BORROWER" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- COLOR SOLUTIONS, INC. "BORROWER" By: /s/ Brian Bonar ------------------------------------- Title: CEO ---------------------------------- By: /s/ Gerry Berg ------------------------------------- Title: Vice President ---------------------------------- IMPERIAL BANK "BANK" By: /s/ Brian Bonar ------------------------------------- Title: Vice President ---------------------------------- EX-10.(T) 9 EXHIBIT 10(T) [LOGO] IMPERIAL BANK MEMBER FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE AND/OR INVENTORY) This Agreement is entered into between IMAGING TECHNOLOGIES CORPORATION, ET. AL. (SEE EXHIBIT "A1" ATTACHED HERETO) , A CORPORATIONS (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: * % of Eligible Accounts * % of the Value of Inventory and in no event more than $1,000,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account on demand and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of THREE QUARTERS OF ONE percent (0.750%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Inventory" means all of the Borrower's goods, merchandise and other personal property which are held for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed, or to be used or consumed in Borrower's business, and shall include all property rights, patents, plans, drawings, diagrams, schematics, assembly and display materials relating thereto. C. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. D. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. E. "Value of inventory" means the value of Borrower's Inventory determined in accordance with generally accepted accounting principles consistently applied excluding, however, the amount of progress payments, pre-delivery payments, deposits and any other sums received by Borrower in anticipation of the sale and delivery of Inventory, all Inventory on consignment or lease to others, and all property on consignment or lease from others to Borrower. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor and all merchandise giving rise thereto, and hereby grants to Bank a continuing security interest in all Borrower's Inventory and in all proceeds and products thereof, whether now owned or hereafter existing or acquired, including all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts and Inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting Inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. 8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is found or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (i) Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon, and reports as to the Inventory and sales thereof; (iii) Permit representatives of Bank to inspect the Inventory and Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location at which the Inventory is or will be kept, other than for temporary processing, storage or similar purposes, and of any removal thereof to a new location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; (viii) Do all acts necessary to maintain, preserve and protect all Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof, and (ix) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of Inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commenced by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law, or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at as option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. 16. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of this Agreement, any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this Agreement, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. 17. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent twenty (20) or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 18. Reference Provision. A. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this document ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. B. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. C. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. D. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 19. Additional Provisions: *SEE ATTACHED (FOREIGN INSURED A/R LINE). /X/ If checked, the Addendum or Exhibit "A" attached (and all amendments thereto and replacements therefor) is incorporated herein by this reference. Executed this 23RD day of JUNE, 1998 ---------------------------------- (Name of Borrower) IMPERIAL BANK BY: ---------------------------------- (Authorized Signature and Title) SEE EXHIBIT "A1" ATTACHED HERETO BY: /s/ Michael A. Berrier Vice President BY: --------------------------------------- ---------------------------------- IMPERIAL BANK Title (Authorized Signature and Title) EXHIBIT "A1" Attachment to the Security and Loan Agreement between IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED and IMPERIAL BANK dated June 23,1998. Imaging Technologies Corporation By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- Prima International By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- Newgen Systems Acquisitions Corporation By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- McMican Corporation By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- Color Solutions, Inc. By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- ITEC Europe Limited By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- Amt Accel UK Limited By: /s/ Brian Bonar -------------------------------------- By: /s/ Gerry Berg VICE PRES -------------------------------------- EXHIBIT "A" (Foreign Insured A/R Line) ADDENDUM TO SECURITY AND LOAN AGREEMENT ("SECURITY AND LOAN AGREEMENT") BETWEEN IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., AND IMPERIAL BANK. DATED: JUNE 23, 1998 This Addendum is made and entered into June 23, 1998, between IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION AND COLOR SOLUTIONS, INC. ("Borrowers") hereby jointly and severally, and Imperial Bank ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on September 30, 1999, subject to Bank's right to renew said commitment at its sole discretion. Any renewal of the commitment shall not be binding upon the Bank unless it is in writing and signed by an officer of the Bank. 2. Borrowers represent and warrant that: a. LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrowers, and Borrowers are not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. FINANCIAL CONDITION. The consolidated balance sheet of Borrowers as of March 31, 1998, and the related consolidated profit and loss statement on that date, a copy of which has heretofore been delivered to Bank by Borrowers, and all other statements and data submitted in writing by Borrowers to Bank in connection with this request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrowers as of the date thereof and the results of the operations of Borrowers for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition or business of Borrowers. Borrowers have no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrowers have not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a material adverse effect upon its financial condition, operations or business as now conducted. c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights patents and license rights of others. d. TAX STATUS. Borrowers have no liability for any delinquent state, local or federal taxes, and, if Borrowers have contracted with any government agency, Borrowers have no liability for re-negotiation of profits. 3. Borrowers agree that so long as they are indebted to Bank, or so long as Bank has any obligation to extend credit to Borrowers, they WILL NOT, without Bank's WRITTEN CONSENT: a. TYPE OF BUSINESS, MANAGEMENT. Make any substantial change in the character of their business; or make any change in its executive management. b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown in financial statement dated March 31, 1998, excluding those being refinanced by Bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by them, other than liens for taxes not delinquent and liens in Bank's favor. d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the normal and ordinary course of their business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of their business. e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity, or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or sell any assets except in the ordinary and normal course of their business as now conducted; or sell, lease, assign, or transfer any substantial part of their business or fixed assets, or any property or other assets necessary for the continuance of their business as now conducted, including without limitation the selling of any property or other asset accompanied by leasing back of same. 4. Should there be a default under the Security and Loan Agreement, the General Security Agreement or under the Note, all obligations, loans and liabilities of Borrowers to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. 5. Pursuant to the provisions in the Security and Loan Agreement and this exhibit, Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time (eligible Foreign Accounts Receivable shall mean those trade accounts from the sale of items due and payable to Borrower and any notes, drafts, letters of credit, or insurance proceeds supporting payments thereof, for goods or services which are intended for export). Advance rates for eligible foreign accounts will be as follows:
Imaging Technology Corp. 90% PCPI Technologies Corp. 90% Prima International Corp. 90% Newgen Imaging Systems Corp. 90%
"Eligible Accounts" shall also NOT include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of any Borrower b. Accounts with respect to which 25% or more of the account debtor's total accounts or obligations outstanding to any Borrower are more than 90 days from invoice date. c. For accounts representing more than 20% of total accounts receivable, the balance in excess of the 20% is not eligible. However, the Bank may deem, at its sole discretion, the entire amount, or any portion thereof, eligible. d. Credit balances greater than 90 days from invoice date. e. Government receivables, unless assigned to the Bank. f. All accounts sold to and purchased from a company of common name/ownership, whereby a potential offset exists. g. Accounts over 90 calendar days from invoice date. h. Consignment or guaranteed sales. i. Bill and hold accounts. j. Equipment rental offsets. k. Collection accounts. l. C.O.D. accounts more than 30 days from invoice date. m. Any account evidenced by a letter of credit, until the date of shipment of the items covered by such letter of credit; n. Accounts payable in a currency other than U.S. dollars, except as may be approved in writing by Bank; o. Accounts from a military buyer, except as may be approved in writing by Bank; 5. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a quarterly basis. All financial reports and statements and calculation of financial covenants will be on a consolidated basis. 6. Borrowers affirmatively covenant that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, or so long as Bank has any obligation to extend credit to Borrowers, they WILL: a. Have and maintain a minimum effective tangible net worth (meaning net worth plus subordinated debt, less intangible assets including but not limited to goodwill, patents, copyrights, and organization expenses), of not less than $12,500,000 beginning with the period ending 6/30/98. b. Have and maintain a trading ratio trading assets (accounts receivable and inventory) to trading liabilities (accounts payable and bank lines outstanding) of at least 1.30 to 1.00 beginning with the period ending 6/30/98, and thereafter. c. Have and maintain a maximum ratio of total debt (less subordinated debt), to tangible net worth (plus subordinated debt) not to exceed 1.75 to 1.00, beginning with the period ending 6/30/97, and thereafter. d. Have and maintain trading capital (trading assets minus trading liabilities as defined in pp.8b above) of not less than $6,000,000 for the period ending 6/30/98, and thereafter. e. Have and maintain a minimum debt service coverage (EBIDA/P&I) of 2.50:1. f. Borrowers shall maintain all significant bank accounts and banking relationship with Bank.. g. Within 10 days from each month-end, deliver to Bank an accounts receivable aging reconciled to the general ledger of Borrower's, a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent, and an inventory certification outlining both inventory composition and activity for the month. All the foregoing will be in form satisfactory to the Bank. Also provide the Bank on a quarterly basis or more frequent if demanded by Bank, a complete address list of all active customers. h. Within 45 days after the end of each quarter end, deliver to Bank a profit and loss statement and a balance sheet in form satisfactory to Bank all certified by an officer of Borrowers. i. Within 90 days after end of Borrower's fiscal year, deliver to Bank the same financial statements as otherwise provided quarterly together with Changes in Financial Position Statement, reviewed by an independent certified public accountant selected by Borrower but acceptable to Bank. j. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. k. INSURANCE Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to the Bank. Bank to be named as loss payee. l. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental changes upon or against it or any of its properties, and any of its liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any material adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed adequate with respect thereto. m. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times. n. ACCOUNTS RECEIVABLE INSURANCE. Maintain foreign accounts receivable insurance (by the Export Import Bank of the United States or another acceptable foreign insurance policy). Insurance policy is subject to review and approval by Imperial Bank. 7. INTEREST RATE. The rate of interest applicable to the Loan Accounts shall be 1.00% above the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the Loan Account is outstanding divided by 360, which shall, for interest computation purposes, be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest, at any time. Notice of such demand may be given verbally or in writing and should be effective upon receipt by Borrower. 8. NOTICE OF DEFAULT. Borrowers shall promptly notify Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and lapse of time would be an event of default. 9. JOINT AND SEVERAL LIABILITY OF BORROWERS. The liability of each Borrower under the Security and Loan Agreement, this Addendum and all other documents executed pursuant to the transaction contemplated herein is join and several. Discharge of any Borrower except for full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of any Collateral, or any impairment or suspension of Bank's rights against any Borrower, or any transfer of a Borrower's interest to another shall not affect the liability of any other Borrower. All Borrowers waive: (a) any right to require the Bank to proceed against any Borrower before any other, or to pursue any other remedy: (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until all obligations of Borrowers to Bank are repaid in full; (d) any and all right of subrogation to Bank until all obligations of Borrowers to Bank are repaid in full. 10. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or delay on the part of Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any not issued in connection with a loan that Bank may make hereunder are cumulative to, not exclusive of, any rights or remedies otherwise available. 11. The terms and conditions of this Addendum and the Security and Loan Agreement extend to all obligations of Borrower to Bank and the Borrower agrees to comply with all such terms and conditions until all obligations of Borrower to Bank are repaid in full. Should there be a default under the Security and Loan Agreement, this Addendum, any General Security Agreement executed by Borrower, under any note executed by Borrower, or under any other obligations of Borrower to Bank, or the provisions of any documents executed by Borrower in relation to any such obligation (and Borrower shall have failed to cure such default within any applicable cure period), all obligations, loans and liabilities of Borrower to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. 12. This Addendum is executed by and on behalf of the parties as of the date first above written. IMAGING TECHNOLOGIES CORPORATION, "BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- PRIMA INTERNATION "BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- NEWGEN SYSTEMS ACQUISITIONS CORPORATION, "BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- ITEC EUROPE LIMITED, "BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- AMT, ACCEL LIMITED, "BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- MCMICAN CORP., BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- COLOR SOLUTIONS, INC. "BORROWER" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- IMPERIAL BANK "BANK" BY: /s/ Brian Bonar -------------------------------- TITLE: CEO ----------------------------- BY: /s/ Gerry Berg -------------------------------- TITLE: Vice President ----------------------------- EX-10.(U) 10 EXHIBIT 10(U) [LOGO] IMPERIAL BANK MEMBER FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE AND/OR INVENTORY) This Agreement is entered into between IMAGING TECHNOLOGIES CORPORATION, ET. AL. (SEE EXHIBIT "A1" ATTACHED HERETO) , a CORPORATIONS (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: - % of Eligible Accounts - % of the Value of Inventory and in no event more than $ 3,500,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account on demand and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of THREE QUARTERS OF ONE percent (0.750%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Inventory" means all of the Borrower's goods, merchandise and other personal property which are held for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed, or to be used or consumed in Borrower's business, and shall include all property rights, patents, plans, drawings, diagrams, schematics, assembly and display materials relating thereto. C. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. D. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. E. "Value of Inventory" means the value of Borrower's Inventory determined in accordance with generally accepted accounting principles consistently applied excluding, however, the amount of progress payments, pre-delivery payments, deposits and any other sums received by Borrower in anticipation of the sale and delivery of Inventory, all Inventory on consignment or lease to others, and all property on consignment or lease from others to Borrower. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor and all merchandise giving rise thereto, and hereby grants to Bank a continuing security interest in all Borrower's inventory and in all proceeds and products thereof, whether now owned or hereafter existing or acquired, including all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts and Inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting Inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. 8. Borrower represents and warrants to Bank: (i) if Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is found or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (i) Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon, and reports as to the Inventory and sales thereof; (iii) Permit representatives of Bank to inspect the Inventory and Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location at which the Inventory is or will be kept, other than for temporary processing, storage or similar purposes, and of any removal thereof to a new location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; (viii) Do all acts necessary to maintain, preserve and protect all Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof, and (ix) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of Inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commenced by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt of moratorium law or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at as option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. 16. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of this Agreement, any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this Agreement, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. 17. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent twenty (20) or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 18. Reference Provision. A. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this document ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. B. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. C. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. D. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 19. Additional Provisions: *SEE ATTACHED (DOMESTIC LINE). /x/ If checked, the Addendum or Exhibit "A" attached (and all amendments thereto and replacements therefor) is incorporated herein by this reference. Executed this 23RD day of JUNE, 1998 -------------------------------- (Name of Borrower) IMPERIAL BANK BY: -------------------------------- (Authorized Signature and Title) SEE EXHIBIT "A1" ATTACHED HERETO By: /s/ Michael E. Berrier Vice President BY: -------------------------------------- -------------------------------- IMPERIAL BANK Title (Authorized Signature and Title) EXHIBIT "A1" Attachment to the Security and Loan Agreement between IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED and IMPERIAL BANK dated June 23, 1998. Imaging Technologies Corporation By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- Prima International By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- Newgen Systems Acquisitions Corporation By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- McMican Corporation By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- Color Solutions, Inc. By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- ITEC Europe Limited By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- Amt Accel UK Limited By: /s/ Brian Bonar ----------------------------------- By: /s/ Gerry Berg VICE PRES ----------------------------------- EXHIBIT "A" (Domestic Line) ADDENDUM TO SECURITY AND LOAN AGREEMENT ("SECURITY AND LOAN AGREEMENT") BETWEEN IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION, COLOR SOLUTIONS, INC., AND IMPERIAL BANK. DATED: JUNE 23, 1998 This Addendum is made and entered into June 23, 1998, between IMAGING TECHNOLOGIES CORPORATION, PRIMA INTERNATIONAL, NEWGEN SYSTEMS ACQUISITIONS CORPORATION, ITEC EUROPE LIMITED, AMT ACCEL UK LIMITED, MCMICAN CORPORATION AND COLOR SOLUTIONS, INC. ("Borrowers") hereby jointly and severally, and Imperial Bank ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on September 30, 1999, subject to Bank's right to renew said commitment at its sole discretion. Any renewal of the commitment shall not be binding upon the Bank unless it is in writing and signed by an officer of the Bank. 2. Borrowers represent and warrant that: a. LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrowers, and Borrowers are not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. FINANCIAL CONDITION. The consolidated balance sheet of Borrowers as of March 31, 1998, and the related consolidated profit and loss statement on that date, a copy of which has heretofore been delivered to Bank by Borrowers, and all other statements and data submitted in writing by Borrowers to Bank in connection with this request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrowers as of the date thereof and the results of the operations of Borrowers for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no material adverse changes in the financial condition or business of Borrowers. Borrowers have no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrowers have not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a material adverse effect upon its financial condition, operations or business as now conducted. c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights patents and license rights of others. d. TAX STATUS. Borrowers have no liability for any delinquent state, local or federal taxes, and, if Borrowers have contracted with any government agency, Borrowers have no liability for re-negotiation of profits. 3. Borrowers agree that so long as they are indebted to Bank, or so long as Bank has any obligation to extend credit to Borrowers, they WILL NOT, without Bank's WRITTEN CONSENT: a. TYPE OF BUSINESS, MANAGEMENT. Make any substantial change in the character of their business; or make any change in its executive management. b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown in financial statement dated March 31, 1998, excluding those being refinanced by Bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by them, other than liens for taxes not delinquent and liens in Bank's favor. d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the normal and ordinary course of their business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of their business. e. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or sell any assets except in the ordinary and normal course of their business as now conducted; or sell, lease, assign, or transfer any substantial part of their business or fixed assets, or any property or other assets necessary for the continuance of their business as now conducted, including without limitation the selling of any property or other asset accompanied by leasing back of same. 4. Should there be a default under the Security and Loan Agreement, the General Security Agreement or under the Note, all obligations, loans and liabilities of Borrowers to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. 5. Pursuant to the provisions in the Security and Loan Agreement and this exhibit, Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. Advance rates for eligible accounts will be as follows:
Domestic -------- Imaging Technology Corp. 80% PCPI Technologies Corp. 80% Prima International Corp. 80% Newgen Imaging Systems Corp. 70%
"Eligible Accounts" shall also NOT include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of any Borrower b. Accounts with respect to which 25% or more of the account debtor's total accounts or obligations outstanding to any Borrower are more than 90 days from invoice date. c. For accounts representing more than 20% of total accounts receivable, the balance in excess of the 20% is not eligible. However, the Bank may deem, at its sole discretion, the entire amount, or any portion thereof, eligible. d. Credit balances greater than 90 days from invoice date. d. Government receivables, unless assigned to the Bank. f. All accounts sold to and purchased from a company of common name/ownership, whereby a potential offset exists. g. Accounts over 90 calendar days from invoice date. h. Consignment or guaranteed sales. i. Bill and hold accounts. j. Equipment rental offsets. k. Collection accounts. l. C.O.D. accounts more than 30 days from invoice date. 6. Borrower may borrow against eligible inventory deemed acceptable to Bank, up to a $1,750,000 sublimit within the line of credit, not to exceed 50% of the balance outstanding on the line of credit, contingent upon Borrowing Base availability, and substantiated by monthly inventory certification submitted by Borrower to Bank. Eligible Inventory shall only include Inventory as Bank in its sole discretion shall determine are eligible from time to time. The advance rate on eligible inventory will be as follows:
Domestic -------- Imaging Technology Corp. 0% PCPI Technologies Corp. 0% Prima International Corp. 0% Newgen Imaging Systems Corp. 40%
Inventory eligible for advance under the Security and Loan agreement shall NOT include the following: a. any Inventory which is not located in the United States; b. any demonstration Inventory or Inventory sold on consignment; c. any Inventory consisting of proprietary software; d. any Inventory which is damaged, obsolete, returned, defective, recalled or unfit for further processing; e. any Inventory which has been previously exported from the United States; f. any Inventory which constitutes defense articles or defense services; g. any Inventory which would result in an ineligible Account; h. Inventory reserve amounts; i. Inventory not insured, naming Bank loss payee; j. Inventory with no liquidation value due to various causes, i.e., service requirements, warranty requirements, etc.; k. Inventory located in areas making it difficult to verify its existence, or which will cause undue expense in liquidation due to transportation costs, or other logistical reasons; l. Inventory other than finished goods (i.e. raw materials and work in process). 7. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a quarterly basis. All financial reports and statements and calculation of financial covenants will be on a consolidated basis. 8. Borrowers affirmatively covenant that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, or so long as Bank has any obligation to extend credit to Borrowers, they WILL: a. Have and maintain a minimum effective tangible net worth (meaning net worth plus subordinated debt, less intangible assets including but not limited to goodwill, patents, copyrights, and organization expenses), of not less than $12,500,000 beginning with the period ending 6/30/98. b. Have and maintain a trading ratio trading assets (accounts receivable and inventory) to trading liabilities (accounts payable and bank lines outstanding) of at least 1.30 to 1.00 beginning with the period ending 6/30/98, and thereafter. c. Have and maintain a maximum ratio of total debt (less subordinated debt), to tangible net worth (plus subordinated debt) not to exceed 1.75 to 1.00, beginning with the period ending 6/30/97, and thereafter. d. Have and maintain trading capital (trading assets minus trading liabilities as defined in pp.8b above) of not less than $6,000,000 for the period ending 6/30/98, and thereafter. e. Have and maintain a minimum debt service coverage (EBIDA/P&I) of 2.50:1. f. Borrowers shall maintain all significant bank accounts and banking relationship with Bank. g. Within 10 days from each month-end, deliver to Bank an accounts receivable aging reconciled to the general ledger of Borrower's, a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent, and an inventory certification outlining both inventory composition and activity for the month. All the foregoing will be in form satisfactory to the Bank. Also provide the Bank on a quarterly basis or more frequent if demanded by Bank, a complete address list of all active customers. h. Within 45 days after the end of each quarter end, deliver to Bank a profit and loss statement and a balance sheet in form satisfactory to Bank all certified by an officer of Borrowers. i. Within 90 days after end of Borrower's fiscal year, deliver to Bank the same financial statements as otherwise provided quarterly together with Changes in Financial Position Statement, reviewed by an independent certified public accountant selected by Borrower but acceptable to Bank. j. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. k. INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to the Bank. Bank to be named as loss payee. l. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental changes upon or against it or any of its properties, and any of its liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any material adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed adequate with respect thereto. m. RECORDS AND REPORTS. Maintain a standard and modem system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times. 9. INTEREST RATE. The rate of interest applicable to the Loan Accounts shall be .75% above the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the Loan Account is outstanding divided by 360, which shall, for interest computation purposes, be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest, at any time. Notice of such demand may be given verbally or in writing and should be effective upon receipt by Borrower. The default rate of interest shall be five percent per year in excess of the rate otherwise applicable. 10. NOTICE OF DEFAULT. Borrowers shall promptly notify Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and lapse of time would be an event of default. 11. JOINT AND SEVERAL LIABILITY OF BORROWERS. The liability of each Borrower under the Security and Loan Agreement, this Addendum and all other documents executed pursuant to the transaction contemplated herein is join and several. Discharge of any Borrower except for full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of any Collateral, or any impairment or suspension of Bank's rights against any Borrower, or any transfer of a Borrower's interest to another shall not affect the liability of any other Borrower. All Borrowers waive: (a) any right to require the Bank to proceed against any Borrower before any other, or to pursue any other remedy; (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until all obligations of Borrowers to Bank are repaid in full; (d) any and all right of subrogation to Bank until all obligations of Borrowers to Bank are repaid in full. 12. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or delay on the part of Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any not issued in connection with a loan that Bank may make hereunder are cumulative to, not exclusive of, any rights or remedies otherwise available. 13. The terms and conditions of this Addendum and the Security and Loan Agreement extend to all obligations of Borrower to Bank and the Borrower agrees to comply with all such terms and conditions until all obligations of Borrower to Bank are repaid in full. Should there be a default under the Security and Loan Agreement, this Addendum, any General Security Agreement executed by Borrower, under any note executed by Borrower, or under any other obligations of Borrower to Bank, or the provisions of any documents executed by Borrower in relation to any such obligation (and Borrower shall have failed to cure such default within any applicable cure period), all obligations, loans and liabilities of Borrower to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies. 14. This Addendum is executed by and on behalf of the parties as of the date first above written. IMAGING TECHNOLOGIES CORPORATION, "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- PRIMA INTERNATIONAL "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- NEWGEN SYSTEMS ACQUISITIONS CORPORATION, "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- ITEC EUROPE LIMITED, "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- AMT ACCEL UK LIMITED, "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- McMICAN CORP., "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- COLOR SOLUIONS, INC. "BORROWER" BY: /s/ Brian Bonar -------------------------- TITLE: CEO ----------------------- BY: /s/ Gerry Berg -------------------------- TITLE: VICE PRESIDENT ----------------------- IMPERIAL BANK "BANK" BY: /s/ Brian Bonar -------------------------- TITLE: VICE PRESIDENT ----------------------- EX-10.(W) 11 EXHIBIT 10(W) THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation Imaging Technologies Corporation, a Delaware Corporation Number of Shares: 60,000 Class of Stock: Common Initial Exercise Price: $2.50 per share Issue Date: June 23, 1998 Expiration Date: June 23, 2003 THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and for other good and valuable consideration, IMPERIAL BANK or registered assignee ("Holder") is entitled to purchase the number of fully paid and non-assessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE 1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering this Warrant and a duly executed Notice of Exercise in substantially the form attached as Appendix I to the principal office of the Company. Unless Holder is exercising the conversion fight set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.5. 1.3 ALTERNATIVE STOCK APPRECIATION RIGHT. At Holder's option, the Company shall pay Holder the fair market value of the Shares issuable upon conversion of this Warrant pursuant to Section 1.2 in cash in lieu of such Shares. 1.4 FAIR MARKET VALUE. If the Shares are traded regularly in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY. 1.7.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition"means any sale, license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. The Company shall use reasonable efforts to cause the surviving corporation to assume the obligations of this Warrant. 1.7.3. NONASSUMPTION. If upon the closing of any Acquisition the successor entity does not assume the obligations of this WARRANT AND HOLDER has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the Acquisition on the same terms as other holders of the same class of securities of the Company. 1.7.4 PURCHASE RIGHT. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant 2 immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a dividend on its common stock payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time, in the manner set forth on Exhibit B, if attached, in the event of Diluting Issuances (as defined on Exhibit A). 2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 3 2.6 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of SUCH registration rights. 3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all communiques to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 4 3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company agrees that the Shares shall be subject to the registration rights set forth on Exhibit B. ARTICLE 4. MISCELLANEOUS. 4.1 TERM: NOTICE OF EXPIRATION. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 LEGENDS. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 NOTICES. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such Holder from time to time. 5 4.6 WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 ATTORNEYS' FEES. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. Imaging Technologies Corporation By: /s/ Brian Bonar ------------------------------- Name: Brian Bonar ------------------------------- Title: CEO ------------------------------- By: /s/ Gerry Berg ------------------------------- Name: Gerry Berg ------------------------------- Title: Vice President ------------------------------- 6 APPENDIX I NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase _____ shares of the Common Stock of Imaging Technologies Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to _____ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: Chief Financial Officer Controllers Department Imperial Bank P.O. Box 92991 Los Angeles, CA 90009 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. IMPERIAL BANK - -------------------------------------- (Signature) - ------------------------- (Date) 7 APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE __________________,_____ Chief Financial Officer Controllers Department Imperial Bank P.O. Box 92991 Los Angeles, CA 90009 Gentleperson: This is to advise you that the Warrant issued to you described below will expire on June 23, 2003. Issuer: Imaging Technologies Corporation Issue Date: June 23, 1998 Class of Security Issuable: Common Exercise Price Per Share: $2.50 Number of Shares Issuable: 60,000 Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. IMAGING TECHNOLOGIES CORPORATION By: /s/ Brian Bonar -------------------------------- Its: CEO ------------------------------- By: /s/ Gerry Berg -------------------------------- Its: Vice President ------------------------------- 8 EXHIBIT A IMPERIAL BANK ANTIDILUTION AGREEMENT This Antidilution Agreement is entered into as of June 23, 1998, by and between Imperial Bank ("Purchaser") and Imaging Technologies Corporation ("the Company"). RECITALS A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant as a result of a Diluting Issuance (as defined below). C. Capitalized terms used herein shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Definitions. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option or warrant to subscribe for, purchase or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume or fix a record date for determining persons entitled to receive any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) Issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any common stock Issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on the date of the Warrant; the Shares; or common stock Issued as incentive or in a nonfinancing transaction to employees, officers, directors or consultants to the Company. 10 (e) The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. 2. DEEMED ISSUANCE OF ADDITIONAL COMMON SHARES. The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. ADJUSTMENT OF WARRANT PRICE FOR DILUTING ISSUANCES. 3.1 RATCHET ADJUSTMENT. If the Company issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Warrant Price in effect immediately before such Issue (a "Diluting Issuance"), the Warrant Price shall be reduced to the lesser of: (a) the amount of such consideration per Additional Common Share; or (b) if the Company's common stock is traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, the last reported bid or sale price of the Company's common stock on the first trading day following a public announcement of the Issuance. 3.2 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant Price the number of Shares Issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares Issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price. 3.3 SECURITIES DEEMED OUTSTANDING. For the purpose of this Section 3, all securities Issuable upon exercise of any outstanding Convertible Securities or Options, Warrants, or other rights to acquire securities of the Company shall be deemed to be outstanding. 4. NO ADJUSTMENT FOR ISSUANCES FOLLOWING DEEMED ISSUANCES. No adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 11 5. ADJUSTMENT FOLLOWING CHANGES IN TERMS OF OPTIONS OR CONVERTIBLE SECURITIES. If the consideration payable to, or the amount of common stock Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. RECOMPUTATION UPON EXPIRATION OF OPTIONS OR CONVERTIBLE SECURITIES. The Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. LIMIT ON READJUSTMENTS. No readjustment of the Warrant Price pursuant to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 8. 30 DAY OPTIONS. In the case of any Options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. COMPUTATION OF CONSIDERATION. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) CASH shall be valued at the amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (b) PROPERTY. Property, other than cash, shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) MIXED CONSIDERATION. The consideration for Additional Ccommon Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: 12 (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. GENERAL. 10.1 GOVERNING LAW. This Antidilution Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 ENTIRE AGREEMENT. Except as set forth below, this Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Purchaser in writing. 10.5 SEVERABILITY. In case any provision of this Antidilution Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 10.6 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 COUNTERPARTS. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 13 PURCHASER ISSUER IMPERIAL BANK IMAGING TECHNOLOGIES CORPORATION By: /s/ Michael A. Berrier By: /s/ Brian Bonar ------------------------- ----------------------- Name: Michael A. Berrier Name: Brian Bonar Title: Vice President Title: CEO Address: 701 13 Street Address: San Diego, CA 90181 By: /s/ Gerry Berg ----------------------- Name: Gerry Berg Title: Vice President Address: 14 EXHIBIT B REGISTRATION RIGHTS The Shares shall be deemed "registrable securities" or otherwise entitled to "piggy back" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s): None ----------------------------------------------------------- [Identify Agreement by date, title and parties. If no Agreement exists, indicate by "none."] The Company agrees that no amendments will be made to the Agreement which would have an adverse impact on Holder's registration thereunder without the consent of Holder. By acceptance of the Warrant to which this Exhibit C is attached, Holder shall not be deemed to be a party to the Agreement, but solely entitled to the registration rights created thereby. If no Agreement exists, then the Company and the Holder shall enter into Holder's standard form of Registration Rights Agreement as in effect on the Issue Date of the Warrant. 15 EX-10.(X) 12 EXHIBIT 10(X) SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of August 21, 1997, by and among Imaging Technologies Corporation, a Delaware corporation, with headquarters located at 11031 Via Frontera, San Diego, California 92127 (the "COMPANY"), and the investors listed on the Schedule of Buyers attached hereto (individually, a "BUYER" and collectively, the "BUYERS"). WHEREAS: A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT"); B. The Company has authorized the following new series of its Preferred Stock, par value $1,000 per share (the "PREFERRED STOCK"): the Company's Series C Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), which shall be convertible into shares of the Company's Common Stock, par value $.005 per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in accordance with the terms of the Company's Certificate of Designations, Preferences and Rights of the Preferred Shares, substantially in the form attached hereto as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS"); C. The Buyers wish to purchase, upon the terms and conditions stated in this Agreement, initially an aggregate of 500 of the Preferred Shares (the "INITIAL PREFERRED SHARES") in the respective amounts set forth opposite each Buyer's name on the Schedule of Buyers and one warrant, in substantially the form attached hereto as EXHIBIT E (the "WARRANTS"), to acquire 400 shares of Common Stock for each Preferred Share purchased, which Warrants shall expire four years after the date of issuance; D. Subject to the terms and conditions set forth in this Agreement, each Buyer may have the right to purchase a number of additional Preferred Shares, along with the related Warrant, equal to up to 40% of the number of Preferred Shares held by such Buyer on December 31, 1997 (the "ADDITIONAL PREFERRED SHARES") and the Company may have the right to cause the Buyers to purchase up to an aggregate of 500 Preferred Shares, along with the related Warrants, (pro rata based on the number of Initial Preferred Shares each Buyer purchased in relation to the total number of Initial Preferred Shares) (the "PUT PREFERRED SHARES") (the Initial Preferred Shares, the Additional Preferred Shares and the Put Preferred Shares collectively are referred to in this Agreement as the "PREFERRED SHARES"); E. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW THEREFORE, the Company and the Buyers hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED SHARES. a. PURCHASE OF PREFERRED SHARES. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the Company shall issue and sell to the Buyers and the Buyers shall purchase from the Company an aggregate of 500 Initial Preferred Shares, in the respective amounts set forth opposite each Buyer's name on the Schedule of Buyers along with one Warrant for each Preferred Share purchased (the "INITIAL CLOSING"). Subject to the satisfaction (or waiver) of the conditions set forth in Sections 1(c), 6(b) and 7(b) below, at the option of each Buyer, the Company shall issue and sell to each such Buyer and each such Buyer shall purchase from the Company at multiple closings, if applicable, an aggregate of up to that number of Additional Preferred Shares, along with the related Warrant, equal to 40% of the number of the Initial Preferred Shares held by such Buyer on December 31, 1997 (the "ADDITIONAL CLOSING"). Subject to the satisfaction (or waiver) of the conditions set forth in Sections 1(d), 1(e), 6(c) and 7(c) below, the Company may require that each Buyer purchase that number of additional Preferred Shares, along with the related Warrant, equal to such Buyer's pro rata portion of up to 500 Preferred Shares (based on the number of Initial Preferred Shares each Buyer purchased in relation to the total number of Initial Preferred Shares purchased by the Buyers) (the "PUT CLOSING"). The Initial Closing, the Additional Closing and the Put Closing collectively are referred to in this Agreement as the "CLOSINGS." The purchase price (the "PURCHASE PRICE") of each Preferred Share and the related Warrant at each of the Closings shall be $10,000. b. THE INITIAL CLOSING DATE. The date and time of the Initial Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time, within three (3) business days following the date hereof, subject to notification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6(a) and 7(a) below (or such later date as is mutually agreed to by the Company and the Buyers). The Initial Closing shall occur on the Initial Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. c. THE ADDITIONAL CLOSING DATE. The date and time of each of the Additional Closings (the "ADDITIONAL CLOSING DATES") shall be 10:00 a.m. Central Time, on the date specified in a Buyer's Additional Share Notice (as defined below), subject to satisfaction (or waiver) of the conditions to the Additional Closing set forth in Sections 6(b) and 7(b) and the conditions set forth in this paragraph (or such later date as is mutually agreed to by the Company and the Buyers). During the period beginning on and including January 1, 1998 and ending on January 1, 2002, but subject to the requirements of Sections 6(b) and 7(b), each Buyer may purchase Additional Preferred Shares by delivering written notice to the Company (an "ADDITIONAL SHARE NOTICE") at least seven days but not more than 20 days prior (an "ADDITIONAL SHARE NOTICE DATE") to the Additional Closing Date set forth in such Buyer's Additional Share Notice. Each Additional Share Notice shall set forth (i) the number of Additional Preferred Shares, along with the related Warrants, to be purchased by such Buyer at such Additional -2- Closing, (ii) the aggregate Purchase Price for such Additional Preferred Shares and the related Warrant and (iii) the date selected by such Buyer for the Additional Closing Date, which Additional Closing Date shall be not later than January 1, 2002. Notwithstanding the foregoing, no Buyer shall be entitled to deliver an Additional Share Notice unless on the date of the delivery of the Additional Share Notice the Market Price (as defined in the Certificate of Designations) of the Common Stock is greater than $7.50 per share (subject to adjustment as a result of any stock split, stock dividend, recapitalization, reverse stock split, consolidation, exchange or similar event). Each Additional Closing shall occur on the Additional Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. d. THE PUT CLOSING DATE. The date and time of the Put Closing (the "PUT CLOSING DATE") shall be 10:00 a.m. Central Time, on the date specified in the Company's Put Share Notice (as defined below), subject to satisfaction of (or waiver) of the conditions to the Put Closing set forth in Sections 6(c) and 7(c) and the conditions set forth in Section 1(e), (or such later date as is mutually agreed to by the Company and the Buyers). During the period beginning on and including January 1, 1998 and ending on June 30, 1998, but subject to the requirements of Sections 6(c) and 7(c) and satisfaction of the Put Notice Conditions (as defined in Section 1(e) below), the Company on only one occasion may require each Buyer to purchase Put Preferred Shares by delivering written notice to each of the Buyers (a "PUT SHARE NOTICE") at least 30 days but not more than 45 days (the "PUT SHARE NOTICE DATE") prior to the Put Closing Date set forth in the Company's Put Share Notice. The Company's Put Share Notice shall set forth (i) each Buyer's pro rata portion (based on the number of Initial Preferred Shares each Buyer purchased in relation to the total number of Initial Preferred Shares purchased by the Buyers) of the aggregate number of Put Preferred Shares, which aggregate number shall not exceed 500 Preferred Shares, along with the related Warrants, which the Company is requiring each Buyer to purchase at the Put Closing, (ii) the aggregate Purchase Price for each such Buyer's Put Preferred Shares and the related Warrants and (iii) the date selected by the Company for the Put Closing Date, which Put Closing Date shall be not later than June 30, 1998. The Put Closing shall occur on the Put Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. The Initial Closing Date, the Additional Closing Dates and the Put Closing Date collectively are referred to in this Agreement as the "CLOSINGS DATES." e. THE PUT NOTICE CONDITIONS. Notwithstanding anything in this agreement to the contrary, the Company shall not be entitled to deliver a Put Share Notice and require the Buyers to purchase the Put Preferred Shares along with the related Warrants unless, in addition to the satisfaction of the requirements of Sections 6(c) and 7(c), all of the following conditions are satisfied: (i) the Company's stockholders shall have approved the issuance of the Securities (as defined below) on or prior to the Put Share Notice Date; (ii) the Company's revenues for the period beginning and including April 1, 1997 and ending and including September 30, 1997 are at least $12,000,000; (iii) during the period beginning 45 days prior to the Put Share Notice Date and ending on and including the Put Closing Date, the Registration Statement (as defined in the Registration Rights Agreement) shall be effective and available for the sale of no less than 125% of the sum of (A) the number of Conversion Shares then issuable upon the conversion of all outstanding Preferred Shares and the Put Preferred Shares to be issued by the Company, (B) the number of Warrant Shares then issuable upon exercise of all outstanding Warrants and the -3- Warrants to be issued in connection with the Put Preferred Shares and (C) the number of Conversion Shares and Warrant Shares that are then held by the Buyers, (iv) during the period beginning 45 days prior to the Put Share Notice Date and ending on and including the Put Closing Date, the Common Stock is designated for quotation on the Nasdaq National Market or a national securities exchange and is not suspended from trading; (v) no event constituting a Major Business Event (as defined below), including an agreement to consummate a Major Business Event, or a Triggering Event set forth in Section 3(d)(iv) of the Certificate of Designations shall have occurred from the period beginning on the Initial Issuance Date and ending on and including the Put Closing Date; (vi) on each trading day during the period beginning 20 days prior to the Put Share Notice Date and ending on and including the Put Closing Date, the Market Price of the Common Stock is not less than $6.00 per share (subject to adjustment as a result of any stock split, stock dividend, recapitalization, reverse stock split, consolidation, exchange or similar event); (vii) during the period beginning 20 days prior to the Put Share Notice Date and ending on and including the Put Closing Date, the Average Daily Trading Dollar Volume (as defined below) is not less than $250,000; (viii) during the period beginning on the Initial Issuance Date and ending on and including the Put Closing Date, the Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of the Certificate of Designations and Sections 2(a) and 2(b) of the Warrants, respectively; and (ix) the Company shall not have previously delivered a Put Share Notice. For purposes of this Section 1(e) "MAJOR BUSINESS EVENT" means (x) consolidation, merger or other business combination of the Company with another entity (other than pursuant to a migratory merger effected solely for the purpose of changing the Company's jurisdiction of incorporation, (y) the sale or transfer of all or substantially all of the Company's assets or (z) a purchase, tender or exchange offer made to and accepted by the holders of more than 10% of the outstanding shares of Common Stock. For purposes of this Section 1(e), "AVERAGE DAILY TRADING DOLLAR VOLUME" means the average during any period of the number of shares of Common Stock sold on each trading day multiplied by such day's weighted-average trading price as reported by Bloomberg Financial Markets; provided, however, that for purposes of determining the Average Daily Trading Dollar Volume, block trades in excess of 30,000 shares of Common Stock shall be counted as the sale of only 30,000 shares of Common Stock. f. FORM OF PAYMENT. On each of the Closing Dates, (i) each Buyer shall pay the Purchase Price to the Company for the Preferred Shares and the Warrants to be issued and sold to such Buyer at the respective Closing, by wire transfer of immediately available funds in accordance with the Company's written wire instructions, and (ii) the Company shall deliver to each Buyer, stock certificates (in the denominations as such Buyer shall request) (the "STOCK CERTIFICATES") representing such number of the Preferred Shares which such Buyer is then purchasing (as indicated opposite such Buyer's name on the Schedule of Buyers) along with a Warrant exercisable for 400 shares of Common Stock for each Preferred Share purchased, duly executed on behalf of the Company and registered in the name of such Buyer or its designee. -4- 2. BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants with respect to only itself that: a. INVESTMENT PURPOSE. Such Buyer (i) is acquiring the Preferred Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will acquire the Conversion Shares then issuable and (iii) upon exercise of the Warrants, will acquire the shares of Common Stock issuable upon exercise thereof (the "WARRANT SHARES") (the Preferred Shares, the Conversion Shares, the Warrants and the Warrant Shares collectively are referred to herein as the "SECURITIES"), for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of Preferred Shares at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. b. ACCREDITED INVESTOR STATUS. Such Buyer is an "accredited investor" as that term is defined in Rule 501(a)(3) of Regulation D. c. RELIANCE ON EXEMPTIONS. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire such securities. d. INFORMATION. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. Such Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. e. NO GOVERNMENTAL REVIEW. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. f. TRANSFER OR RESALE. Such Buyer understands that except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned -5- or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or a successor rule thereto)("RULE 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. g. LEGENDS. Such Buyer understands that the certificates or other instruments representing the Preferred Shares and the Warrants and, until such time as the sale of the Conversion Shares and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares, except as set forth below, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for sale under the 1933 Act, (ii) in connection with a sale transaction, such holder provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of such Securities may be made without registration under the 1933 Act, or (iii) such holder provides the Company with reasonable assurances that such Securities can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold. Each Buyer acknowledges, covenants and agrees to sell the Securities represented by a certificate(s) from which the legend has been removed, only pursuant to (i) a registration statement effective under the 1933 Act, or (ii) advice of counsel that such sale is exempt from registration required by Section 5 of the 1933 Act. -6- h. AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and is a valid and binding agreement of such Buyer enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. i. RESIDENCY. Such Buyer is a resident of that country specified in its address on the Schedule of Buyers. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Buyers that: a. ORGANIZATION AND QUALIFICATION. The Company and its subsidiaries (a complete list of which is set forth in Schedule 3(a)) are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power to own their properties and to carry on their business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith. b. AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents, the Certificate of Designations and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Preferred Shares and the Warrants and the reservation for issuance and the issuance of the Conversion Shares and the Warrant Shares issuable upon conversion or exercise thereof, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) the Transaction Documents and the Warrants have been duly executed and delivered by the Company, (iv) the Transaction Documents and the Warrants constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies, and (v) prior to the Closing Date, the Certificate of Designations has been filed with the Secretary of State of the -7- State of Delaware and will be in full force and effect, enforceable against the Company in accordance with its terms. c. CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, of which as of the date hereof, 9,880,585 shares were issued and outstanding, 4,592,748 shares are reserved for issuance pursuant to the Company's stock option and purchase plans and 817,415 shares are reserved for issuance pursuant to securities (other than the Preferred Shares and the Warrants) exercisable or exchangeable for, or convertible into, shares of Common Stock and (ii) 10,000 shares of Preferred Stock, of which as of the date hereof, 420.5 shares were issued and outstanding. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(c), no shares of Common Stock or Preferred Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in Schedule 3(c), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement). Except as disclosed in Schedule 3(c), there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement. The Company has furnished to the Buyers true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. d. ISSUANCE OF SECURITIES. The Preferred Shares and the Warrants are duly authorized and, upon issuance in accordance with the terms hereof, shall be (i) validly issued, fully paid and non-assessable, (ii) free from all taxes, liens and charges with respect to the issue thereof and (iii) entitled to the rights and preferences set forth in the Certificate of Designations. 3,000,000 shares of Common Stock (subject to adjustment pursuant to the Company's covenant set forth in Section 4(f) below) have been duly authorized and reserved for issuance upon conversion of the Preferred Shares and upon exercise of the Warrants. Upon conversion or exercise in accordance with the Certificate of Designations or the Warrants, as the case may be, the Conversion Shares and the Warrant Shares will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. The issuance by the Company of the Securities is exempt from registration under the 1933 Act. -8- e. NO CONFLICTS. Except as disclosed in Schedule 3(e), the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of Preferred Stock of the Company or the By-laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the principal market or exchange on which the Common Stock is traded or listed) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected. Except as disclosed in Schedule 3(e), neither the Company nor its subsidiaries is in violation of any term of or in default under the Certificate of Incorporation, any Certificate of Designation, Preferences and Rights of any outstanding series of Preferred Stock or the By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted, and shall not be conducted, in violation of any law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. Except as disclosed in Schedule 3(e), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since June 30, 1995, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered to the Buyers or their respective representatives true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, -9- during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its subsidiaries or any of their officers, directors, employees or agents have provided the Buyers with any material, nonpublic information. g. ABSENCE OF CERTAIN CHANGES. Except as disclosed in Schedule 3(g), since June 30, 1996 there has been no material adverse change and no material adverse development in the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. h. ABSENCE OF LITIGATION. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a material adverse effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein or (iii), except as expressly set forth in the SEC Documents or in Schedule 3(h), have a Material Adverse Effect. i. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF PREFERRED SHARES. The Company acknowledges and agrees that each of the Buyers is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that each Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any of the Buyers or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to such Buyer's purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. j. NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR CIRCUMSTANCES. No event, liability, development or circumstance has occurred or exists, or is contemplated to occur, with respect to the Company or its subsidiaries or their respective business, properties, -10- prospects, operations or financial condition, which has not been publicly announced or disclosed in writing to the Buyers. k. NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities. l. NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act or cause this offering of Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the Nasdaq National Market, nor will the Company or any of its subsidiaries take any action or steps that would require registration of the Securities under the 1933 Act or cause the offering of the Securities to be integrated with other offerings. m. EMPLOYEE RELATIONS. Neither the Company nor any of its subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. Neither the Company nor any of its subsidiaries is a party to a collective bargaining agreement, and the Company and its subsidiaries believe that relations with their employees are good. n. INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth on Schedule 3(n), none of the Company's trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or are expected to expire or terminate within two years from the date of this Agreement. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth on Schedule 3(n), there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties. -11- o. ENVIRONMENTAL LAWS. The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. p. TITLE. The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(p) or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries. Any real property and facilities held under lease by the Company or any of its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. q. INSURANCE. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. r. REGULATORY PERMITS. The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. s. INTERNAL ACCOUNTING CONTROLS. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. t. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, -12- decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect. u. TAX STATUS. Except as set forth on Schedule 3(u), the Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. v. CERTAIN TRANSACTIONS. Except as set forth on Schedule 3(v) and in the SEC Documents and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. w. DILUTIVE EFFECT. The Company understands and acknowledges that the number of Conversion Shares issuable upon conversion of the Preferred Shares and the Warrant Shares issuable upon exercise of the Warrants will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Shares in accordance with this Agreement and the Certificate of Designations and its obligation to issue the Warrant Shares upon exercise of the Warrants in accordance with this Agreement and the Warrants, is, in each case, absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. 4. COVENANTS. a. BEST EFFORTS. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. b. FORM D. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly -13- after such filing. The Company shall, on or before each of the Closing Dates, take such action as the Company shall reasonably determine is necessary to qualify the Securities for, or obtain exemption for the Securities for, sale to the Buyers at each of the Closings pursuant to this Agreement under applicable securities or "Blue Sky" laws of the states of the United States, and shall provide evidence of any such action so taken to the Buyers on or prior to the Closing Date. c. REPORTING STATUS. Until the earlier of (i) the date as of which the Investors (as that term is defined in the Registration Rights Agreement) may sell all of the Conversion Shares and the Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which (A) the Investors shall have sold all the Conversion Shares and the Warrant Shares and (B) none of the Preferred Shares or Warrants is outstanding (the "REGISTRATION PERIOD"), the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such termination. d. USE OF PROCEEDS. The Company will use the proceeds from the sale of the Preferred Shares for substantially the same purposes and in substantially the same amounts as indicated in Schedule 4(d). e. FINANCIAL INFORMATION. The Company agrees to send the following to each Investor (as that term is defined in the Registration Rights Agreement) during the Registration Period: (i) within two (2) days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any registration statements or amendments filed pursuant to the 1933 Act; (ii) on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its subsidiaries and (iii) copies of any notices and other information made available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof to the stockholders. f. RESERVATION OF SHARES. The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than 150% of the number of shares of Common Stock needed to provide for the issuance of the Conversion Shares and the Warrant Shares. g. RIGHT OF FIRST REFUSAL. Subject to the exceptions described below, the Company and its subsidiaries shall not negotiate or contract with any party for any equity financing (including any debt financing with an equity component) or issue any equity securities of the Company or any subsidiary or securities convertible or exchangeable into or for equity securities of the Company or any subsidiary (including debt securities with an equity component) in any form ("FUTURE OFFERINGS") during the period beginning on the Initial Issuance Date and ending on, and including, the date which is 365 days after the later of the Registration Statement (as defined in the Registration Rights Agreement) covering the resale of the Common Stock issuable upon conversion of the Initial Preferred Shares and the exercise of the related Warrants or the Registration Statement covering the resale of the Common Stock issuable upon conversion of the Put Preferred Shares and the exercise of the related Warrants has been declared effective by the SEC, as the case may be, unless it shall have first delivered to each Buyer or a designee -14- appointed by such Buyer written notice (the "FUTURE OFFERING NOTICE") describing the proposed Future Offering, including the terms and conditions thereof, and providing each Buyer an option to purchase up to its Aggregate Percentage (as defined below), as of the date of delivery of the Future Offering Notice, in the Future Offering (the limitations referred to in this and the preceding sentence are collectively referred to as the "CAPITAL RAISING LIMITATION"). For purposes of this Section 4(g), "AGGREGATE PERCENTAGE" at any time with respect to any Buyer shall mean the percentage obtained by dividing (i) the aggregate number of Conversion Shares issued or issuable, as if a conversion occurred on such date, upon conversion of the Initial Preferred Shares held by such Buyer by (ii) the aggregate number of Conversion Shares issued or issuable, as if a conversion occurred on such date, upon conversion of the Initial Preferred Shares held by the Buyers. A Buyer can exercise its option to participate in a Future Offering by delivering written notice thereof to participate to the Company within ten (10) business days of receipt of a Future Offering Notice, which notice shall state the quantity of securities being offered in the Future Offering that such Buyer will purchase, up to its Aggregate Percentage, and that number of securities it is willing to purchase in excess of its Aggregate Percentage. In the event the Buyers fail to elect to fully participate in the Future Offering within the periods described in this Section 4(g), the Company shall have 30 days thereafter to sell the securities of the Future Offering respecting which such Buyer's rights were not exercised, upon terms and conditions, no more favorable to the purchasers thereof than specified in the Future Offering Notice. In the event the Company has not sold such securities of the Future Offering within such 30 day period, the Company shall not thereafter issue or sell such securities without first offering such securities to the Buyers in the manner provided in this Section 4(g). The Capital Raising Limitation shall not apply to (i) a loan from a commercial bank, (ii) any transaction involving the Company's issuances of securities in connection with (A) a merger or consolidation, (B) any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or (C) the disposition or acquisition of a business, product or license by the Company, (iii) the issuance of Common Stock in a firm commitment, underwritten public offering, (iv) the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof, or (v) the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan for the benefit of the Company's employees, directors or consultants. The Buyers shall not be required to participate or exercise their right of first refusal with respect to a particular Future Offering in order to exercise their right of first refusal with respect to later Future Offerings. h. LISTING. The Company shall promptly secure the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) upon each national securities exchange and automated quotation system (including the Nasdaq National Market and The Nasdaq SmallCap Market), if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. The Company shall maintain the Common Stock's authorization for quotation on the Nasdaq National Market, The Nasdaq SmallCap Market, The New York Stock Exchange, Inc. ("NYSE") or The American Stock Exchange, Inc. ("AMEX"). Neither the Company nor any of its subsidiaries shall take any action which may result in the delisting or suspension of the Common Stock on The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX. The Company shall promptly -15- provide to each Buyer copies of any notices it receives from the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(h). i. EXPENSES. Subject to Section 9(l) below, following the Initial Closing, the Company shall reimburse the Buyers for the Buyers' expenses (including attorneys fees and expenses) in connection with negotiating and preparing the Transaction Documents and consummating the transactions contemplated thereby up to an aggregate of $30,000. j. PROXY STATEMENT. The Company shall hold its next meeting of stockholders on or before November 30, 1997. The Company shall provide each stockholder entitled to vote at such meeting of stockholders of the Company, a proxy statement, which has been previously reviewed by the Buyers and a counsel of their choice, soliciting each such stockholder's affirmative vote at such annual stockholder meeting for approval of the Company's issuance of the Securities as described in this Agreement and the Company shall use its best efforts to solicit its stockholders' approval of such issuance of the Securities and cause the Board of Directors of the Company to recommend to the stockholders that they approve such proposal. k. FILING OF FORM 8-K. On or before the tenth (10th) day following each of the Closing Dates, the Company shall file a Form 8-K with the SEC describing the terms of the transaction contemplated by the Transaction Documents and consummated at such Closing, in each case in the form required by the 1934 Act. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant Shares in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Preferred Shares or exercise of the Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the Conversion Shares and the Warrant Shares under the 1933 Act, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares and the Warrant Shares, prior to registration of the Conversion Shares and the Warrant Shares under the 1933 Act) will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section 5 shall affect in any way each Buyer's obligations and agreements set forth in Section 2(g) to comply with all applicable prospectus delivery requirements, if any, upon resale of the Securities. If a Buyer provides the Company with an opinion of counsel, reasonably satisfactory in form, and substance to the Company, that registration of a resale by such Buyer of any of such Securities is not required under the 1933 Act, the Company shall permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by such Buyer and without any restrictive legends. -16- The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that the Buyers shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. a. INITIAL CLOSING DATE. The obligation of the Company hereunder to issue and sell the Initial Preferred Shares and the related Warrants to each Buyer at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: (i) Such Buyer shall have executed each of the Transaction Documents and delivered the same to the Company. (ii) The Certificate of Designations shall have been filed with the Secretary of State of the State of Delaware. (iii) Such Buyer shall have delivered to the Company the Purchase Price for the Preferred Shares and the related Warrants being purchased by such Buyer at the Initial Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company. (iv) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Buyer at or prior to the Initial Closing Date. b. ADDITIONAL CLOSING DATES. The obligation of the Company hereunder to issue and sell the Additional Preferred Shares and the related Warrants to each Buyer at each of the Additional Closings is subject to the satisfaction, at or before the respective Additional -17- Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: (i) Such Buyer shall have complied with the requirements of Section 1(c). (ii) Such Buyer shall have delivered to the Company the Purchase Price for the Additional Preferred Shares and the related Warrants being purchased by such Buyer at the Additional Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company. (iii) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Additional Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Buyer at or prior to the Additional Closing Date. c. PUT CLOSING DATE. The obligation of the Company hereunder to issue and sell the Put Preferred Shares and the related Warrants to each Buyer at the Put Closing is subject to the satisfaction, at or before the Put Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: (i) Such Buyer shall have delivered to the Company the Purchase Price for the Put Preferred Shares and the related Warrants being purchased by such Buyer at the Put Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company. (ii) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Put Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Buyer at or prior to the Put Closing Date. 7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. a. INITIAL CLOSING DATE. The obligation of each Buyer hereunder to purchase the Initial Preferred Shares at the Initial Closing is subject to the satisfaction, at or before the -18- Initial Closing Date, of each of the following conditions, provided that these conditions are for each Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: (i) The Company shall have executed each of the Transaction Documents, and delivered the same to such Buyer. (ii) The Certificate of Designations shall have been filed with the Secretary of State of the State of Delaware, and a copy thereof certified by such Secretary of State shall have been delivered to such Buyer. (iii) The Common Stock shall be authorized for quotation on the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX, trading in the Common Stock issuable upon conversion of the Initial Preferred Shares and the exercise of the related Warrants to be traded on the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall not have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and all of the Conversion Shares and Warrant Shares issuable upon conversion of the Initial Preferred Shares and exercise of the related Warrants to be sold at the Initial Closing shall be listed upon the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX. (iv) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Initial Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Initial Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, without limitation, an update as of the Initial Closing Date regarding the representation contained in Section 3(c) above. (v) Such Buyer shall have received the opinion of the Company's counsel dated as of the Initial Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of EXHIBIT C attached hereto. (vi) The Company shall have executed and delivered to such Buyer the Warrants and the Stock Certificates (in such denominations as such Buyer shall request) for the Initial Preferred Shares being purchased by such Buyer at the Initial Closing. (vii) The Board of Directors of the Company shall have adopted resolutions consistent with Section 3(b)(ii) above and in a form reasonably acceptable to such Buyer (the "RESOLUTIONS"). -19- (viii) As of the Initial Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and the exercise of the Warrants, at least 3,000,000 shares of Common Stock. (ix) The Irrevocable Transfer Agent Instructions, in the form of EXHIBIT D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (x) The Company shall have delivered to such Buyer a certificate evidencing the incorporation and good standing of the Company and each subsidiary in such corporation's state of incorporation issued by the Secretary of State of such state of incorporation as of a date within 10 days of the Initial Closing. (xi) The Company shall have delivered to such Buyer certified copies of its Certificate of Incorporation and Bylaws, each as in effect at the Initial Closing. (xii) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request. b. ADDITIONAL CLOSING DATES. The obligation of each Buyer hereunder to purchase the Additional Preferred Shares and the related Warrants at each of the Additional Closings is subject to the satisfaction, at or before the Additional Closing Dates, of each of the following conditions, provided that these conditions are for each Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: (i) The Certificate of Designations shall be in full force and effect and shall not have been amended since the Initial Closing Date, and a copy thereof certified by the Secretary of State of the State of Delaware shall have been delivered to such Buyer. (ii) The Common Stock shall be authorized for quotation on the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX, trading in the Common Stock issuable upon conversion of the Additional Preferred Shares and the exercise of the related Warrants to be traded on the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall not have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and all of the Conversion Shares and Warrant Shares issuable upon conversion of the Additional Preferred Shares and the related Warrants to be sold at such Additional Closing shall be listed upon the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX. (iii) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the respective Additional Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) -20- and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the respective Additional Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of such Additional Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, without limitation, an update as of such Additional Closing Date regarding the representation contained in Section 3(c) above. (iv) Such Buyer shall have received the opinion of the Company's counsel dated as of such Additional Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of EXHIBIT C attached hereto. (v) The Company shall have executed and delivered to such Buyer the Warrants and the Stock Certificates (in such denominations as such Buyer shall request) for the Additional Preferred Shares being purchased by such Buyer at such Additional Closing. (vi) The Board of Directors of the Company shall have adopted, and shall not have amended, the Resolutions in a form reasonably acceptable to such Buyer. (vii) As of such Additional Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and the exercise of the Warrants, a number of shares of Common Stock equal to at least 150% of the number of shares of Common Stock which would be issuable upon conversion and exercise in full, as the case may be, of the then outstanding Preferred Shares and Warrants, including for such purposes any Preferred Shares and Warrants to be issued at such Additional Closing. (viii) The Irrevocable Transfer Agent Instructions, in the form of EXHIBIT D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (ix) The Company shall have delivered to such Buyer a certificate evidencing the incorporation and good standing of the Company and each subsidiary in such corporation's state of incorporation issued by the Secretary of State of such state of incorporation as of a date within 10 days of such Additional Closing. (x) The Company shall have delivered to such Buyer certified copies of its Certificate of Incorporation and Bylaws, each as in effect at such Additional Closing. (xi) During the period beginning on the Additional Share Notice Date and ending on and including the Additional Closing Date, the Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of the Certificate of Designations and Sections 2(a) and 2(b) of the Warrants, respectively. -21- (xii) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request. c. PUT CLOSING DATE. The obligation of each Buyer hereunder to purchase the Put Preferred Shares at the Put Closing is subject to the satisfaction, at or before the Put Closing Date, of each of the following conditions, provided that these conditions are for each Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: (i) The Company shall have complied with the requirements of Section 1(d) and all of the Put Notice Conditions set forth in Section 1(e) shall have been satisfied. (ii) The Certificate of Designations shall be in full force and effect and shall not have been amended since the Put Closing Date, and a copy thereof certified by the Secretary of State of the State of Delaware shall have been delivered to such Buyer. (iii) The Common Stock shall be authorized for quotation on the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX, trading in the Common Stock issuable upon conversion of the Put Preferred Shares and the exercise of the related Warrants to be traded on the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall not have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and all of the Conversion Shares and Warrant Shares issuable upon conversion of the Put Preferred Shares and exercise of the related Warrants to be sold at the Put Closing shall be listed upon the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX. (iv) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the Put Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Put Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Put Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, without limitation, an update as of the Put Closing Date regarding the representation contained in Section 3(c) above. (v) Such Buyer shall have received the opinion of the Company's counsel dated as of the Put Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of EXHIBIT C attached hereto. -22- (vi) The Company shall have executed and delivered to such Buyer the Warrants and the Stock Certificates (in such denominations as such Buyer shall request) for the Put Preferred Shares being purchased by such Buyer at the Put Closing. (vii) The Board of Directors of the Company shall have adopted, and shall not have amended, the Resolutions in a form reasonably acceptable to such Buyer. (viii) As of the Put Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and the exercise of the Warrants, a number of shares of Common Stock equal to at least 150% of the number of shares of Common Stock which would be issuable upon conversion and exercise in full, as the case may be, of the then outstanding Preferred Shares and Warrants, including for such purposes any Preferred Shares and Warrants to be issued at such Put Closing. (ix) The Irrevocable Transfer Agent Instructions, in the form of EXHIBIT D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (x) The Company shall have delivered to such Buyer a certificate evidencing the incorporation and good standing of the Company and each subsidiary in such corporation's state of incorporation issued by the Secretary of State of such state of incorporation as of a date within 10 days of the Put Closing. (xi) The Company shall have delivered to such Buyer certified copies of its Certificate of Incorporation and Bylaws, each as in effect at the Put Closing. (xii) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request. 8. INDEMNIFICATION. In consideration of each Buyer's execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents, the Certificate of Designations or the Warrants or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents, the Certificate of Designations or the Warrants or any other certificate, instrument or document contemplated -23- hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Indemnitee and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Indemnitees, any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities or the status of such Buyer or holder of the Securities as an investor in the Company. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. 9. GOVERNING LAW; MISCELLANEOUS. a. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. b. COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. c. HEADINGS. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all other prior oral or written agreements between the Buyers, the Company, their affiliates and persons -24- acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Preferred Shares then outstanding. f. NOTICES. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically generated and kept on file by the sending party); (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Imaging Technologies Corporation 11031 Via Frontera San Diego, California 92127 Telephone: 619-485-8411 Facsimile: 619-487-5809 Attention: President With a copy to: Law Offices of Carmine J. Bua 3838 Camino Del Rio North, Suite 333 San Diego, California 92108-1789 Telephone: (619) 280-8000 Facsimile: (619) 280-8001 Attention: Carmine J. Bua, Esq. If to the Transfer Agent: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, New York 10005 Telephone: 718-921-8209 Facsimile: 718-921-8331 Attention: Mr. Herb Lemmer -25- If to a Buyer, to its address and facsimile number on the Schedule of Buyers, with copies to such Buyer's representatives as set forth on the Schedule of Buyers. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Preferred Shares. Except as in compliance with Section 3 of the Certificate of Designations, the Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of two-thirds (2/3) of the Preferred Shares then outstanding including by merger or consolidation. A Buyer may assign some or all of its rights hereunder to affiliates or associates of such Buyer, without the consent of the Company, and to others, with the consent of the Company; provided, however, that any such assignment shall not release such Buyer from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption. h. NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. SURVIVAL. Unless this Agreement is terminated under Section 9(l), the representations and warranties of the Company and the Buyers contained in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8, shall survive each of the Closings. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder. j. PUBLICITY. The Company and each Buyer shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Buyer, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations (although each Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release and shall be provided with a copy thereof). k. FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. TERMINATION. In the event that the Initial Closing shall not have occurred with respect to a Buyer on or before three (3) business days from the date hereof due to the Company's or such Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching party's failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this Agreement with respect to such breaching party at -26- the close of business on such date without liability of any party to any other party; provided, however, that if this Agreement is terminated pursuant to this Section 9(l), the Company shall remain obligated to reimburse the non-breaching Buyers for the expenses described in Section 4(i) above. m. PLACEMENT AGENT. Each of the Company and the Buyers, on their own behalf, acknowledges that it has not engaged a placement agent in connection with the sale of the Preferred Shares. n. NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. -27- IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above. COMPANY: BUYERS: IMAGING TECHNOLOGIES CORPORATION NELSON PARTNERS By: /s/ Ralph R. Barry By: /s/ Anne Dupuy -------------------------------- --------------------------------------- Name: Ralph R. Barry Name: Anne Dupuy ------------------------------ ----------------------------------- Its: Vice President and CFO Its: Officer ------------------------------- -------------------------------------- OLYMPUS SECURITIES, LTD. By: /s/ Anne Dupuy --------------------------------------- Name: Anne Dupuy Its: Alternate Director THEMIS PARTNERS L.P. By: Promethean Investment Group L.L.C. Its: General Partner By: /s/ James F. O'Brien, Jr. --------------------------------------- Name: James F. O'Brien, Jr. Its: President HERACLES FUND By: Promethean Investment Group L.L.C. Its: Investment Advisor By: /s/ James F. O'Brien, Jr. --------------------------------------- Name: James F. O'Brien, Jr. Its: President SAMYANG MERCHANT BANK By: Promethean Investment Group L.L.C. Its: Investment Advisor By: /s/ James F. O'Brien, Jr. --------------------------------------- Name: James F. O'Brien, Jr. Its: President LEONARDO, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon --------------------------------------- Name: Michael L. Gordon Its: Chief Operating Officer GAM ARBITRAGE INVESTMENTS, INC. By: Angelo, Gordon & Co., L.P. Its: Investment Advisor By: /s/ Michael L. Gordon --------------------------------------- Name: Michael L. Gordon Its: Chief Operating Officer AG SUPER FUND INTERNATIONAL PARTNERS, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon --------------------------------------- Name: Michael L. Gordon Its: Chief Operating Officer RAPHAEL, L.P. By: /s/ Michael L. Gordon --------------------------------------- Name: Michael L. Gordon Its: Chief Operating Officer RAMIUS FUND, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon --------------------------------------- Name: Michael L. Gordon Its: Managing Officer HICK INVESTMENTS, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon --------------------------------------- Name: Michael L. Gordon Its: Managing Officer SCHEDULE OF BUYERS
NUMBER OF INITIAL INVESTOR ADDRESS PREFERRED INVESTOR'S REPRESENTATIVES' ADDRESS INVESTOR NAME AND FACSIMILE NUMBER SHARES AND FACSIMILE NUMBER - ----------------------- -------------------------------------- ------------------------------------------------------ Nelson Partners c/o Leeds Management Services 100 Citadel Investment Group, L.L.C. 129 Front Street, 5th Floor 225 West Washington Street Hamilton HM12 Bermuda Chicago, Illinois 60606 Attn: Anne Dupuy Attention: Benjamin Kopin Facsimile: (441) 292-2239 Kenneth C. Griffin Facsimile: (312) 368-4347 Olympus Securities, Ltd. c/o Leeds Management Services 100 Citadel Investment Group, L.L.C. 129 Front Street, 5th Floor 225 West Washington Street Hamilton HM12 Bermuda Chicago, Illinois 60606 Attn: Anne Dupuy Attention: Benjamin Kopin Facsimile: (441) 292-2239 Kenneth C. Griffin Facsimile: (312) 368-4347 Themis Partners L.P. c/o Promethean Investment Group, L.L.C. 30 Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520 New York, New York 10019 New York, New York 10019 Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr. Facsimile: 212-698-0505 Facsimile: 212-698-0505 Heracles Fund Bank of Bermuda (Cayman) Limited 30 Promethean Investment Group, L.L.C. P.O. Box 513 40 West 57th Street, Suite 1520 3rd Floor British American Center New York, New York 10019 Dr. Roy's Drive Attn: James F. O'Brien, Jr. Georgetown, Grand Cayman Facsimile: 212-698-0505 Cayman Island, BWI Attn: Allen J. Bernardo Facsimile: 809-949-7802 Samyang Merchant Bank c/o Promethean Investment Group, L.L.C. 40 Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520 New York, New York 10019 New York, New York 10019 Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr. Facsimile: 212-698-0505 Facsimile: 212-698-0505 Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 100 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 GAM Arbitrage c/o Angelo, Gordon & Co., L.P. 10 Investments, Inc. 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 AG Super Fund c/o Angelo, Gordon & Co., L.P. 10 International Partners, 245 Park Avenue - 26th Floor L.P. New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 NUMBER OF INITIAL INVESTOR ADDRESS PREFERRED INVESTOR'S REPRESENTATIVES' ADDRESS INVESTOR NAME AND FACSIMILE NUMBER SHARES AND FACSIMILE NUMBER - ----------------------- -------------------------------------- ------------------------------------------------------ Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 30 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 40 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Hick Investments, Ltd. c/o Angelo, Gordon & Co., L.P. 10 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449
EX-10.(Y) 13 EXHIBIT 10(Y) REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of August 21, 1997, by and among Imaging Technologies Corporation, a Delaware corporation, with headquarters located at 11031 Via Frontera, San Diego, California 92127 (the "COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively, the "BUYERS"). WHEREAS: A. In connection with the Securities Purchase Agreement by and among the parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the conditions of the Securities Purchase Agreement, to (i) issue and sell to the Buyers shares of the Company's Series C Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), which will be convertible into shares of the Company's common stock, par value $.005 per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in accordance with the terms of the Company's Certificate of Designations, Preferences and Rights of the Series C Redeemable Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"), and (ii) issue Warrants (the "WARRANTS") which will be exercisable to purchase shares of Common Stock (the "WARRANT SHARES"); and B. To induce the Buyers to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 ACT"), and applicable state securities laws: NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyers hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: a. "INVESTOR" means a Buyer and any transferee or assignee thereof to whom a Buyer assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9. b. "PERSON" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing one or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("RULE 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). d. "REGISTRABLE SECURITIES" means the Conversion Shares and the Warrant Shares issued or issuable upon conversion of the Preferred Shares and exercise of the Warrants, respectively, and any shares of capital stock issued or issuable with respect to the Conversion Shares, the Warrant Shares, the Warrants or the Preferred Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise. e. "REGISTRATION STATEMENT" means a registration statement of the Company filed under the 1933 Act. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. 2. REGISTRATION. a. MANDATORY REGISTRATION. The Company shall prepare, and, on or prior to 45 days after the date of issuance of the relevant Preferred Shares, file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form S-3 (or, if such form is unavailable for such a registration, on such other form as is available for such a registration, subject to the consent of the Investors holding a majority of the Registrable Securities and the provisions of Section 2(c), which consent will not be unreasonably withheld), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement(s) also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Shares or exercise of the Warrants (i) to prevent dilution resulting from stock splits, stock dividends or similar transactions and (ii) by reason of changes in the Conversion Price or Conversion Rate of the Preferred Shares in accordance with the terms thereof. Such Registration Statement shall initially register for resale at least 3,000,000 shares of Common Stock, subject to adjustment as provided in Section 3(b). Such registered shares of Common Stock shall be allocated among the Investors pro rata based on the total number of Registrable Securities issued or issuable as of each date that a Registration Statement, as amended, relating to the resale of the Registrable Securities is declared effective by the SEC. The Company shall use its best efforts to have the Registration Statement(s) declared effective by the SEC as soon as practicable, but in no event later than 150 days after the issuance of the relevant Preferred Shares. b. COUNSEL AND INVESTMENT BANKERS. Subject to Section 5 hereof, in connection with any offering pursuant to Section 2, the Buyers shall have the right to select one legal counsel and an investment banker or bankers and manager or managers to administer their interest in the offering, which investment banker or bankers or manager or managers shall be -2- reasonably satisfactory to the Company. The Company shall reasonably cooperate with any such counsel and investment bankers. c. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration of the Registration Period (as hereinafter defined) the Company proposes to file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the 1933 Act of any of its securities (other than on Form S-4 or Form S-8 or their then equivalents relating to securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans) the Company shall promptly send to each Investor who is entitled to registration rights under this Section 2(c) written notice of the Company's intention to file a Registration Statement and of such Investor's rights under this Section 2(c) and, if within twenty (20) days after receipt of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, subject to the priorities set forth in Section 2(d) below. No right to registration of Registrable Securities under this Section 2(c) shall be construed to limit any registration required under Section 2(a). The obligations of the Company under this Section 2(c) may be waived by Investors holding a majority of the Registrable Securities. If an offering in connection with which an Investor is entitled to registration under this Section 2(c) is an underwritten offering, then each Investor whose Registrable Securities are included in such Registration Statement shall, unless otherwise agreed by the Company, offer and sell such Registrable Securities in an underwritten offering using the same underwriter or underwriters and, subject to the provisions of this Agreement, on the same terms and conditions as other shares of Common Stock included in such underwritten offering. d. PRIORITY IN PIGGY-BACK REGISTRATION RIGHTS IN CONNECTION WITH REGISTRATIONS FOR COMPANY ACCOUNT. If the registration referred to in Section 2(c) is to be an underwritten public offering and the managing underwriter(s) advise the Company in writing, that in their reasonable good faith opinion, marketing or other factors dictate that a limitation on the number of shares of Common Stock which may be included in the Registration Statement is necessary to facilitate and not adversely affect the proposed offering, then the Company shall include in such registration: (1) first, all securities the Company proposes to sell for its own account, (2) second, up to the full number of securities proposed to be registered for the account of the holders of securities entitled to inclusion of their securities in the Registration Statement by reason of demand registration rights, and (3) third, the securities requested to be registered by the Investors and other holders of securities entitled to participate in the registration, as of the date hereof, drawn from them pro rata based on the number each has requested to be included in such registration. e. ELIGIBILITY FOR FORM S-3. The Company represents, warrants and covenants that on and after the date hereof it meets and will meet the requirements for the use of Form S-3 for registration of the sale by the Investors of the Registrable Securities and the Company has filed and shall file all reports required to be filed by the Company with the SEC in a timely manner so as to obtain and maintain such eligibility for the use of Form S-3. In the event that Form S-3 is not available for sale by the Investors of the Registrable Securities, then the Company (i) with the consent of the Investors holding a majority of the Registrable Securities -3- pursuant to Section 2(a), shall register the sale of the Registrable Securities on another appropriate form and (ii) the Company shall undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC. 3. RELATED OBLIGATIONS. Whenever an Investor has requested that any Registrable Securities be registered pursuant to Section 2(c) or at such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations: a. The Company shall promptly prepare and file with the SEC a Registration Statement with respect to the Registrable Securities (on or prior to the forty-fifth (45th) day after the date of issuance of any Preferred Shares for the registration of Registrable Securities pursuant to Section 2(a)) and use its best efforts to cause such Registration Statement relating to the Registrable Securities to become effective as soon as possible after such filing (but in no event later than 150 days after the issuance of any Preferred Shares for the registration of Registrable Securities pursuant to Section 2(a)), and keep such Registration Statement effective pursuant to Rule 415 at all times until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Investors shall have sold all the Registrable Securities and (B) none of the Preferred Shares or Warrants is outstanding (the "REGISTRATION PERIOD"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the event the number of shares available under a Registration Statement filed pursuant to this Agreement is insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within fifteen (15) days after the necessity therefor arises -4- (based on the market price of the Common Stock and other relevant factors on which the Company reasonably elects to rely). The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issued or issuable upon conversion of the Preferred Shares and exercise of the Warrants is greater than the quotient determined by dividing (i) the number of shares of Common Stock available for resale under such Registration Statement by (ii) 1.5. For purposes of the calculation set forth in the foregoing sentence, any restrictions on the convertibility of the Preferred Shares or exerciseability of the Warrants shall be disregarded and such calculation shall assume that the Preferred Shares and the Warrants are then convertible and exercisable, respectively, into shares of Common Stock at the then prevailing Conversion Rate (as defined in the Company's Certificate of Designations) and Warrant Exercise Price (as defined in the Warrant), respectively, if applicable. c. The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents, including any preliminary prospectus, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as any Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities -5- for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. e. In the event Investors who hold a majority of the Registrable Securities being offered in the offering select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. f. As promptly as practicable after becoming aware of such event, the Company shall notify each Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor (or such other number of copies as such Investor may reasonably request). The Company shall also promptly notify each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Investor by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. g. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold (and, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. h. The Company shall permit each Investor and a single firm of counsel, initially Katten Muchin & Zavis or such other counsel as thereafter designated as selling stockholders' counsel by the Investors who hold a majority of the Registrable Securities being sold, to review and comment upon a Registration Statement and all amendments and supplements thereto at least four (4) business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of such counsel, which consent shall not be unreasonably withheld. -6- i. At the request of the Investors who hold a majority of the Registrable Securities being sold, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) if required by an underwriter, a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investors. j. The Company shall make available for inspection by (i) any Investor, (ii) any underwriter participating in any disposition pursuant to a Registration Statement, (iii) one firm of attorneys and one firm of accountants or other agents retained by the Investors, and (iv) one firm of attorneys retained by all such underwriters (collectively, the "INSPECTORS") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector has knowledge. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. k. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. -7- l. The Company shall use its best efforts either to (i) cause all the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all the Registrable Securities covered by the Registration Statement on the Nasdaq National Market or, if, despite the Company's best efforts to satisfy the preceding clause (i) or (ii), the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the inclusion for quotation on The Nasdaq SmallCap Market for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(l). m. The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, any managing underwriter or underwriters, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or, if there is no managing underwriter or underwriters, the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request. n. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement. o. The Company shall provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such Registration Statement. p. If requested by the managing underwriters or an Investor, the Company shall (i) immediately incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the Investors agree should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if requested by a shareholder or any underwriter of such Registrable Securities. q. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. -8- r. The Company shall make generally available to its security holders as soon as practical, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. s. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. t. Within two (2) business days after the Registration Statement which includes the Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that the Registration Statement has been declared effective by the SEC in the form attached hereto as EXHIBIT A. 4. OBLIGATIONS OF THE INVESTORS. a. At least seven (7) days prior to the first anticipated filing date of a Registration Statement, the Company shall notify each Investor in writing of the information the Company requires from each such Investor if such Investor elects to have any of such Investor's Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. b. Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement. c. In the event any Investor elects to participate in an underwritten public offering pursuant to Section 2, each such Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor notifies the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement. d. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f), -9- such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of 3(f). e. No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements approved by the Investors entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company and fees and disbursements of one counsel for the Investors, shall be paid by the Company; provided, however, that the Company shall not be obligated to pay more than $2,500 of the fees and disbursements of one counsel for the Investors for each Registration Statement that is filed. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor who holds such Registrable Securities, the directors, officers, partners, employees, agents of, and each Person, if any, who controls, any Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"), and any underwriter (as defined in the 1933 Act) for the Investors, and the directors and officers of, and each Person, if any, who controls, any such underwriter within the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several, (collectively, "CLAIMS") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered -10- ("BLUE SKY FILING"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions set forth in Section 6(d) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(c), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a violation and such Indemnified Person, notwithstanding such advice, used it; (iii) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company; and (iv) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are -11- based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), such Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. c. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information such persons so furnished in writing expressly for inclusion in the Registration Statement. d. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Company shall pay reasonable fees for only one separate legal counsel for the Investors, and such legal counsel shall be selected by the Investors holding a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates -12- to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. e. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. f. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at -13- any time permit the Investors to sell securities of the Company to the public without registration ("RULE 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement; and (vi) such transferee shall be an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold two-thirds (2/3) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. -14- 11. MISCELLANEOUS. a. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically generated and kept on file by the sending party); (iii) three (3) days after being sent by U.S. certified mail, return receipt requested; or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Imaging Technologies Corporation 11031 Via Frontera San Diego, California 92127 Telephone: 619-485-8411 Facsimile: 619-487-5809 Attention: President With a copy to: Law Offices of Carmine J. Bua 3838 Camino Del Rio North, Suite 333 San Diego, California 92108-1789 Telephone: (619) 280-8000 Facsimile: (619) 280-8001 Attention: Carmine J. Bua, Esq. If to a Buyer, to its address and facsimile number on the Schedule of Buyers attached hereto, with copies to such Buyer's counsel as set forth on the Schedule of Buyers. Each party shall provide five (5) days prior notice to the other party of any change in address, phone number or facsimile number. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. -15- d. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. This Agreement and the Securities Purchase Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Securities Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. All consents and other determinations to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by Investors -16- holding a majority of the Registrable Securities, determined as if all of the Preferred Shares and the Warrants then outstanding have been converted into or exercised for Registrable Securities. k. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. -17- IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: BUYERS: IMAGING TECHNOLOGIES CORPORATION NELSON PARTNERS By: /s/ Ralph R. Barry By: /s/ Anne Dupuy -------------------------- ------------------------------------- Name: Ralph R. Barry Name: Anne Dupuy ------------------------- Its: Officer Its: Vice President and CFO ------------------------- OLYMPUS SECURITIES, LTD. By: /s/ Anne Dupuy -------------------------------------- Name: Anne Dupuy Its: Alternate Director THEMIS PARTNERS L.P. By: Promethean Investment Group L.L.C. Its: General Partner By: /s/ James F. O'Brien, Jr. ------------------------------------- Name: James F. O'Brien, Jr. Its: President HERACLES FUND By: Promethean Investment Group L.L.C. Its: Investment Advisor By: /s/ James F. O'Brien, Jr. ------------------------------------ Name: James F. O'Brien, Jr. Its: President -18- SAMYANG MERCHANT BANK By: Promethean Investment Group L.L.C. Its: Investment Advisor By: /s/ James F. O'Brien, Jr. ------------------------------------ Name: James F. O'Brien, Jr. Its: President LEONARDO, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon ------------------------------------ Name: Michael L. Gordon Its: Chief Operating Officer GAM ARBITRAGE INVESTMENTS, INC. By: Angelo, Gordon & Co., L.P. Its: Investment Advisor By: /s/ Michael L. Gordon ------------------------------------ Name: Michael L. Gordon Its: Chief Operating Officer AG SUPER FUND INTERNATIONAL PARTNERS, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon ------------------------------------ Name: Michael L. Gordon Its: Chief Operating Officer -19- RAPHAEL, L.P. By: /s/ Michael L. Gordon ---------------------------------- Name: Michael L. Gordon Its: Chief Operating Officer RAMIUS FUND, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon ---------------------------------- Name: Michael L. Gordon Its: Managing Officer HICK INVESTMENTS, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon ---------------------------------- Name: Michael L. Gordon Its: Managing Officer -20- SCHEDULE OF BUYERS
INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER - ------------------------ ------------------------------ ----------------------------------- Nelson Partners c/o Leeds Management Services Citadel Investment Group, L.L.C. 129 Front Street, 5th Floor 225 West Washington Street Hamilton HM12 Bermuda Chicago, Illinois 60606 Attn: Anne Dupuy Attention: Benjamin Kopin Facsimile: (441) 292-2239 Kenneth C. Griffin Facsimile: (312) 368-4347 Olympus Securities, Ltd. c/o Leeds Management Services Citadel Investment Group, L.L.C. 129 Front Street, 5th Floor 225 West Washington Street Hamilton HM12 Bermuda Chicago, Illinois 60606 Attn: Anne Dupuy Attention: Benjamin Kopin Facsimile: (441) 292-2239 Kenneth C. Griffin Facsimile: (312) 368-4347 Themis Partners L.P. c/o Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520 New York, New York 10019 New York, New York 10019 Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr. Facsimile: 212-698-0505 Facsimile: 212-698-0505 Heracles Fund Bank of Bermuda (Cayman) Limited Promethean Investment Group, L.L.C. P.O. Box 513 40 West 57th Street, Suite 1520 3rd Floor British American Center New York, New York 10019 Dr. Roy's Drive Attn: James F. O'Brien, Jr. Georgetown, Grand Cayman Facsimile: 212-698-0505 Cayman Island, BWI Attn: Allen J. Bernardo Facsimile: 809-949-7802 Samyang Merchant Bank c/o Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520 New York, New York 10019 New York, New York 10019 Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr. Facsimile: 212-698-0505 Facsimile: 212-698-0505 Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 GAM Arbitrage c/o Angelo, Gordon & Co., L.P. Investments, Inc. 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 -21- INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER - ------------------------ ------------------------------ ----------------------------------- AG Super Fund c/o Angelo, Gordon & Co., L.P. International Partners, 245 Park Avenue - 26th Floor L.P. New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Hick Investments, Ltd. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue - 26th Floor New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449
-22- EX-10.(Z) 14 EXHIBIT 10(Z) WARRANT THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS. IMAGING TECHNOLOGIES CORPORATION WARRANT TO PURCHASE COMMON STOCK Warrant No.: 5 Number of Shares: 40,000 Date of Issuance: August 21, 1997 Imaging Technologies Corporation, a Delaware corporation (the "COMPANY"), hereby certifies that, for Ten United States Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Nelson Partners, the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) Forty Thousand (40,000) fully paid nonassessable shares of Common Stock (as defined herein) of the Company (the "WARRANT SHARES") at the purchase price per share provided in Section l(b) below (the "WARRANT EXERCISE PRICE"); provided, however, that in no event shall the holder be entitled to exercise this Warrant for a number of Warrant Shares in excess of that number of Warrant Shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed 4.9% of the outstanding shares of the Common Stock following such exercise. For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such proviso is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised Warrants beneficially owned by the holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the holder and its affiliates (including, without limitation, any convertible notes or preferred stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The holder may waive the foregoing limitations by written notice to the Company upon not less than 61 days prior notice (with such waiver taking effect only upon the expiration of such 61 day notice period). Section 1. (a) SECURITIES PURCHASE AGREEMENT. This Warrant is one of the Warrants (the "PREFERRED SHARE WARRANTS") issued pursuant to Section 1 of that certain Securities Purchase Agreement dated as of August 21, 1997, among the Company and the Buyers referred to therein (the "PURCHASE AGREEMENT"). (b) DEFINITIONS. The following words and terms as used in this Warrant shall have the following meanings: "MARKET PRICE" means, with respect to any security for any date, the lowest Closing Bid Price (as defined below) for such security during the seven consecutive trading days immediately preceding such date. "CLOSING BID PRICE" means, for any security as of any date, the last closing bid price for such security on the Nasdaq National Market as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq National Market is not the principal trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of the Preferred Shares. If the Company and the holders of the Preferred Shares are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(a) of this Warrant with the term "Closing Bid Price" being substituted for the term "Market Price." (All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period.) "APPROVED STOCK PLAN" shall mean any contract, plan or agreement which has been approved by the Board of Directors of the Company, pursuant to which the Company's securities may be issued to any employee, officer, director, consultant or other service provider for services provided to the Company. -2- "CERTIFICATE OF DESIGNATIONS" means the Company's Certificate of Designations, Preferences and Rights of the Series C Redeemable Convertible Preferred Stock. "COMMON STOCK" means (i) the Company's common stock, par value $.005 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. "COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as defined below) or Convertible Securities (as defined below) are actually exercisable or convertible at such time, but excluding any shares of Common Stock issuable upon exercise of the Preferred Share Warrants. "EXPIRATION DATE" means the date four years from the date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the City of New York or the State of New York (a "HOLIDAY"), the next preceding date that is not a Holiday. "OTHER SECURITIES" means (i) those warrants of the Company issued prior to, and outstanding on, the date of issuance of this Warrant, (ii) the Preferred Shares (as defined below) and (iii) the shares of Common Stock issued upon conversion of the Preferred Shares. "PERSON" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "PREFERRED SHARES" means the shares of the Company's Series C Redeemable Convertible Preferred Stock issued pursuant to the Purchase Agreement. "SECURITIES ACT" means the Securities Act of 1933, as amended. "WARRANT" means this Warrant and all Warrants issued in exchange, transfer or replacement of any thereof. "WARRANT EXERCISE PRICE" shall be $7.50, subject to adjustment as hereinafter provided. (c) OTHER DEFINITIONAL PROVISIONS. (i) Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company's successors and (B) to any applicable law defined or referred to herein, shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time. -3- (ii) When used in this Warrant, the words "HEREIN," "HEREOF," and "HEREUNDER," and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words "SECTION," "SCHEDULE," and "EXHIBIT" shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified. (iii) Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa. Section 2. EXERCISE OF WARRANT. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, in whole or in part, at any time during normal business hours on any business day on or after the opening of business on the date hereof and prior to 11:59 P.M. Eastern Time on the Expiration Date by (i) delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto, of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which the Warrant is being exercised (plus any applicable issue or transfer taxes) (the "AGGREGATE EXERCISE PRICE") in cash or by check or wire transfer or by notifying the Company that it should subtract from the number of Warrant Shares issuable to the holder upon such exercise an amount of Warrant Shares having a last reported sale price (as reported by Bloomberg) on the date immediately preceding the date of the subscription notice equal to the Aggregate Exercise Price of the Common Stock being acquired upon exercise, and (iii) the surrender of this Warrant, at the principal office of the Company; provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer and the provisions of Section 7 shall be applicable. In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), a certificate or certificates for the Warrant Shares so purchased, in such denominations as may be requested by the holder hereof and registered in the name of, or as directed by, the holder, shall be delivered at the Company's expense to, or as directed by, such holder as soon as practicable after such rights shall have been so exercised, and in any event no later than three business days after such exercise. In the case of a dispute as to the determination of the Warrant Exercise Price or the last reported sale price (as reported by Bloomberg) of a security or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within one business day of receipt of the holder's subscription notice. If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price or the last reported sale price (as reported by Bloomberg) or arithmetic calculation of the Warrant Shares within one day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via facsimile (i) the disputed determination of the Warrant Exercise Price or the last reported sale price (as reported by Bloomberg) to an independent, reputable investment banking firm or (ii) the disputed arithmetic calculation of the Warrant Shares to its independent, outside accountant. The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder -4- of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment banking firm's or accountant's determination or calculation, as the case may be, shall be deemed conclusive absent manifest error. (b) Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than ten business days after any exercise and at its own expense, issue a new Warrant identical in all respects to the Warrant exercised except (i) it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised, and (ii) the holder thereof shall be deemed for all corporate purposes to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which the Warrant is surrendered and payment of the amount due in respect of such exercise and any applicable taxes is made, irrespective of the date of delivery of certificates evidencing such Warrant Shares, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. (c) No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock issued upon exercise of this Warrant shall be rounded up or down to the nearest whole number. (d) If the Company shall fail for any reason or for no reason to issue to the holder on a timely basis as described in this Section 2, a certificate for the number of shares of Common Stock to which the holder is entitled upon the holder's exercise of this Warrant or a new Warrant for the number of shares of Common Stock to which such holder is entitled pursuant to Section 2(b) hereof, the Company shall, in addition to any other remedies under this Warrant or the Securities Purchase Agreement or otherwise available to such holder, including any indemnification under Section 8 of the Securities Purchase Agreement, pay as additional damages in cash to such holder on each date after the tenth business day following receipt by the Company of the exercise notice that such exercise is not timely effected in an amount equal to 1% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis and to which the holder is entitled and, in the event the Company has failed to timely deliver a new Warrant, the number of shares represented by the portion of this Warrant which is not being converted, as the case may be, and (B) the average of the Closing Bid Prices for the three consecutive trading days immediately preceding the last possible date which the Company could have issued such Common Stock to the holder without violating this Section 2. Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and agrees as follows: (a) This Warrant is, and any Preferred Share Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued. -5- (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. (c) During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least 100% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. (d) The Company shall promptly secure the listing of the shares of Common Stock issuable upon exercise of this Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. (e) The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. No impairment of the designations, preferences and rights of the Preferred Shares contained in the Company's Certificate of Designations or any waiver thereof which has an adverse effect on the rights granted hereunder shall be given effect until the Company has taken appropriate action (satisfactory to the holders of Preferred Share Warrants representing a majority of the shares of Common Stock issuable upon the exercise of such Preferred Share Warrants then outstanding) to avoid such adverse effect with respect to this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. (f) This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. Section 4. TAXES. The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant. -6- Section 5. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders. Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment and not with a view to, or for sale in connection with, any distribution hereof or of any of the shares of Common Stock or other securities issuable upon the exercise thereof, and not with any present intention of distributing any of the same. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "ACCREDITED INVESTOR" as such term is defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "ACCREDITED INVESTOR"). Upon exercise of this Warrant, the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale and that such holder is an Accredited Investor. Notwithstanding the foregoing, by making the representations herein, the holder does not agree to hold the Warrant or the Warrant Shares for any minimum or other specified term and reserves the right to dispose of the Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. If such holder cannot make such representations because they would be factually incorrect, it shall be a condition to such holder's exercise of the Warrant that the Company receive such other representations as the Company considers reasonably necessary to assure the Company that the issuance of its securities upon exercise of the Warrant shall not violate any United States or state securities laws. Section 7. OWNERSHIP AND TRANSFER. (a) The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as -7- the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) This Warrant and the rights granted to the holder hereof are transferable to affiliates or associates of the holder hereof, without the written consent of the Company, and to other Persons, with the consent of the Company, which consent shall not be unreasonably withheld, in whole or in part, upon surrender of this Warrant, together with a properly executed warrant power in the form of Exhibit B attached hereto; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 7(c) below. (c) The holder of this Warrant understands that this Warrant has not been and is not expected to be, registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (a) subsequently registered thereunder, or (b) such holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration; provided that (i) any sale of such securities made in reliance on Rule 144 promulgated under the Securities Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Securities and Exchange Commission thereunder; and (ii) neither the Company nor any other person is under any obligation to register the Preferred Share Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. (d) The Company is obligated to register the Warrant Shares for resale under the Securities Act pursuant to the Registration Rights Agreement dated August 21, 1997 by and between the Company and the Buyers listed on the signature page thereto (the "REGISTRATION RIGHTS AGREEMENT") and the initial holder of this Warrant (and certain assignees thereof) is entitled to the registration rights in respect of the Warrant Shares as set forth in the Registration Rights Agreement. Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES. In order to prevent dilution of the rights granted under this Warrant, the Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: (a) ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE OF COMMON STOCK. If and whenever on or after the date of issuance of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than shares of Common Stock deemed to have been issued by the Company in connection with an Approved Stock Plan or upon exercise or conversion of the Other Securities) for a consideration per share less than the Warrant Exercise Price in effect immediately prior to such time (the "APPLICABLE PRICE"), then immediately after such issue or sale the Warrant Exercise -8- Price shall be reduced to an amount equal to the product of (x) the Warrant Exercise Price in effect immediately prior to such issue or sale and (y) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Applicable Price by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (II) the consideration, if any, received by the Company upon such issue or sale, by (2) the product derived by multiplying the (I) Applicable Price by (II) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. Upon each such adjustment of the Warrant Exercise Price hereunder, the number of shares of Common Stock acquirable upon exercise of this Warrant shall be adjusted to the number of shares determined by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment. (b) EFFECT ON WARRANT EXERCISE PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable: (i) ISSUANCE OF OPTIONS. If the Company in any manner grants any rights or options to subscribe for or to purchase Common Stock (other than pursuant to an Approved Stock Plan or Other Securities) or any stock or other securities convertible into or exchangeable for, directly or indirectly, Common Stock (such rights or options being herein called "OPTIONS" and such convertible or exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Applicable Price, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of this Section 8(b)(i), the "price per share for which Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities" is determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Company upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Applicable Price, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible -9- Securities shall be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of this Section 8(b)(ii), the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No adjustment of the Warrant Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale. (iii) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Warrant Exercise Price in effect at the time of such change shall be readjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of shares of Common Stock acquirable hereunder shall be correspondingly readjusted; provided that no adjustment shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect. (c) EFFECT ON WARRANT EXERCISE PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the following shall be applicable: (i) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the last reported sale price (as reported by Bloomberg) of such securities for the twenty (20) consecutive trading days immediately preceding the date of receipt. In case any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Warrants then -10- outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "VALUATION EVENT"), the fair value of such consideration will be determined within forty-eight (48) hours of the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company. The determination of such appraiser shall be final and binding upon all parties. (ii) INTEGRATED TRANSACTIONS. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $.01. (iii) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock. (iv) RECORD DATE. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. (e) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person (as defined below) or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior to the consummation of any Organic Change, the Company will make appropriate provision (in form and substance satisfactory to the holders of the Preferred Share Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Preferred Share Warrants then -11- outstanding) to insure that each of the holders of the Preferred Share Warrants will thereafter have the right to acquire and receive in lieu of or addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Preferred Share Warrants, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Preferred Share Warrants had such Organic Change not taken place. In any such case, the Company will make appropriate provision (in form and substance satisfactory to the holders of the Preferred Share Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Preferred Share Warrants then outstanding) with respect to such holders' rights and interests to insure that the provisions of this Section 8 and Section 9 below will thereafter be applicable to the Preferred Share Warrants (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Company, an immediate adjustment of the Warrant Exercise Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of shares of Common Stock acquirable and receivable upon exercise of the Preferred Share Warrants, if the value so reflected is less than the Warrant Exercise Price in effect immediately prior to such consolidation, merger or sale). The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes, by written instrument (in form and substance satisfactory to the holders of Preferred Share Warrants representing a majority of shares of Common Stock issuable upon exercise of the Preferred Share Warrants then outstanding), the obligation to deliver to each holder of Preferred Share Warrants such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. (f) CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Preferred Share Warrants; provided that no such adjustment will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8. (g) NOTICES. (i) Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company will give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to -12- vote with respect to any Organic Change, dissolution or liquidation, except that in no event shall such notice be provided to such holder prior to such information being made known to the public. (iii) The Company will also give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place. Section 9. PURCHASE RIGHTS. In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "PURCHASE RIGHTS"), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an indemnification undertaking, issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Section 11. NOTICE. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Imaging Technologies Corporation 11031 Via Frontera San Diego, California 92127 Telephone: 619-485-8411 Facsimile: 619-487-5809 Attention: President -13- With copy to: Law Offices of Carmine J. Bua 3838 Camino Del Rio North, Suite 333 San Diego, California 92108-1789 Telephone: 619-280-8000 Facsimile: 619-280-8001 Attention: Carmine J. Bua, Esq. If to a holder of this Warrant, to it at the address set forth below such holder's signature on the signature page hereof. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. Section 12. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against which enforcement of such change, waiver, discharge or termination is sought. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Warrant shall be governed by and interpreted under the laws of the State of New York Section 13. DATE. The date of this Warrant is August 21, 1997. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. -14- IMAGING TECHNOLOGIES CORPORATION By: /s/ Ralph R. Barry ------------------------------------ Name: Ralph R. Barry --------------------------------- Title: Vice President and CFO --------------------------------- -15- EXHIBIT A TO WARRANT SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT IMAGING TECHNOLOGIES CORPORATION The undersigned hereby exercises the right to purchase the number of Warrant Shares covered by this Warrant specified below according to the conditions thereof and herewith makes payment therefor in the amount of $___________ , the Aggregate Exercise Price of such Warrant Shares in full, and requests that such Warrant Shares be issued in the name of: [HOLDER] Dated: , 199_. -------------- By: --------------------------------- Name: ------------------------------- Title: ------------------------------- Address: ----------------------------- ------------------------------------- ------------------------------------- ------------------------------------- Number of Warrant Shares Being Purchased: ------------------- -16- EXHIBIT B TO WARRANT FORM OF WARRANT POWER FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to __________ Federal Identification No. _______________, a warrant to purchase ______________ shares of the capital stock of Imaging Technologies Corporation, a Delaware corporation, represented by warrant certificate no. _______________, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint _____________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises. Dated: , 199 ---------------- -- -------------------------------- By: ---------------------------- Its: ---------------------------- -17- EX-10.(AA) 15 EXHIBIT 10(AA) PROMISSORY NOTE This Promissory Note ("Note") is effective on June 30, 1998. NewGen Imaging Systems, Inc. and its parent company Imaging Technologies Corporation, collectively referred to herein as "Company", for value received (including but not limited to Dataproducts Corporation's forbearance in pursuing collection of the delinquent balance owed by Company to Dataproducts Corporation), hereby accept joint and several liability for and promise to pay to the order of Dataproducts Corporation, a Delaware Corporation ("Holder"), by wire transfer to its account at Union Bank, Los Angeles Main Office at the remittance address given in Schedule B, the principal sum of Nine Hundred Thirty-four Thousand Five Hundred and 21/100 Dollars ($934,500.21) with interest on the declining balance of said principal amount from the date hereof at the rate of eight percent (8.00%) per annum on a 360-day basis in accordance with Schedules A and B, attached hereto and incorporated herein by this reference. Principal and interest due hereunder shall be paid in seven (7) installments, including accrued interest, as per the payment schedule set forth in Schedule B. In any event, payment in full of both principal and interest shall be made no later than February 28, 1999. Prepayment of principal under this Note may occur at any time without penalty. Any partial prepayment under this Note shall, however, not operate to postpone or suspend the obligation of Company to make payments as and when due hereunder and shall not alter any other regularly scheduled installments provided for herein. This Note shall be paid to the Holder without claim of set-off or deduction of any nature or for any cause whatsoever on the part of the Company against the Holder, and should suit be instituted to enforce payment of this Note, the Company hereby waives any and all rights of setoff, deduction, cross-complaint or counterclaim of any nature or for any cause whatsoever on its part against the Holder. In the event that (a) any installment provided for hereunder is not paid in full on its scheduled due date, or (b) the undersigned defaults in the performance of any material covenant or promise contained herein, or (c) a petition is filed seeking reorganization or arrangement of the undersigned under the federal bankruptcy laws, or (d) the undersigned makes a general assignment for the benefit of creditors, or (e) the undersigned suffers the appointment of a receiver, then in any of such events, the entire remaining unpaid balance of both principal and interest owing hereunder shall, at the option of the holder hereof, become immediately due and payable. Thereafter, said unpaid balance of principal and interest shall, until paid, both before and after judgment, earn penalties at the rate of fourteen percent (14.00%) per annum. The acceptance of any installment payment after the occurrence of a default or any other event giving rise to the right of acceleration provided for in this paragraph shall not constitute a waiver of any such right of acceleration with respect to any such default or event or any subsequent default or event. Neither this Note nor Holder's forbearance hereunder shall operate to or be construed as limiting, modifying or extinguishing any rights or remedies Holder may have under the OEM Purchase Agreement between Company and Holder dated September 23, 1996 and Amendments thereto, or other existing contracts or agreements between them. This Note is intended as a good faith accommodation by the Holder. In the event that any payment under this Promissory Note is not made at the time and in the manner required hereby, Company consents to the entry of a judgment against it for the amount Page 1 outstanding, and agrees to reimburse the Holder for commercially reasonable costs and expenses, including but not limited to attorney's fees incurred by the Holder to third parties, (whether with or without suit or before or after judgment) in connection with any proceedings to secure payment of amounts due under this Note. The undersigned hereby waives presentment for payment, protest, demand notice of dishonor, objection to confession of judgment, and notice of nonpayment. Every provision hereof is intended to be several. If any provision of this Note is determined by a court of competent jurisdiction to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall not affect the other provisions hereof, which shall remain binding and enforceable. This Note and all of its provisions shall be binding upon any and all successors-in-interest of the Company and shall inure to the benefit of the successors or assigns of the Holder. This Note and its enforcement shall be governed and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Company has caused the Note to be signed by its authorized officer and by its parent company's authorized officer. NEWGEN IMAGING SYSTEMS, INC. IMAGING TECHNOLOGIES CORPORATION By /s/ Frank Leonardi By /s/ Brian Bonar ----------------------------- ------------------------------ Name Frank Leonardi Name Brian Bonar --------------------------- ---------------------------- [print/type] [print/type] Title VP Sales Title CEO. -------------------------- --------------------------- SIGNATURE OF HOLDER By /s/ R. P. Kramer ---------------------------- Name R. P. Kramer --------------------------- Title Vice President & Treasurer ------------------------- For DATAPRODUCTS CORPORATION Page 2 EX-10.(AB) 16 EXHIBIT 10(AB) STOCK PURCHASE AGREEMENT Stock Purchase Agreement ("Agreement"), dated as of November 28, 1997, by and between Imaging Technologies Corporation, a Delaware Corporation, with offices at 11031 Via Frontera, San Diego, California 92127 ("ITEC"), and Timothy E. McCanna, residing at 21776 Alarez, Mission Viejo, California 92675 ("McCanna"); and Michael W. Johnson, residing at 33812 Ave. Pescador, San Juan Capistrano, California 92675 ("Johnson"), McCanna and Johnson being all of the shareholders of New Media Memory, Inc., a California Corporation ("NMM") (hereinafter sometimes collectively referred to as the "Stockholders"). WITNESSETH WHEREAS, the Stockholders own 1,000 shares of the Common Stock no par value of NMM (hereinafter "Stock"), which constitutes all of the outstanding shares of the Stock of NMM; and WHEREAS, the Stockholders desire to sell and ITEC desires to purchase the Stock, pursuant to the terms and conditions of this Agreement; and WHEREAS, it is intention of the parties hereto that, upon the consummation of the purchase and sale of the Stock pursuant to this Agreement, ITEC shall own all of the outstanding Stock of NMM; NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, it is agreed as follows; ARTICLE 1 SALE OF STOCK 1.1 Subject to the terms and conditions hereinafter set forth, the Stockholders agree to sell, assign, transfer and deliver to ITEC on the Closing Date as hereinafter set forth, and ITEC agrees to purchase from the Stockholders on the Closing Date, the number of shares of Stock set forth opposite the name of such Shareholder on Schedule 1 annexed hereto. The certificates representing the Stock shall be duly endorsed in blank, or accompanied by Stock Powers, duly executed in blank by the Stockholder transferring the same, and with all necessary transfer tax and other revenue stamps acquired at the Stockholders expense duly fixed and cancelled. Each Stockholder agrees to cure any deficiencies with respect to the endorsement of the certificates representing the Stock owned by such Stockholder or with respect to the endorsement of the certificates representing the Stock owned by such Stockholder or with respect to the Stock Power accompanying any such certificate. 1.2 PRICE. ITEC shall purchase the stock from the Stockholders for the sum of Ten ($10) Dollars, 200,000 unregistered shares of ITEC's common stock (subject to adjustment as described under Article 1.6) and other good and valuable consideration. 1.3 The closing of the sale contemplated by this Agreement shall take place at 10:00 A.M. at the offices of ITEC, 11031 Via Frontera, San Diego, California on November 28, 1997, or such other time and date as shall be mutually agreed to by the parties (said time and date are hereinafter referred to as the "Closing Date"). 1.4 Effective on the Closing Date of the purchase Tim McCanna shall enter into employment agreement with NMM calling for him to serve as an executive officer of NMM for no less three years. Compensation under the agreements shall be at the fair market value of the services to be provided and will based on the AEA Compensation Study or such other amount as agreed to by ITEC's Compensation Committee and Mr. McCanna. Mr. McCanna shall also receive health benefits under comparable terms and conditions as other employees in similar positions within ITEC subsidiaries. 1.5 Reserved 1.6 ADJUSTMENT OF SHARES. If after the completion of the due diligence procedures, it is determined that the net equity as of November 30, 1997 is less than $400,000 then the number of shares issueable by ITEC shall be reduced by an amount equal to 10.0% divided by $400,000 times the amount of the net equity below $400,000 times 200,000 shares. ARTICLE 2 REPRESENTATION AND WARRANTIES OF THE STOCKHOLDERS The Stockholders, jointly and severally represent, and warrant to the best of their knowledge, and agree, except as otherwise herein indicated, as follows: 2.1 CORPORATE STATUS OF NMM. NMM is a corporation duly organized, validly existing and in good standing under laws of the State of California, and is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the nature of its business or the ownership of its properties or both makes such qualification necessary, except as described in the NMM Reports herein provided, and except where failure to be so qualified would not have a material adverse effect on the financial condition, business or operations of NMM. 2.2 Each Stockholder is the lawful owner of the number of shares of Stock listed opposite the name of such Stockholder in Schedule 1 hereto, free and clear all liens, encumbrances, restrictions and claims of every kind; Each Stockholder has full and legal right, power and authority to enter into this Agreement and to sell, assign, transfer and convey the shares of Stock so owned by him pursuant to the provisions of this Agreement will transfer to ITEC valid title thereto, free and cleat of all liens, encumbrances, restrictions and claims of every kind. 2.3 CAPITAL STOCK. The authorized capital stock of NMM consists of ______ shares of NMM Common Stock of which 1,000 shares were outstanding November 28, 1997. All of the outstanding shares of NMM Common Stock have been validly issued and are fully paid and nonassessable. Except with respect to such 1,000 shares, NMM does not have any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating NMM to issue or sell shares of its capital stock or any securities or obligations convertible into, or exercisable, or exchangeable for, any shares of its capital stock. 2.4 STATEMENTS, DOCUMENTS AND REPORTS. NMM has previously furnished to ITEC certain disclosures which shall be included as part of the NMM Reports. Each of the balance sheets included in the NMM Reports (including any related notes and schedules) fairly presents the financial position of NMM as of its date and the other financial statements included in the NMM Reports (including any related notes and schedules) fairly presents the consolidated results of operations or other information included therein of NMM for the periods or as of the dates therein set forth, subject, where appropriate, to normal period-end adjustments, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved (except as otherwise stated therein). Except as and to the extent reflected, reserved against or otherwise disclosed in NMM's consolidated balance sheet at October 31, 1997 (including the notes thereto), or as otherwise disclosed in the NMM Reports, NMM, to the best of its knowledge, did not have at such date and does not now have any liabilities or obligations of any kind (other than non-monetary performance obligations under the NMM Material Contracts), whether accrued, absolute, asserted or unasserted, contingent or otherwise, and whether or not required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied, which would have a material adverse effect on the business, financial condition or prospects of NMM. This Agreement does not contain, and none of the NMM Reports contained as of its date with respect to NMM, any untrue statement of a material fact or any omission to state a material fact required to be stated herein or therein or necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. 2.5 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in the NMM Reports, since October 31, 1997 NMM has not; (a) undergone any change in its financial condition, business or operations, other than changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse to NMM taken as a whole; (b) experienced any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting its prospects, properties or businesses. (c) declared, set aside or paid any dividend (whether in cash, stock or property) with respect to the capital stock of NMM; (d) entered into, or materially amended, a material employment agreement or severance agreement or effected (other than normal increases in the ordinary course of its business that are consistent with past practices and that, in the aggregate, have not resulted in a material increase in benefits or compensation expense) any material increase in the compensation payable or to become payable to its directors, officers or employees or any material increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers or key employees; (e) entered into any material transaction other than in the ordinary course of business; (f) waived any valuable right or any material debt owed to it; (g) changed or amended any material contract or arrangement by which it or any of its assets or properties is bound or subject; Each NMM Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, including, but not limited to, the Code (if applicable) and ERISA (if applicable). Neither NMM, the NMM Employee Plans nor any of their respective current or former directors, officers, employees or agents have, with respect to any NMM Employee Plan, engaged directly or indirectly in any non-exempt "prohibited transaction," as such term is defined in Section 4975 of the Code or Section 406 or ERISA. NMM neither provides nor has represented, promised or contracted (whether in oral or written form) to any employee or former employee (either individually or to employees or former employees as a group) that such employee(s) or former employees are, or would be, provided with post-retirement medical, dental, welfare or life insurance benefits upon their retirement. 2.11 NMM SUPPLIED INFORMATION. None of the information relating to NMM to be supplied by NMM in writing expressly for inclusion in any filing made with the U.S. Securities and Exchange Commission ("Commission"), including any amendments or supplements thereto, will, at the time of filing thereof with the Commission, at the time of the meeting of NMM shareholders to be held in connection with the merger, or at the Effective Time contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 2.12 INTELLECTUAL PROPERTY. The NMM Reports list all patents, trademarks, trade names, trademark and trade name registrations, copyright registrations and all pending applications for any of the foregoing (collectively, "Rights") owned by NMM and any licenses or Rights granted by or to NMM. Except as set forth in the NMM Reports, to the best of NMM's knowledge, NMM owns or is licensed to use the Rights, trade secret rights and other proprietary rights necessary for the conduct of its business as currently conducted, or it can obtain licenses therefor upon commercially reasonable terms, all without infringement of the rights of others, and to the best of NMM's knowledge no person is infringing upon the Rights, trade secret rights and other proprietary rights owned by NMM or used by NMM. 2.13 MATERIAL CONTRACTS. All contracts, agreements and instruments to which NMM is a party, which involve future revenue to or payments by NMM that are material, are listed in the NMM Reports (collectively, the "NMM Material Contracts"). Except as set forth in the NMM Reports, all the NMM Material Contracts to which NMM is a party are in full force and effect in all material respects. NMM has no notice that any party to any such NMM Material Contract intends to cancel, withdraw, modify or amend such NMM Material Contract. NMM is not in material default or breach, and no event has occurred or shall occur by reason of the transactions contemplated herein which would constitute a default or breach, where such default or breach would entitle another party hereto to accelerate or terminate such NMM Material Contract or otherwise impose a material penalty or forfeiture thereunder (whether with or without notice, lapse of time or the happening or occurrence of any other event), under any NMM Material Contract. 2.14 FEES. NMM has not paid nor become obligated to pay any Investment banking, brokerage or finders fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby or any other transaction of the type contemplated hereby. 2.15 GENERAL INDEMNITY. NMM and its shareholders will indemnify, hold harmless, and at ITEC's request, defend ITEC and ITEC's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors from any against any loss, cost, liability, fine, penalty or expense (including court costs and reasonable fees of attorneys and other professionals) but only to the extent to which they have been compensated, arising out of or in connection with any claim or action, whether based on contract or tort (including negligence and strict products liability), concerning any known, either disclosed or undisclosed, patent infringement action(s) for any NMM products or technologies existing as of the Effective Time. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF ITEC ITEC represents and warrants to the best of its knowledge, and agree, except as otherwise herein indicated, as follows: 3.1 CORPORATE STATUS OF ITEC. ITEC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the nature of its business or the ownership of its properties or both makes such qualification necessary, except where failure to be so qualified would not have a material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.2 CAPITAL STOCK. The authorized capital stock of ITEC consists of 100,000,000 shares of ITEC Common Stock, $0.005 par value, of which 9,977,145 shares were outstanding on September 30, 1997; 7,500 authorized shares of ITEC 5% Preferred Stock of which 420.5 shares were outstanding on September 30, 1997; 1,200 authorized shares of ITEC's Series C Redeemable Convertible Preferred Stock of which 500 shares were outstanding on September 30, 1997; and 1,183 authorized shares of ITEC Preferred Stock none of which were outstanding on September 30, 1997 ("Shares"). All of the outstanding Shares have been validly issued and are fully paid and nonassessable. As of September 30, 1997, ITEC (a) had reserved up to 1,295,589 authorized but unissued shares of ITEC Common Stock for issuance upon exercise of stock options outstanding pursuant to ITEC's stock option plans, (b) had reserved up to 500,000 authorized but unissued shares of ITEC Common Stock for issuance upon purchase under ITEC's stock purchase plan; (c) had reserved up to 3,212,901 authorized but unissued shares of ITEC Common Stock for issuance upon exercise of certain warrants, (d) had reserved up to 64,516 authorized but unissued shares of ITEC Common Stock for issuance upon conversion of the Convertible Debentures, (e) had reserved up to 24,029 authorized but unissued shares of ITEC Common Stock for issuance upon conversion of ITEC 5% Preferred Stock; (f) had reserved up to 3,000,000 authorized but unissued shares of ITEC Common Stock for issuance upon conversion of ITEC Series C Redeemable Convertible Preferred Stock. Except with respect to such 18,074,180 shares, ITEC does not have any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating ITEC to issue or sell shares of its capital stock or any securities or obligations convertible into, or exchangeable for, any shares of its capital stock; provided, however, that ITEC may in the business judgment of its Board of Directors issue and sell additional equity securities before or after the Effective Time. 3.3 SUBSIDIARIES. The ITEC Annual Report on Form 10-KSB for the year ended June 30, 1997 heretofore delivered by ITEC to NMM, together with all items incorporated by reference therein and all exhibits thereto, sets forth each Subsidiary of ITEC. Except as is disclosed in the ITEC Reports, ITEC owns, directly or indirectly, all of the outstanding capital stock of, or other equity interests in, each of its subsidiaries free and clear of all liens, charges, pledges, security interests or other encumbrances and all of such capital stock or other equity interests has been duly authorized and validly issued and is fully paid and nonassessable. Except as otherwise disclosed in the ITEC Reports, none of such Subsidiaries has any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating it to issue or sell any shares of its capital stock, or any other equity interest, or any securities or obligations convertible into or exercisable or exchangeable for, any shares of capital stock of, or any other equity interest in, such Subsidiary. Each such Subsidiary is duly organized, validly existing an in good standing under the laws of its jurisdiction of organization, has corporate power and authority to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in all jurisdictions in which the nature of its business or the ownership of its properties or both makes such qualification necessary, except where failure to be so organized, to have such power or authority or to be so qualified would not have a material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.4 RESERVED. 3.5 AUTHORITY FOR AGREEMENT. ITEC has the corporate power to enter into this Agreement and to carry out their obligations hereunder. No further corporate proceedings on the part of ITEC are necessary to authorize this Agreement and the transactions contemplated hereby. The execution and delivery of this Agreement and the other transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, conflict with, or result in any violation of or default under, or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to, any provision of the Certificate of Incorporation, Bylaws or other organizational documents of ITEC or any other Subsidiaries of ITEC, or of any mortgage, indenture, lease, agreement or other instrument, permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to ITEC or any other Subsidiaries of ITEC, or any of their respective properties, except as noted in the second following sentence, or constitute an event under any employee benefit plan or arrangement or individual agreement or contract that may result in any payment (whether of severance pay or otherwise), any acceleration of payment or funding or vesting, or any increases in benefits or compensation. The consolidation of the transaction contemplated hereby will not require ITEC to obtain the consent or approval of any other party to any of the above or affect the validity or effectiveness of any of the above. Other than in connection with or in compliance with the provisions of the California Statute, the Securities Act, the Exchange Act, and the securities or blue sky laws of the various states, no authorization, consent or approval of, or declaration of, filing with or notice to any governmental body or authority is necessary for the execution and delivery of this Agreement by ITEC or the consummation by ITEC of the transactions contemplated hereby. 3.6 NEW SECURITIES. The shares of ITEC Common issuable pursuant to this Agreement have been duly and validly authorized and when issued pursuant to this Agreement will be validly issued, fully paid, and nonassessable and shall be issued in accordance with all applicable federal and state securities laws. 3.7 ANNUAL AND QUARTERLY REPORTS AND OTHER DISCLOSURES. ITEC has previously furnished to NMM (a) true and complete copies of (i) its Annual Reports on Form 10-KSB filed with the Commission for the year ended June 30, 1997, (ii) its Quarterly Report on Form 10-QSB filed with the Commission for the fiscal quarter ended September 30, 1997, (iii) definitive proxy statements filed by ITEC with the Commission, (iv) each Current Report on Form 8-K filed by ITEC with the Commission on or after January 1, 1997, and (v) each document, if any, filed by any Subsidiary of ITEC with the Commission on or after January 1, 1997, and (b) certain other written disclosures (all of which are included in the ITEC Reports). Each of the ITEC Reports which was filed with the Commission complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable. Each of the balance sheets included in the ITEC Reports (including any related notes and schedules) fairly presents the consolidated financial position of ITEC as of its date and the other financial statements included in the ITEC Reports (including any related notes and schedules) fairly present the consolidated results of operations or other information included therein of ITEC for the periods or as of the dates therein set forth, subject, where appropriate, to normal year-end adjustments, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved (except as otherwise stated therein). Except as and to the extent reflected, reserved against or otherwise disclosed in ITEC's consolidated balance sheet at June 30, 1997 (including the notes thereto), or as otherwise disclosed in the ITEC Reports, ITEC, to the best of its knowledge, did not have at such date and does not now have any liabilities or obligations of any kind (other than non-monetary performance obligations under the ITEC Material Contracts), whether accrued, absolute, asserted or unasserted, contingent or otherwise, and whether or not required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied, which would have a material adverse effect on the business, financial condition or prospects of ITEC. This Agreement does not contain, and none of the ITEC Reports contained as of its date, any untrue statement of a material fact or any omission to state a material fact required to be stated herein or therein or necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. 3.8 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in the ITEC Reports since September 30, 1997 neither ITEC nor any of its Subsidiaries has: (a) undergone any change in its financial condition, business or operations, other than changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse to ITEC and its Subsidiaries taken as a whole; (b) experienced any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting its prospects, properties or businesses; (c) declared, set aside or paid any dividend (whether in cash, stock or property) with respect to the capital stock of ITEC; (d) entered into, or materially amended, a material employment agreement or severance agreement or effected (other than normal increases in the ordinary course of its business that are consistent with past practices and that, in the aggregate, have not resulted in a material increase in benefits or compensation expense) any material increase in the compensation payable or to become payable to its directors, officers or employees or any material increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, or with any such officers or key employees; (e) entered into any material transaction other than in the ordinary course of business; (f) waived any valuable right or any material debt owed to it; (g) changed or amended any material contract or arrangement by which it or any of its assets or properties is bound or subject; (h) materially changed its accounting methods, principles or practices; or (i) other than in the ordinary course of business consistent with past practices, materially revalued any of its assets, including, without limitation, write-downs of inventory or write-offs of accounts receivable. 3.9 COMPLIANCE WITH APPLICABLE LAW. The businesses of ITEC and its Subsidiaries are not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.10 TITLE TO PROPERTY AND ASSETS. ITEC owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair ITEC's ownership or use of such property or assets. With respect to the property and assets it leases, ITEC is in compliance in all material respects with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 3.11 LITIGATION. Except as described in any of the ITEC Reports, (a) no material investigation or review by any governmental entity with respect to ITEC or any of its subsidiaries is pending or, to the best of ITEC's knowledge, threatened, nor has any governmental entity indicated to ITEC an intention to conduct the same, and (b) there is no action, suit or proceeding pending or, to the best of ITEC's knowledge, threatened against, or affecting ITEC or its Subsidiaries at law or in equity, or before any arbitrator or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, which (i) seeks to enjoin or otherwise attacks this Agreement or the transactions contemplated hereby, or (ii) either singly or in the aggregate are not expected to have any material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.12 TAX MATTERS. ITEC and its consolidated subsidiaries have timely filed all Federal, state, local and foreign tax returns required to be filed by them or on their behalf. All taxes shown by such returns to be due and payable have been paid or are reflected as a liability on the ITEC balance sheets included in the ITEC Reports. The accruals for taxes reflected on such ITEC balance sheets are adequate for all unpaid Federal, state, local or foreign taxes (including interest and penalties, if any, hereon) due or which will become due for any period commencing prior to the date of such ITEC balance sheets. 3.13 EMPLOYEE BENEFIT PLANS. Except as disclosed in the ITEC Reports, there is no bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, plan, fund or other arrangement for the benefit or welfare of any former or current director, consultant, officer or employee between ITEC and any directors or executive officers of ITEC. The ITEC Reports set forth a list of each employee benefit plan, policy, program or contract including, but not limited to, all such plans, policies and programs that are covered by Title I of ERISA, which are maintained or contributed to by ITEC for the benefit of, or pursuant to which ITEC has any liability with respect to, any current or former employees of ITEC (a "ITEC Employee Plan" and any trust (including a trust intended to qualify under Section 501 (c)(9) of the code). Each ITEC Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, including, but not limited to, the Code (if applicable) and ERISA (if applicable). Neither ITEC, the ITEC Employee Plans nor any of their respective current or former directors, officers, employees or agents have, with respect to any ITEC Employee Plan, engaged directly or indirectly in any non-exempt "prohibited transaction," as such term is defined in Section 4975 of the Code or Section 406 of ERISA. ITEC neither provides nor has represented, promised or contracted (whether in oral or written form) to any employee or former employee (either individually or to employees or former employees as a group) that such employee(s) or former employees are, or would be, provided with postretirement medical, dental, welfare or life insurance benefits upon their retirement. 3.14 INTELLECTUAL PROPERTY. The ITEC Reports list all Rights owned by ITEC and any licenses of Rights granted by or to ITEC. Except as set forth in the ITEC Reports, to ITEC's knowledge, ITEC owns or is licensed to use the Rights, trade secret rights and other proprietary rights necessary for the conduct of its business as currently conducted, or it can obtain licenses therefor upon commercially reasonable terms, all without infringement of the rights of others, and to the best of ITEC's knowledge no person is infringing upon the Rights, trade secret rights and other proprietary rights owned by ITEC or used by ITEC. 3.15 MATERIAL CONTRACTS. All contracts, agreements and instruments to which, ITEC is a party, which involve future revenue to or payments by ITEC that are material are listed in the ITEC Reports (collectively, the "ITEC Material Contacts"). Except as set forth in the ITEC Reports, all the ITEC Material Contracts to which ITEC is a party are in full force and effect in all material respects, ITEC has no notice that any party to any such ITEC Material Contract intends to cancel, withdraw, modify or amend such ITEC Material Contract. ITEC is not in material default or breach, and no event has occurred or shall occur by reason of the transactions contemplated herein which would constitute a default or breach, where such default or breach would entitle another party hereto to accelerate or terminate such ITEC Material Contract or otherwise impose a material penalty or forfeiture thereunder (whether with or without notice, lapse of time or the happening or occurrence of any other event), under any ITEC Material Contract. 3.16. FEES. ITEC has not paid nor become obligated to pay any investment banking, brokerage or finder's fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby or any other transaction of the type contemplated hereby. ARTICLE 4 COVENANT It is further agreed as follows: 4.1 CONDUCT OF BUSINESS. Prior to the Closing Date, or the date, if any, on which this Agreement is earlier terminated pursuant to Section 6.1 hereof, ITEC and its Subsidiaries shall cause, and the Stockholders shall cause NMM and its Subsidiaries conduct their respective operations according to their ordinary usual course of business, (ii) use their reasonable efforts, and shall cause said Subsidiaries to use their reasonable efforts, to preserve intact their respective business organizations and good will, keep available the services of their respective officers and employees and maintain satisfactory relationships with businesses, suppliers, distributors, customers and others having business relationships with them, (iii) confer on a regular and frequent basis with one or more representatives of one another to report operational matters of materiality and the general status of ongoing operations, (iv) not amend their respective Articles/Certificates of Incorporation or Bylaws, except as provided for in the Agreement, (v) notify one another of any material emergency or other material change in the normal course of ITEC's, NMM's or their Subsidiaries' respective properties, and of any governmental complaints, investigations or hearings (or communications indicating that, the same may be contemplated), (vi) deliver to the other true and correct copies of any reports, statements or schedules filed by ITEC, NMM or their respective Subsidiaries with the SEC subsequent to the date of this Agreement within one day of the date on which such document is so filed, (vii) neither declare nor pay any dividends on their outstanding shares of capital stock nor redeem any capital stock, (viii) not (a) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof and described otherwise contemplated pursuant to this Agreement, issue any shares of their respective capital stocks, affect any stock split or otherwise change their respective capitalizations as they existed on the date hereof, or (b) grant, confer or award any options, warrants, conversion rights or other rights not existing on the date hereof to acquire any shares of their respective capital stocks other than as contemplated hereby (ix) not guarantee any indebtedness, (x) not acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof, (xi) not release or relinquish any material contract or other rights, (xii) not adopt or materially amend any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, plan fund or other arrangement for the benefit or welfare of any director, officer or employee, or (except for normal increases ordinary course of business that are consistent with past practices and that, in the aggregate, do not result in a material increase in benefits or compensation expense) increase in any manner the compensation or fringe benefits of any officer or employee or pay any benefit not required by any existing plan and arrangement, (xiii) not enter into any material transaction other than in the ordinary course of business except for transactions heretofore disclosed in writing to the other parties, and (xiv) not enter into any contract, agreement, commitment or arrangement to do any of the foregoing. 4.2 NO SHOP. Unless and until this agreement has been terminated pursuant to Section 6.2, the Stockholders agree to cause NMM not to (directly or indirectly, through any officer, director employee, agent or otherwise, (a) acquire or agree to acquire any person or (outside the ordinary course of business) any solicit any acquisition or investment proposals; (b) except as required by NMM's directors' fiduciary duty (as determined in the specific case by a written opinion of NMM's outside legal counsel), disclose to any person other than ITEC any non-public information concerning NMM, its assets, its business and/or its financial condition, immediately after experiencing each and any solicitation, contact or inquiry from any with respect thereto, and/or so entertaining, discussing, or disclosing, the Stockholders shall cause NMM to immediately the President of ITEC by telephone (confirmed in writing) all relevant details thereof. 4.3 PUBLIC DISCLOSURES. Non disclosure of this Agreement, its contents or the transactions contemplated hereby shall be made person except at such time and in such form and content as maybe selected by ITEC (provided, however, that such content shall be reasonably satisfactory to NMM). After the initial public disclosure thereof, the Stockholders will, and will cause NMM to consult with ITEC before issuing any press release or otherwise making any public statement (including, without limitation, statements by NMM generally to its customers, employees or suppliers) with respect to the transactions contemplated hereby. 4.4 FOREWARNING. Each party shall promptly give written notice to the other parties upon becoming aware of the occurrence or to its knowledge, impending or threatened occurrence, of any event which would cause or constitute a breach of any of its representations, warranties, or covenants contained in this Agreement or an inability to satisfy the conditions to another party's obligation to effect the Acquisition, and will use its best to prevent or promptly remedy the same. In an instrument in writing signed on behalf of such party by a duly authorized officer. ARTICLE 5 CONDITIONS PRECEDENT 5.1 The sale of the Stock shall be subject, at the stockholder's option to the following conditions: 5.1.1 REPRESENTATIONS, COVENANTS, CERTIFICATE. (a) The representation and warranties of ITEC herein contained shall in all material respects be true as of the date of this Agreement and as of the Closing Date with the same effect as though made at the Closing Date; (b) ITEC shall in all material respects have Performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date; (c) there shall have been no material adverse change in ITEC's business, assets, financial condition or prospects; and (d) ITEC shall have delivered to the Stockholders a certificate, dated the Closing Date and signed on its behalf by its president or a Vice President, to such affect. 5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ITEC. The obligations of ITEC to purchase the Shares and of ITEC to deliver the shares of ITEC Common Stock options issuable pursuant to this Agreement, shall be subject, at its option, to the following conditions: 5.2.1 REPRESENTATIONS AND COVENANTS. (a) The representations and warranties of the Stockholders herein contained shall in all material respects be true as of the date of this Agreement of the Closing Date with the same effect as though made at the Closing Date; (b) the Stockholders shall in all material respects have performed all obligations and complied with all covenants required by this Agreement to be performed or complied them on or prior to the Closing Date, and shall have caused NMM to perform all obligations and comply with all covenants by this Agreement to be performed or complied with by it on or prior to the Closing Date; and (c) there shall have been no material adverse change in NMM's business, assets, financial condition or prospects. 5.3 INJUNCTIONS. No preliminary or permanent injunction or other order by any United States Federal or state court which the consummation of the transactions contemplated by this Agreement shall have been issued. ARTICLE 6 MISCELLANEOUS 6.1 EXTENSIONS AND WAIVERS. At any time prior to the Closing Date, the parties hereto may, (i) extend the time for the performance of any of the obligations or other acts of the parties hereto (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. 6.2 RESERVED. 6.3 No Stockholder, officer or director of NMM or any of it's subsidiaries possesses directly or indirectly any financial interest in or is a director, officer or employee of any corporation, firm, association or business organization which is a client, supplier, customer, lessor, lessee or competitor or potential competitor of ITEC or any of its subsidiaries. Ownership of securities of a company whose securities are registered under the Exchange Act, not in excess of 1% of any class of such securities shall not be deemed to be of financial interest for the purposes of this section. 6.4 The Stockholders represent and warrant that they are not subject to any agreement, judgment or decree adversely affecting their ability to act as employees of NMM or any of its subsidiaries as the case may be. 6.5 All indebtedness other than travel and similar advances of the Stockholders, directors, officers and employees of NMM, and of any of its subsidiaries, shall be repaid in full prior to the Closing Date. 6.6 As ITEC's sole and exclusive remedy for any failure or breach of representation or warranty made by the Stockholders in this Agreement, or made in any schedule delivered pursuant hereto to be true and correct in all respects as of the date of this Agreement and as of the Closing Date, the Stockholders agree, jointly and severally, to indemnify and hold ITEC and its officers, directors and agents harmless from damages, losses or expenses suffered, or paid directly or indirectly through application of NMM's assets as a result of any and all claims, demands, suits, causes of action, proceedings, judgments and liabilities, including reasonable counsel fees incurred in litigation or otherwise assessed, incurred or sustained by or against any of them with respect to or arising out of such failure or breach of any such representation or Warranty up to an amount equal to the "Indemnity Amount". For purposes hereof, the Indemnity Amount shall be an amount stated in United States Dollars, equal to the product of (i) 250,000 and (ii) the exercise price per share under the options granted to each of the Stockholders hereunder. Each of the Stockholder's liability hereunder, if any, shall be satisfied by the delivery of a promissory note due and payable in three equal annual installments, commencing on the first anniversary of the Closing Date, and on the same day in each of the next two consecutive years, bearing interest at the minimum legal rate to avoid imputed interest. Notwithstanding the foregoing, in the event of a willful and deliberate misrepresentation by the Stockholders, the Stockholders shall be liable for the full amount of damages, losses or expenses suffered or paid by ITEC and its officers, directors and agents. 6.7 ITEC agrees to indemnify and hold the Stockholders harmless from damages, losses and expanses in the aggregate, suffered or paid, directly ox indirectly, as a result of any and all claims, demands, suits, causes of action, proceedings, judgments and liabilities, including reasonable counsel fees incurred in litigation or otherwise assessed, incurred or sustained by or against any of them with respect to or arising out of the failure of any representation or warranty made by ITEC in this Agreement to be true and correct in all respects as of the date of this Agreement and as of the Closing Date, 6.8 In the event any claim is made against either ITEC or the stockholders pursuant to Paragraphs 6.6 or 6.7 hereof, the party against whom such claim is made shall give the other party prompt written notice of any such claim against it or of breach of any representation or warranty made in this Agreement by the other party hereto. The party against whom such claim or breach is alleged shall have the option to defend, settle or compromise any such claim, breach or litigation resulting from such claim or breach at it's sole cost and expense; through counsel of its own choosing. 6.9 The respective representations, warranties and indemnification of each of the Stockholders and of ITEC contained in this Agreement or in any schedule delivered pursuant to this Agreement shall survive the purchase and sale of the Stock contemplated hereby for a period of one Year from the Closing Data, except in the event of willful and deliberate misrepresentation, in which event, there shall be no time limitation on survival of such representations, warranties and indemnification. 6.10 This Agreement may be executed in one or more counter parts, all of which taken together shall constitute one instrument. 6.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 6.12 NOTICES. All notices and other communications shall be hereunder in writing and shall be deemed given if delivered by hand or mailed by registered or certified mail (return receipt requested) to the parties at the following addressees (or at such other address for a party as shall be specified by like notice) and shall be deemed given on the date on which so hand-delivered or on the third business day following the date on which so mailed: To ITEC: 11031 Via Frontera San Diego, California 92127 Attn: Edward W. Savarese TO NMM: ---------------------------- ---------------------------- Attn: Tim McCanna 6.13 EQUITABLE REMEDIES. The Shareholders acknowledge and agree that the legal remedies available to ITEC in the event the Shareholders or NMM violates the covenants and agreements made in this Agreement would be inadequate and that ITEC would be entitled, without posting any bond or other security, to temporary preliminary and permanent injunctive relief, specific performance, and other equitable remedies in the event of such a violation, in addition to any other remedies which ITEC may have at law or in equity. 6.14 SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extant of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only so broad (but fully as broad) as is enforceable. 6.15 ENTIRE AGREEMENT ASSIGNABILITY ETC. This Agreement (i) constitutes the entire agreement, supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof (including without limitation the letter of intent) (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder, and (iii) shall not be assignable by operation of law or otherwise. SCHEDULE 1 Tim McCanna 5,000 shares Johnson 5,000 shares IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. IMAGING TECHNOLOGIES CORPROATION - --------------------------------- Edward W. Savarese Chief Executive Officer The foregoing is acknowledged and agreed to by NEW MEDIA MEMORY Tim McCanna - -------------------------------- President - -------------------------------- - -------------------------------- IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. IMAGING TECHNOLOGIES CORPROATION /s/ Brian Bonar - -------------------------------- Brian Bonar President & COO THE FOREGOING IS ACKNOWLEDGED AND AGREED TO BY MCMICAN CORPORATION /s/ Timothy E. McCanna - --------------------------------- Timothy E. McCanna /s/ Michael W. Johnson - --------------------------------- Michael W. Johnson EX-10.(AC) 17 EXHIBIT 10(AC) AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION THIS AGREEMENT and PLAN OF MERGER and PLAN OF REORGANIZATION, (the "Agreement"), is made as of November 30, 1997, between and among Color Solutions, Inc. a California corporation ("CSI"), ITEC Sub, a Nevada corporation ("ITEC Sub") and Imaging Technologies Corporation, a Delaware corporation ("ITEC") and the holder of all of the issued and outstanding capital stock of ITEC Sub. RECITALS WHEREAS, the parties hereto desire to clarify the understanding of the parties; and WHEREAS, it is deemed advisable and in the best interests of each of CSI, ITEC Sub and ITEC and of their respective stockholders that ITEC Sub be merged into CSI pursuant to the General Corporations Law of the State of California (the "California Statute") and the General Corporations Law of the State of Nevada (the "Nevada Statute") in a transaction that would qualify as a "reorganization" as that term is used in Section 368 of the Internal Revenue code of 1986, as amended (the "Code"), and upon the terms and conditions contained in this Agreement. AGREEMENT NOW, THEREFORE, CSI, ITEC Sub and ITEC hereby agree as follows: ARTICLE 1 THE MERGER 1.1 CONSTITUENT, SURVIVING CORPORATIONS. CSI and ITEC shall be the constituent corporations to the Merger (such term and certain other capitalized terms used herein are defined in Section 6.1 hereof). At the Effective Time, ITEC Sub shall be merged into CSI in accordance with the California Statute and the Nevada Statute, and CSI shall be the surviving corporation of the Merger (herein sometimes called the "Surviving Corporation"). The name, identity, existence, rights, privileges, powers, franchises, properties and assets of CSI shall continue unaffected and unimpaired by the Merger. At the Effective Time, the identity and separate existence of ITEC Sub shall cease, and all of the rights, privileges, powers, franchises, properties and assets of ITEC Sub shall be vested in CSI. 1.2 ARTICLES OF INCORPORATION; BYLAWS. The Restated Articles of Incorporation of CSI, as in effect immediately prior to the Effective Time, shall thereafter continue in full force and effect as the Articles of Incorporation of the Surviving Corporation until amended as provided therein or by law. The Bylaws of CSI in effect at the Effective Time shall be the Bylaws of the Surviving Corporation, until amended or repealed as provided therein or by law. 1.3 CONVERSION, ETC. OF CSI STOCK 1.3.1 CONVERSION OF COMMON STOCK. At the Effective Time, all shares of CSI Common Stock issued and outstanding immediately prior to the Effective Time shall, by 1 virtue of the Merger and without any action on the part of the holder thereof, be converted into and become the right to receive an aggregate of eight hundred and fifty thousand (850,000) fully paid, nonassessable, unregistered shares of ITEC Common Stock, subject to adjustment, if any, pursuant to Article 1.3.4 of this Agreement to be issued to the parties set forth in Exhibit 1.3.1. 1.3.2 ISSUANCE OF ITEC SECURITIES. Subject to the terms and conditions hereof, immediately prior to the Effective Time, ITEC shall issue and deliver to American Stock Transfer and Trust, as exchange agent for the Merger (the "Exchange Agent"), certificates and/or instructions representing the number of shares of ITEC Common Stock into which the shares of CSI Common Stock outstanding at the Effective Time are to be converted in accordance with Sections 1.3.1 hereof. 1.3.3 ISSUANCE OF NEW CERTIFICATES. As soon as practicable after the Effective Time, the Exchange Agent shall mail to each record holder, as of the Effective Time, of an outstanding certificate or certificates which immediately prior to the Effective Time represented shares of CSI capital stock (the "Certificates") a form letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Certificates for payment therefor. Each holder of a Certificate or Certificates shall be entitled to receive, upon surrender to the Exchange Agent of the Certificate or Certificates for cancellation, together with such letter of transmittal duly executed, and subject to any required withholding of taxes, the ITEC securities into which the shares previously represented by such Certificate or Certificates shall have been converted in the Merger. Until surrendered to the Exchange Agent, each Certificate shall be deemed for all CSI corporate purposes to evidence only the right to receive upon such surrender the ITEC securities into which the shares represented thereby have been converted, subject to any required withholding of taxes. 1.3.4 ADJUSTMENT OF ITEC SHARES. If after the completion of the due diligence procedures, it is determined that the net income for the ten month period ended October 31, 1997 was less than $75,000 then the number of shares issuable by ITEC shall be reduced by an amount equal to 12.5% divided by $125,000 times the amount of the net income below $75,000 times 800,000 shares. 1.4 CONVERSION OF CSI COMMON STOCK. At the Effective Time, all of the shares of CSI Common Stock (including any options, warrants or other instruments which would otherwise be convertible into Common Stock of CSI) outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into eight hundred and fifty thousand (850,000) shares of Common Stock of ITEC, subject to adjustment, if any, pursuant to Article 1.3.4 of this Agreement. 1.5 CSI STOCK OPTIONS. At the Effective Time, all options then outstanding under the CSI Stock Option Plans shall be canceled as of the Effective Time. 2 1.6 CONVERSION OF ITEC SUB STOCK. At the Effective Time, all of the outstanding shares of Common Stock of ITEC Sub shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into an equal number of shares of the Common Stock of CSI. Such shares will not be subject to Sections 1.3.1, 1.3.2 or 1.4 hereof and shall constitute all of the outstanding Common Stock of CSI immediately following the Effective Time. 1.7 CLOSING OF TRANSFER BOOKS. At the Effective Time the transfer books for CSI capital stock shall be closed, and no transfer of shares of CSI capital stock shall thereafter be made on such books. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF CSI Except as set forth as Schedule 2 hereto (the "CSI Reports") CSI represents and warrants to ITEC and ITEC Sub as follows: 2.1 CORPORATE STATUS OF CSI. CSI is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the nature of its business or the ownership of its properties or both makes such qualification necessary, except as described in the CSI Reports and except where failure to be so qualified would not have a material adverse effect on the financial condition, business or operations of CSI taken as a whole. 2.2 CAPITAL STOCK. The authorized capital stock of CSI consists of 10,000,000 shares of CSI Common Stock, of which 1,030 shares have been validly issued and are fully paid and nonassessable. Except with respect to such shares, CSI does not have any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating CSI to issue or sell shares of its capital stock or any securities or obligations convertible into, or exercisable or exchangeable for, any shares of its capital stock. 2.3 AUTHORITY FOR AGREEMENT. CSI has the corporate power to enter into this Agreement and to carry out its obligations hereunder. Except for approval of this Agreement by CSI shareholders in accordance with Section 4.5 hereof, no other corporate proceedings on the part of CSI are necessary to authorize this Agreement and the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, conflict with, or result in any violation of or default under, or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to, any provision (a) of the Articles of Incorporation, Bylaws or other organizational documents of CSI, or (b) of any mortgage, indenture, lease, agreement or other instrument, permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to CSI, or any of their respective properties, except as noted in the second following sentence (and except where such conflict violation, etc. would not result in loss or damage to CSI or its Subsidiaries in excess of $20,000), or (c) except as described in the CSI Reports, constitute an event under any employee benefit plan or arrangement or individual agreement or contract that may result in any payment (whether of severance pay or otherwise), any acceleration of payment or funding or 3 vesting, or any increase in benefits or compensation. Except as described in the CSI Reports, the consummation of the transaction contemplated hereby will not require CSI to obtain the consent or approval of any other party to any of the above or affect the validity or effectiveness of any of the above. Other than in connection with or in compliance with the provisions of the California statute, the Nevada statute, the Securities Act, the Exchange Act, and the securities or blue sky laws of the various states, no authorization, consent or approval of, or declaration of, filing with or notice to any governmental body or authority is necessary for the execution and delivery of this Agreement by CSI or the consummation by CSI of the transactions contemplated hereby. 2.4 STATEMENTS, DOCUMENTS AND REPORTS. CSI has previously furnished to ITEC certain written disclosures and will provide its audited financial statements as of and for the year ended October 31, 1997 which shall be included as part of the CSI Reports. Each of the balance sheets included in the CSI Reports (including any related notes and schedules) fairly presents the consolidated financial position of CSI as of its date and the other financial statements included in the CSI Reports (including any related notes and schedules) fairly presents the consolidated results of operations or other information included therein of CSI for the periods or as of the dates therein set forth, subject, where appropriate, to normal year-end adjustments, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved (except as otherwise stated therein). Except as and to the extent reflected, reserved against or otherwise disclosed in CSI's consolidated balance sheet at October 31, 1997 (including the notes thereto), or as otherwise disclosed in the CSI Reports, CSI, to the best of its knowledge, did not have at such date and does not now have any liabilities or obligations of any kind (other than non-monetary performance obligations under the CSI Material Contracts), whether accrued, absolute, asserted or unasserted, contingent or otherwise, and whether or not required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied, which would have a material adverse effect on the business, financial condition or prospects of CSI. This Agreement does not contain, and none of the CSI Reports contained as of its date with respect to CSI, any untrue statement of a material fact or any omission to state a material fact required to be stated herein or therein or necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. ITEC agrees to grant an extension for submitting CSI's audited financial statements until December 31, 1997. 2.5 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in the CSI Reports, since October 31,1997 CSI has not; (a) undergone any change in its financial condition, business or operations, other than changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse to CSI taken as a whole; (b) experienced any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting its prospects, properties or businesses; (c) declared, set aside or paid any dividend (whether in cash, stock or Property) with respect to the capital stock of CSI; 4 (d) entered into, or materially amended, a material employment agreement or severance agreement or effected (other than normal increases in the ordinary course of its business that are consistent with past practices and that, in the aggregate, have not resulted in a material increase in benefits or compensation expense) any material increase in the compensation payable or to become payable to its directors, officers or employees or any material increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers or key employees; (e) entered into any material transaction other than in the ordinary course of business; (f) waived any valuable right or any material debt owed to it; (g) changed or amended any material contract or arrangement by which it or any of its assets or properties is bound or subject; (h) materially changed its accounting methods, principles or practices; or (i) other than in the ordinary course of business consistent with past practices, materially revalued any of its assets, including, without limitation, write-downs of inventory or write-offs of accounts receivable. 2.6 COMPLIANCE WITH APPLICABLE LAW. The businesses of CSI is not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a material adverse effect on the financial condition, business or operations of CSI taken as a whole. 2.7 TITLE TO PROPERTY AND ASSETS. CSI owns its Property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair CSI's ownership or use of such Property or assets. With respect to the property and assets it leases, CSI is in compliance in all material respects with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.8 LITIGATION. Except as described in the CSI Reports, (a) to CSI's knowledge no material investigation or review by any governmental entity with respect to CSI is pending or threatened, nor has any governmental entity indicated to CSI an intention to conduct the same, and (b) there is no action, suit or proceeding pending or, to the best of CSI's knowledge, threatened against CSI at law or in equity, or before any arbitrator or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, which (i) seeks to enjoin or otherwise attacks this Agreement or the transactions contemplated hereby, or (ii) either singly or in the aggregate are not expected to have any material adverse effect on the financial condition, business or operations of CSI taken as a whole. 2.9 TAX MATTERS. CSI has timely filed all Federal, state, local and foreign tax returns required to be filed by them or on their behalf. All taxes shown by such returns to be due and payable have been paid or are reflected as a liability on the CSI balance sheets included in the CSI Reports. The accruals for taxes reflected on such CSI balance sheets are adequate for all 5 unpaid Federal, state, local or foreign taxes (including interest and penalties, if any, thereon) due or which will become due for any period commencing prior to the date of such CSI balance sheets. 2.10 EMPLOYEE BENEFIT PLANS. There are no bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, plan, fund or other arrangement for the benefit or welfare of any former or current director, consultant, officer or employee between CSI and any directors or executive officers of CSI. The CSI Reports set forth a list of each employee benefit plan, policy, program or contract including, but not limited to, all such plans, policies and programs that are covered by Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which are maintained or contributed to by CSI for the benefit of, or pursuant to which CSI has any liability with respect to, any current or former employees of CSI (an "CSI Employee Plan") and any trust (including a trust intended to qualify under Section 501 (c)(9) of the Code). Each CSI Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, including, but not limited to, the Code (if applicable) and ERISA (if applicable). Neither CSI, the CSI Employee Plans nor any of their respective current or former directors, officers, employees or agents have, with respect to any CSI Employee Plan, engaged directly or indirectly in any non-exempt "prohibited transaction," as such term is defined in Section 4975 of the Code or Section 406 of ERISA. CSI neither provides nor has represented, promised or contracted (whether in oral or written form) to any employee or former employee (either individually or to employees or former employees as a group) that such employee(s) or former employees are, or would be, provided with post-retirement medical, dental, welfare or life insurance benefits upon their retirement. 2.11 CSI SUPPLIED INFORMATION. None of the information relating to CSI to be supplied by CSI in writing expressly for inclusion in any filing made with the U.S. Securities and Exchange Commission ("Commission"), including any amendments or supplements thereto, will, at the time of filing thereof with the Commission, at the time of the meeting of CSI shareholders to be held in connection with the merger, or at the Effective Time contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 2.12 INTELLECTUAL PROPERTY. The CSI Reports list all patents, trademarks, trade names, trademark and trade name registrations, copyright registrations and all pending applications for any of the foregoing (collectively, "Rights") owned by CSI and any licenses or Rights granted by or to CSI. Except as set forth in the CSI Reports (including notification of possible patent infringement under letter dated February 18, 1997), to the best of CSI's knowledge, CSI owns or is licensed to use the Rights, trade secret rights and other proprietary rights necessary for the conduct of its business as currently conducted, or it can obtain licenses therefor upon commercially reasonable terms, all without infringement of the rights of others, and to the best of CSI's knowledge no person is infringing upon the Rights, trade secret rights and other proprietary rights owned by CSI or used by CSI. 6 2.13 MATERIAL CONTRACTS. All contracts, agreements and instruments to which CSI is a party, which involve future revenue to or payments by CSI that are material, are listed in the CSI Reports (collectively, the "CSI Material Contracts"). Except as set forth in the CSI Reports, all the CSI Material Contracts to which CSI is a party are in full force and effect in all material respects. CSI has no notice that any party to any such CSI Material Contract intends to cancel, withdraw, modify or amend such CSI Material Contract. CSI is not in material default or breach, and no event has occurred or shall occur by reason of the transactions contemplated herein which would constitute a default or breach, where such default or breach would entitle another party hereto to accelerate or terminate such CSI Material Contract or otherwise impose a material penalty or forfeiture thereunder (whether with or without notice, lapse of time or the happening or occurrence of any other event), under any CSI Material Contract. 2.14 FEES. CSI has not paid nor become obligated to pay any investment banking, brokerage or finders fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby or any other transaction of the type contemplated hereby. 2.15 GENERAL INDEMNITY. CSI and its shareholders will indemnify, hold harmless, and at ITEC's request, defend ITEC and ITEC's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors from and against any loss, cost, liability, fine, penalty or expense (including court costs and reasonable fees of attorneys and other professionals) to the extent to which they have been compensated, arising out of or in connection with any claim or action, whether based on contract or tort (including negligence and strict products liability), concerning any known, either disclosed or undisclosed, patent infringement action(s) for any CSI products or technologies existing as of the Effective Time. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF ITEC AND ITEC SUB Except as set forth in Schedule 3 hereto (the "ITEC Reports") ITEC and ITEC Sub represent and warrant to CSI as follows; 3.1 CORPORATE STATUS OF ITEC AND ITEC SUBSIDIARIES. ITEC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the nature of its business or the ownership of its properties or both makes such qualification necessary, except where failure to be so qualified would not have a material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.2 CAPITAL STOCK. The authorized capital stock of ITEC consists of 100,000,000 shares of ITEC Common Stock, $0.005 par value, of which 9,977,145 shares were outstanding on September 30, 1997; 7,500 authorized shares of ITEC 5% Preferred Stock of which 420.5 shares were outstanding on September 30, 1997; 1,200 authorized shares of ITEC's Series C Redeemable Convertible Preferred Stock of which 500 shares were outstanding on September 7 30, 1997; and 1,183 authorized shares of ITEC Preferred Stock none of which were outstanding on September 30, 1997 ("Shares"). All of the outstanding Shares have been validly issued and are fully paid and nonassessable. As of September 30, 1997, ITEC (a) had reserved up to 1,295,589 authorized but unissued shares of ITEC Common Stock for issuance upon exercise of stock options outstanding pursuant to ITEC's stock option plans, (b) had reserved up to 500,000 authorized but unissued shares of ITEC Common Stock for issuance upon purchase under ITEC's stock purchase plan; (c) had reserved up to 3,212,901 authorized but unissued shares of ITEC Common Stock for issuance upon exercise of certain warrants, (d) had reserved up to 64,516 authorized but unissued shares of ITEC Common Stock for issuance upon conversion of the Convertible Debentures, (e) had reserved up to 24,029 authorized but unissued shares of ITEC Common Stock for issuance upon conversion of ITEC 5% Preferred Stock; (f) had reserved up to 3,000,000 authorized but unissued shares of ITEC Common Stock for issuance upon conversion of ITEC Series C Redeemable Convertible Preferred Stock. Except with respect to such 18,074,180 shares, ITEC does not have any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating ITEC to issue or sell shares of its capital stock or any securities or obligations convertible into, or exchangeable for, any shares of its capital stock; provided, however, that ITEC may in the business judgment of its Board of Directors issue and sell additional equity securities before or after the Effective Time. 3.3 SUBSIDIARIES. The ITEC Annual Report on Form 10-KSB for the year ended June 30, 1997 heretofore delivered by ITEC to CSI, together with all items incorporated by reference therein and all exhibits thereto, sets forth each Subsidiary of ITEC. Except as is disclosed in the ITEC Reports, ITEC owns, directly or indirectly, all of the outstanding capital stock of, or other equity interests in, each of its subsidiaries free and clear of all liens, charges, pledges, security interests or other encumbrances and all of such capital stock or other equity interests has been duly authorized and validly issued and is fully paid and nonassessable. Except as otherwise disclosed in the ITEC Reports, none of such Subsidiaries has any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating it to issue or sell any shares of its capital stock, or any other equity interest, or any securities or obligations convertible into or exercisable or exchangeable for, any shares of capital stock of, or any other equity interest in, such Subsidiary. Each such Subsidiary is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, has corporate power and authority to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in all jurisdictions in which the nature of its business or the ownership of its properties or both makes such qualification necessary, except where failure to be so organized, to have such power or authority or to be so qualified would not have a material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.4 ITEC SUB CORPORATE STATUS. ITEC Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada with full corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. The authorized capital stock of ITEC Sub consists of 100,000,000 shares of Common Stock, $.001 par value, all of which are duly authorized, validly issued and outstanding, fully paid and nonassessable, and are owned of record and beneficially by ITEC, free and clear of all liens, charges, pledges, security interests or other encumbrances. There are no outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating ITEC Sub 8 to issue or sell any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock. 3.5 AUTHORITY FOR AGREEMENT. ITEC and ITEC Sub have the corporate power to enter into this Agreement and to carry out their obligations hereunder. No further corporate proceedings on the part of ITEC or ITEC Sub are necessary to authorize this Agreement and the transactions contemplated hereby, except for approval of this Agreement by the sole stockholder of ITEC Sub (which ITEC covenants to accomplish). The execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, conflict with, or result in any violation of or default under, or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to, any provision of the Certificate of Incorporation, Bylaws or other organizational documents of ITEC, ITEC Sub or any other Subsidiaries of ITEC, or of any mortgage, indenture, lease, agreement or other instrument, permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to ITEC, ITEC Sub or any other Subsidiaries of ITEC, or any of their respective properties, except as noted in the second following sentence, or constitute an event under any employee benefit plan or arrangement or individual agreement or contract that may result in any payment (whether of severance pay or otherwise), any acceleration of payment or funding or vesting, or any increases in benefits or compensation. The consolidation of the transaction contemplated hereby will not require ITEC to obtain the consent or approval of any other party to any of the above or affect the validity or effectiveness of any of the above. Other than in connection with or in compliance with the provisions of the California Statute, the Nevada Statute, the Securities Act, the Exchange Act, and the securities or blue sky laws of the various states, no authorization, consent or approval of, or declaration of, filing with or notice to any governmental body or authority is necessary for the execution and delivery of this Agreement by ITEC or ITEC Sub or the consummation by ITEC or ITEC Sub of the transactions contemplated hereby. 3.6 NEW SECURITIES. The shares of ITEC Common issuable pursuant to the Merger have been duly and validly authorized and when issued pursuant to the Merger will be validly issued, fully paid, and nonassessable and shall be issued in accordance with all applicable federal and state securities laws. 3.7 ANNUAL AND QUARTERLY REPORTS AND OTHER DISCLOSURES. ITEC has previously furnished to CSI (a) true and complete copies of (i) its Annual Reports on Form 10-KSB filed with the Commission for the year ended June 30, 1997, (ii) its Quarterly Report on Form 10-QSB filed with the Commission for the fiscal quarter ended September 30, 1997, (iii) definitive proxy statements filed by ITEC with the Commission, (iv) each Current Report on Form 8-K filed by ITEC with the Commission on or after January 1, 1997, and (v) each document, if any, filed by any Subsidiary of ITEC with the Commission on or after January 1, 1997, and (b) certain other written disclosures (all of which are included in the ITEC Reports). Each of the ITEC Reports which was filed with the Commission complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable. Each of the balance sheets included in the ITEC Reports (including any related notes and schedules) fairly presents the consolidated financial position of ITEC as of its date and the other financial statements included in the ITEC Reports (including any related notes and schedules) fairly present the consolidated 9 results of operations or other information included therein of ITEC for the periods or as of the dates therein set forth, subject, where appropriate, to normal year-end adjustments, In each case in accordance with generally accepted accounting principles consistently applied during the periods involved (except as otherwise stated therein). Except as and to the extent reflected, reserved against or otherwise disclosed in ITEC's consolidated balance sheet at June 30, 1997 (including the notes thereto), or as otherwise disclosed in the ITEC Reports, ITEC, to the best of its knowledge, did not have at such date and does not now have any liabilities or obligations of any kind (other than non-monetary performance obligations under the ITEC Material Contracts), whether accrued, absolute, asserted or unasserted, contingent or otherwise, and whether or not required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied, which would have a material adverse effect on the business, financial condition or prospects of ITEC. This Agreement does not contain, and none of the ITEC Reports contained as of its date, any untrue statement of a material fact or any omission to state a material fact required to be stated herein or therein or necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. 3.8 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as described in the ITEC Reports, since September 30, 1997 neither ITEC nor any of its Subsidiaries has: (a) undergone any change in its financial condition, business or operations, other than changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse to ITEC and its Subsidiaries taken as a whole; (b) experienced any damage, destruction or loss, whether covered by insurance or not, materially and adversely affecting its prospects, properties or businesses; (c) declared, set aside or paid any dividend (whether in cash, stock or property) with respect to the capital stock of ITEC; (d) entered into, or materially amended, a material employment agreement or severance agreement or effected (other than normal increases in the ordinary course of its business that are consistent with past practices and that, in the aggregate, have not resulted in a material increase in benefits or compensation expense) any material increase in the compensation payable or to become payable to its directors, officers or employees or any material increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such officers or key employees; (e) entered into any material transaction other than in the ordinary course of business; (f) waived any valuable right or any material debt owed to it; (g) changed or amended any material contract or arrangement by which it or any of its assets or properties is bound or subject; 10 (h) materially changed its accounting methods, principles or practices; or (i) other than in the ordinary course of business consistent with past practices, materially revalued any of its assets, including, without limitation, write-downs of inventory or write-offs of accounts receivable. 3.9 COMPLIANCE WITH APPLICABLE LAW. The businesses of ITEC and its Subsidiaries are not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.10 TITLE TO PROPERTY AND ASSETS. ITEC owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair ITEC's ownership or use of such property or assets. With respect to the property and assets it leases, ITEC is in compliance in all material respects with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 3.11 LITIGATION. Except as described in any of the ITEC Reports, (a) no material investigation or review by any governmental entity with respect to ITEC or any of its subsidiaries is pending or, to the best of ITEC's knowledge, threatened, nor has any governmental entity indicated to ITEC an intention to conduct the same, and (b) there is no action, suit or proceeding pending or, to the best of ITEC's knowledge, threatened against or affecting ITEC or its Subsidiaries at law or in equity, or before any arbitrator or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, which (i) seeks to enjoin or otherwise attacks this Agreement or the transactions contemplated hereby, or (ii) either singly or in the aggregate are not expected to have any material adverse effect on the financial condition, business or operations of ITEC and its Subsidiaries taken as a whole. 3.12 TAX MATTERS. ITEC and its consolidated subsidiaries have timely filed all Federal, state, local and foreign tax returns required to be filed by them or on their behalf. All taxes shown by such returns to be due and payable have been paid or are reflected as a liability on the ITEC balance sheets included in the ITEC Reports. The accruals for taxes reflected on such ITEC balance sheets are adequate for all unpaid Federal, state, local or foreign taxes (including interest and penalties, if any, thereon) due or which will become due for any period commencing prior to the date of such ITEC balance sheets. 3.13 EMPLOYEE BENEFIT PLANS. Except as disclosed in the ITEC Reports, there is no bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, plan, fund or other arrangement for the benefit or welfare of any former or current director, consultant, officer or employee between ITEC and any directors or executive officers of ITEC. The ITEC Reports set forth a list of each employee benefit plan, policy, program or contract including, but not limited to, all such plans, policies and programs that are covered by Title I of ERISA, which are maintained or contributed to by ITEC for the benefit of, or pursuant to which ITEC has any liability with respect to, any current or former employees of ITEC (a "ITEC 11 Employee Plan") and any trust (including a trust intended to qualify under Section 501 (c)(9) of the Code). Each ITEC Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, including, but not limited to, the Code (if applicable) and ERISA (if applicable). Neither ITEC, the ITEC Employee Plans nor any of their respective current or former directors, officers, employees or agents have, with respect to any ITEC Employee Plan, engaged directly or indirectly in any non-exempt "prohibited transaction," as such term is defined in Section 4975 of the Code or Section 406 of ERISA. ITEC neither provides nor has represented, promised or contracted (whether in oral or written form) to any employee or former employee (either individually or to employees or former employees as a group) that such employee(s) or former employees are, or would be, provided with postretirement medical, dental, welfare or life insurance benefits upon their retirement. 3.14 INTELLECTUAL PROPERTY. The ITEC Reports list all Rights owned by ITEC and any licenses of Rights granted by or to ITEC. Except as set forth in the ITEC Reports, to ITEC's knowledge, ITEC owns or is licensed to use the Rights, trade secret rights and other proprietary rights necessary for the conduct of its business as currently conducted, or it can obtain licenses therefor upon commercially reasonable terms, all without infringement of the rights of others, and to the best of ITEC's knowledge no person is infringing upon the Rights, trade secret rights and other proprietary rights owned by ITEC or used by ITEC. 3.15 MATERIAL CONTRACTS. All contracts, agreements and instruments to which ITEC is a party, which involve future revenue to or payments by ITEC that are material are listed in the ITEC Reports (collectively, the "ITEC Material Contracts"). Except as set forth in the ITEC Reports, all the ITEC Material Contracts to which ITEC is a party are in full force and effect in all material respects. ITEC has no notice that any party to any such ITEC Material Contract intends to cancel, withdraw, modify or amend such ITEC Material Contract. ITEC is not in material default or breach, and no event has occurred or shall occur by reason of the transactions contemplated herein which would constitute a default or breach, where such default or breach would entitle another party hereto to accelerate or terminate such ITEC Material Contract or otherwise impose a material penalty or forfeiture thereunder (whether with or without notice, lapse of time or the happening or occurrence of any other event), under any ITEC Material Contract. 3.16 FEES. ITEC has not paid nor become obligated to pay any investment banking, brokerage or finder's fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby or any other transaction of the type contemplated hereby. ARTICLE 4 COVENANTS It is further agreed as follows: 4.1 CONDUCT OF BUSINESS. Prior to the Effective Time, or the date, if any, on which this Agreement is earlier terminated pursuant to Section 6.2 hereof, ITEC, ITEC Sub and CSI (i) shall, and shall cause each of the respective Subsidiaries to, conduct their respective operations 12 according to their ordinary and usual course of business, (ii) shall use their reasonable efforts, and shall cause each of their respective subsidiaries to use their reasonable efforts, to preserve intact their respective business organizations and good will, keep available the services of their respective officers and employees and maintain satisfactory relationships with businesses, suppliers, distributors, customers and others having business relationships with them, (iii) shall confer on a regular and frequent basis with one or more representatives of one another to report operational matters of materiality and the general status of ongoing operations, (iv) shall not amend their respective Articles/Certificates of Incorporation or Bylaws, except as provided for in this Agreement, (v) shall notify one another of any material emergency or other material change in the normal course of their or their Subsidiaries' respective businesses or in the operation of their or their Subsidiaries' respective properties and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), (vi) shall deliver to the other true and correct copies of any reports, statements or schedules filed by them or their respective Subsidiaries with the Commission subsequent to the date of this Agreement within one day of the date on which such document is so filed, (vii) shall neither declare nor pay any dividends on their outstanding shares of capital stock nor redeem any capital stock, (viii) shall not (a) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof and described in Sections 2.2 or 3.2 hereof or as otherwise contemplated by Section 3.2 hereof or as described in the CSI Reports, issue any shares of their respective capital stocks, effect any stock split or otherwise change their respective capitalizations as they existed on the date hereof, or (b) grant, confer or award any options, warrants, conversion rights or other rights not existing on the date hereof to acquire any shares of their respective capital stocks other than as contemplated by Section 3.2 hereof, (ix) shall not guarantee any indebtedness, (x) shall not acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof, (xi) shall not release or relinquish any material contract or other rights, (xii) other than as contemplated by Section 5.2.5 hereof, shall not adopt or materially amend any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan, agreement, trust, plan, fund or other arrangement for the benefit or welfare of any director, officer or employee, or (except for normal increases in the ordinary course of business that are consistent with past practices and that, in the aggregate do not result in a material increase in benefits or compensation expense) increase in any manner the compensation or fringe benefits of any officer or employee or pay any benefit not required by any existing plan and arrangement, (xiii) shall not enter into any material transaction other than in the ordinary course of business except for transactions heretofore disclosed in writing to the other parties, and (xiv) shall not enter into any contract, agreement, commitment or arrangement to do any of the foregoing. 4.2 ACCESS AND INFORMATION; CONFIDENTIALITY. CSI, ITEC and ITEC Sub shall each afford to one another and to one another's officers, employees, accountants, counsel and other authorized representatives full and complete access, throughout the period prior to the earlier of the Effective Time or the termination of this Agreement, if any, pursuant to Section 6.2 hereof, to its plants, properties, assets, projections, plans, documents, books and records, and shall use their best efforts to cause their respective representatives to furnish to one another such additional financial and operating data and any and all other information as to their and their Subsidiaries' respective businesses, prospects, liabilities, assets and personnel as the other may 13 from time to time reasonably request (including, without limitation, making available for inquiry their officers, employees and advisers), all for the purpose of verifying the accuracy of each other's representations and warranties made in this Agreement. ITEC, ITEC Sub and CSI shall each cause all information obtained by it or its representatives pursuant to this Agreement or in connection with the negotiation hereof to be treated as strictly confidential and shall not use, nor permit others to use, any such information in a manner detrimental to the other. 4.3 CSI AUDITED FINANCIAL STATEMENTS. CSI shall at its own expense prepare a balance sheet, statements of operations, cash flows and shareholder's equity as of and for the ten months ended October 31, 1997 and for the year ended December 31, 1996 and shall obtain and deliver to ITEC a favorable audit certification by independent public accountants acceptable to ITEC on such financial statements. Such audited financial statements shall include as a supplemental unaudited schedule or unaudited note to the financial statement a statement of operations for each quarterly periods presented. Such audited financial statements shall be delivered by CSI to ITEC not later than December 31, 1997. 4.4 FILINGS AND SUBMISSIONS. ITEC shall, with CSI's cooperation and participation, (i) prepare and file with the Commission as soon as reasonably practicable such filings with the Commission as may be necessary and/or required with respect to the transactions contemplated by this Agreement under the Securities Act or the Exchange Act, as applicable, and (ii) take all such action as may be required under state blue sky or securities laws in connection with the transactions contemplated by this Agreement. CSI and ITEC shall each furnish to one another and one another's counsel all such information as may be required for the effectuation of the foregoing actions, and each represents and warrants to the other that no information furnished in connection with such actions or otherwise in connection with the consummation of the Merger and the other transactions contemplated by this Agreement with respect to itself will contain any untrue statement of a material fact or omit to state a material fact required to be stated in order to make any information so furnished, in the circumstances under which it is so furnished, not misleading. CSI and ITEC shall each promptly notify the other if at any time before the Effective Time it becomes aware of filing or submission, whether to the Commission or others, contains information pertaining to it, an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. In such event, CSI and ITEC shall together prepare a supplement or amendment to such filing or submission which corrects such misstatement or omission, and shall cause the same to be filed with the Commission or others as necessary. 4.5 SHAREHOLDERS' MEETING. In lieu of calling a special meeting of its shareholders to consider and vote upon the approval and adoption of this Agreement and to the transactions contemplated hereby, CSI may obtain approval of the Agreement and such transactions by written consent of holders of a majority of the capital stock of CSI. Delivery to ITEC of an executed copy of such written consent shall constitute satisfaction of CSI's obligations hereunder. CSI will call a special meeting of its shareholders to consider and vote upon the approval and adoption of this Agreement and the transactions contemplated hereby. The record date for and the date of such meeting shall be determined jointly by CSI and ITEC, but each shall occur as soon as practicable. 14 Except as may be required by CSI's directors' fiduciary duty (as determined in the specific case by a written opinion of CSI's outside legal counsel), CSI (a) will, through its Board of Directors and management, recommend to its shareholders the approval and adoption of this Agreement and the transactions contemplated hereby and (b) will use its best efforts to solicit the requisite vote of approval. CSI hereby represents that the Board of Directors of CSI has unanimously (a) determined that the Merger is fair and in the best interest of the company and its shareholders, (b) approved this Agreement and the Merger, and (c) resolved to (except as may be required by CSI's directors' fiduciary duty (as determined in the specific case by a written opinion of CSI's outside legal counsel)) recommend approval and adoption of the Merger and this Agreement by the CSI shareholders. 4.6 EXEMPTION FROM REGISTRATION. The parties hereto intend that the shares of ITEC to be issued to the shareholders of CSI shall be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act and the rules and regulations promulgated thereunder and exempt from the registration requirements of the applicable states. In furtherance thereof, the Shareholders of CSI will execute and deliver to ITEC on the closing date, investment letters suitable to ITEC counsel, in form substantially as per Exhibit 4.6 attached hereto. 4.7 RESERVED 4.8 REASONABLE EFFORTS; FURTHER ASSURANCES. Subject to the terms and conditions herein provided, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to more fully effectuate the parties' intentions as expressed in this Agreement, to cause all closing conditions of the other parties to be satisfied, and to consummate and make effective the Merger and the other transactions in accordance with the terms of this Agreement. No party hereto will, however, take or permit steps to be taken that would cause such party to be in breach or default of any covenant, representation or warranty of that party contained herein, or which result in a breach of applicable statutory or non-statutory laws. 4.9 PUBLIC DISCLOSURES. No disclosure of this Agreement, its contents or the transactions contemplated hereby shall be made by any person except at such time and in such form and content as may be agreed upon by ITEC and CSI (provided, however, that such content shall be reasonably satisfactory to CSI). After the initial public disclosure thereof, CSI will consult with ITEC before issuing any press release or otherwise making any public statement (including, without limitation, statements by CSI generally to its customers, employees or suppliers) with respect to the transactions contemplated hereby. 4.10 FOREWARNING. Each party shall promptly give written notice to the other parties upon becoming aware of the occurrence or, to its knowledge, impending or threatened occurrence, of any event which would cause or constitute a breach of any of its representations, warranties, or covenants contained in this Agreement or an inability to satisfy the conditions to another party's obligation to effect the Merger, and will use its best efforts to prevent or promptly remedy the same. 15 ARTICLE 5 CONDITIONS PRECEDENT 5.1 CONDITIONS PRECEDENT TO CSI'S OBLIGATION TO EFFECT THE MERGER. The obligation of CSI to effect the Merger shall be subject, at its option, to the following conditions: 5.1.1 REPRESENTATIONS, COVENANTS, CERTIFICATE. (a) The representations and warranties of ITEC and ITEC Sub herein contained shall in all material respects be true as of the date of this Agreement and as of the Effective Time with the same effect as though made at the Effective Time; (b) ITEC and ITEC Sub shall in all material respects have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by them on or prior to the Effective Time; (c) there shall have been no material adverse changes in ITEC's or ITEC Sub's business, assets, financial condition or prospects; and (d) ITEC and ITEC Sub shall each have delivered to CSI a certificate, dated the Effective Time and signed on its behalf by its President or a Vice President, to both such effects. 5.1.2 OPINION OF COUNSEL FOR ITEC AND ITEC SUB. CSI shall have received from Carmine Bua, Esq., counsel for ITEC and ITEC Sub (or, if ITEC utilizes other counsel in connection with any suit or proceeding, from such other counsel with respect thereto), an opinion (subject to reasonable exceptions, limitations, qualifications and assumptions), dated the Effective Time, in form and substance reasonably satisfactory to CSI, to the effect that (a) ITEC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has corporate power to own all of its properties and assets and to carry an its business as it is now being conducted and has corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby; (b) ITEC Sub in a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and has corporate power to enter into this Agreement, consummate the Merger and to carry out the other transactions contemplated hereby; (c) this Agreement has been duly authorized, executed and delivered by ITEC and ITEC Sub and constitutes their valid and binding obligation, and all corporate action by them required in order to effect the transactions contemplated hereby has been taken; (d) the shares of ITEC Common Stock issuable pursuant to the Merger have been duly and validly authorized and upon issuance will be validly issued, fully paid and nonassessable shares; (e) except as provided in Section 3.5 hereof, no order, authorization, consent or approval of, or registration, declaration or filing with any governmental authority is required in connection with the consummation by ITEC and ITEC Sub of the Merger or by ITEC and ITEC Sub of the other transactions contemplated by this Agreement; (f) the execution, delivery and performance of this Agreement by ITEC and ITEC Sub and the consummation of the transactions contemplated hereby will not constitute a breach or violation of or default under the Certificate of Incorporation or Bylaws of ITEC or ITEC Sub; (g) upon the filing of this Agreement and/or other appropriate certificates with the in accordance with the California Statute and the Nevada Statute with the effect provided therein and in Article 1 of this Agreement; (h) such counsel knows of no suit or proceeding pending or threatened against or affecting ITEC or any of its Subsidiaries which is reasonably likely to materially adversely affect the financial condition, 16 business or operations of ITEC and its Subsidiaries taken as a whole; (i) and a favorable opinion as to such other matters incident to the matters herein contemplated as CSI and its counsel may reasonably request, including the validity of all proceedings taken by ITEC. CSI shall agree to waive receipt of such opinion of counsel until December 15, 1997. 5.1.3 RESERVED 5.1.4 CSI REPORTS. Within 10 business days following the execution of this Agreement, CSI shall deliver to ITEC the CSI Reports. Subsequent to the Effective Time, the CSI Reports shall be updated through December 31, 1997 and shall be delivered to ITEC on such date. 5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ITEC AND ITEC SUB. The obligations of ITEC Sub to effect the Merger, and of ITEC to deliver the shares of ITEC Common Stock issuable pursuant to the Merger, shall be subject, at their option, to the following conditions: 5.2.1 REPRESENTATIONS, COVENANTS, CERTIFICATION. (a) The representations and warranties of CSI herein contained shall in all material respects be true as of the date of this Agreement and as of the Effective Time with the same affect as though made at the Effective Time; (b) CSI shall in all material respects have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by it prior to the Effective Time; (c) there shall have been no material adverse change in CSI's business, assets, financial condition or prospects; and (d) CSI shall have delivered to ITEC a certificate, dated the Effective Time and signed on its behalf by its President or a Vice President, to both such effects. 5.2.2 OPINION OF COUNSEL FOR CSI. ITEC and ITEC Sub shall have received from Wenthur & Chachas, counsel for CSI (or, if CSI utilizes other counsel in connection with any suit or proceeding, from such other counsel with respect thereto), an opinion (subject to reasonable exceptions, limitations, qualifications and assumptions), dated the Effective Time, in form and substance reasonably satisfactory to ITEC, to the effect that (a) CSI is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has corporate power to own all of its properties and assets and to carry on its business as it is now being conducted, and has corporate power and authority to enter into this Agreement, consummate the Merger and to carry out the other transactions contemplated hereby; (b) this Agreement has been duly authorized, executed and delivered by CSI and constitutes the valid and binding obligation of CSI, and all corporate action by it required in order to effect the transactions contemplated hereby has been taken; (c) except as provided in Section 2.3 hereof, no order, authorization, consent or approval of, or registration, declaration or filing with any governmental authority is required of CSI in connection with the consummation by CSI of the Merger or by CSI of the other transactions contemplated by this Agreement; (d) the execution, delivery and performance of this Agreement by CSI and the consummation of the transactions contemplated hereby will not constitute a breach or violation of or default under the Articles of Incorporation or Bylaws of CSI; (e) upon the filing of this Agreement and/or other appropriate certificates with the Secretary of State of California and with the Secretary of State of Nevada, the 17 Merger shall have been duly consummated in accordance with the California Statute and the California Statute with the effect provided therein and in Article 1 of this Agreement; (f) such counsel knows of no suit or proceeding pending or threatened against or affecting CSI or any of its Subsidiaries which is reasonably likely to materially adversely affect the financial condition, business or operations of CSI and its Subsidiaries taken as a whole; and a favorable opinion as to such other matters incident to the matters herein contemplated as ITEC and its counsel may reasonably request, including the validity of all proceedings taken by CSI. ITEC and ITEC Sub shall agree to waive receipt of such opinion of counsel until December 31, 1997. 5.2.3 RESERVED 5.2.4 MESSRS. HERBERT, FRENCH AND CALDWELL AS EMPLOYEES. Messrs. Herbert, French and Caldwell shall enter into employment agreements (on terms and conditions as set forth in a term sheet which has been delivered by ITEC to them and otherwise of like tenor as the employment agreements ITEC's subsidiaries shall enter with its other senior executive officers) with CSI calling for them to serve as an executive officer of CSI for no less three years beginning at the Effective Time. Compensation under the agreements shall be at the fair market value of the services to be provided, which has been determined to be their current salaries through December 31, 1997 and thereafter the compensation will based on the mid range of the AEA Compensation Study or such other amount as agreed to by ITEC's Compensation Committee and the respective individual(s). Messrs. Herbert, French and Caldwell are also to receive health benefits under comparable terms and conditions as other employees in similar positions within ITEC subsidiaries. 5.2.5 MESSRS. HERBERT, FRENCH AND CALDWELL NON COMPETE AGREEMENTS. Mr. Herbert will enter into a non-compete agreement for a period that is three-years beyond the termination of employment, and Messrs. French and Caldwell will enter into non-complete agreements for a period that is one-year beyond the termination of employment. 5.2.6 CONVERSION OF NOTES, ACCRUED INTEREST AND OTHER LIABILITIES Prior to the Effective Time of the Merger, the $100,000 convertible note payable plus accrued but unpaid interest and any other liabilities due to Mr. Woo Young Kim will be converted into common stock of CSI. 5.2.7 ITEC REPORTS. Within 10 business days following the execution of this Agreement, ITEC shall deliver to CSI the ITEC Reports. 5.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY. The obligations of CSI and ITEC Sub to effect the Merger and the obligation of ITEC to deliver the shares of ITEC Common Stock issuable pursuant to the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions: 5.3.1 STOCKHOLDERS' APPROVAL. The holders of the shares of capital stock of CSI and ITEC Sub entitled to vote thereon shall have duly approved this Agreement and the transactions contemplated hereby, all in accordance with the requirements of the 18 California Statute and the Nevada Statute and the respective Articles/Certificate of Incorporation and Bylaws of CSI an ITEC Sub. 5.3.2 INJUNCTIONS. No preliminary or permanent injunction or other order by any United States Federal or state court which prevents the consummation of the transactions contemplated by this Agreement shall have been issued. 5.3.3 POOLING OF INTERESTS. CSI shall take all actions reasonably requested by ITEC, including obtaining agreements from their affiliates regarding the sale of their shares, to assist ITEC in accounting for the transaction contemplated by this Agreement as a "pooling of interest." 5.3.4 TAX-FREE REORGANIZATION. ITEC and CSI shall take all actions necessary to ensure that the transaction described herein shall be qualified as a tax-free reorganization under Section 368 of the Code. ITEC and the Shareholders shall execute, and CIS shall file with the Internal Revenue Service, an election under Code section 1377(a)(2) to treat 1996-1997 taxable year as if it consisted of two taxable years, the first of which ends at the Effective Time. The parties shall deliver the various other documents that are described elsewhere in the agreement evidencing satisfaction of the conditions to the Merger, and shall take any other actions expressly required by this agreement, or reasonably requested by any of them, at or before the Effective Time in order to consummate the merger. 5.4 CLOSING DATE. The closing of the Merger contemplated by this Agreement shall, unless another date or place is agreed to in writing by the parties hereto, take place at the offices of Imaging Technologies Corporation, 11031 Via Frontera, San Diego, California 92127 (except for the filing of this Agreement and/or other appropriate certificates with the Secretary of State of California and the Secretary of State of Nevada, which shall take place in the office of such respective Secretaries), on (i) the date of the meeting of the shareholders of CSI to approve the Merger, if all conditions to the Merger have been satisfied or waived on or before such date, (ii) the business day following the satisfaction or waiver of all conditions to the Merger if all such conditions have not been satisfied or waived on or before the date of such meeting of shareholders, or (iii) the date the Certificate of Merger is filed in the State of California if the mutual agreement of the parties is to proceed with the closing after delivery of the CSI Reports, the ITEC Reports, shareholder approval of ITEC Sub and CSI and Board approval by ITEC, ITEC Sub and CSI. ARTICLE 6 DEFINITIONS AND MISCELLANEOUS 6.1 DEFINITIONS OF CERTAIN TERMS. As used herein, the following terms shall have the following meanings: CALIFORNIA STATUTE: as defined in the fourth paragraph of this Agreement. CODE: as defined in the second paragraph of this Agreement. 19 CONVERTIBLE DEBENTURES: ITEC Convertible Subordinated Notes. DISSENTING SHARES: as defined in Section 4.9 hereof. EFFECTIVE TIME: the time at which this Agreement and/or other appropriate certificates shall be filed in the office of the Secretary of State of California in accordance with Sections 1103 and 1108 of the California Statute. ERISA: as defined in Section 2.10 hereof. EXCHANGE AGENT: as defined in section 1.4.2 hereof. EXCHANGE ACT: Securities Exchange Act of 1934, as amended. MERGER: the merger of CSI into ITEC Sub in accordance with the terms and conditions of this Agreement. NEVADA STATUTE: as defined in the fourth paragraph of this Agreement. CSI COMMON STOCK: shares of Common Stock of CSI. CSI REPORTS: as defined in Article 2 hereof. CSI STOCK OPTION PLANS: the Stock Option Plan of CSI. ITEC COMMON STOCK: shares of Common Stock, $0.005 value, of ITEC. ITEC 5% PREFERRED STOCK: shares of 5% Convertible Preferred Stock, $1,000 par value, of ITEC. ITEC SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK: shares Series C Redeemable Convertible Preferred Stock, $1,000 par value, $10,000 liquidation value of ITEC. ITEC REPORTS: as defined in Article 3 hereof. ITEC SUB COMMON STOCK: shares of Common Stock, $0.001 par value, of ITEC Sub. SATISFACTORY AFFILIATE AGREEMENT: as defined in Section 4.6 hereof. COMMISSION: the Securities and Exchange Commission, or any governmental agency succeeding to its functions. SECURITIES ACT: Securities Act of 1933, as amended. SUBSIDIARY: any corporation, association, or other business entity a majority (by number of votes) of the shares of capital stock (or other voting interests) of which is owned by CSI, ITEC or their respective Subsidiaries. SURVIVING CORPORATION: as defined in Section 1.1 hereof. 20 6.2 TERMINATION. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and the Merger contemplated herein may be abandoned (a) by the mutual written consent of ITEC, ITEC Sub and CSI, (b) by either ITEC Sub or CSI if the Effective Time has not occurred prior to January 31, 1998 (provided that the right to terminate this Agreement under this Section 6.2 shall not be available to any party (ITEC and ITEC Sub being considered for this purpose a single party) whose failure to fulfill any obligation under this Agreement has been the sole cause of or has alone resulted in the failure of the Effective Time to occur on or before such date), or (c) by either ITEC Sub or CSI, as the case may be, if any of the conditions specified herein with respect to its obligations has not been met or waived, as of the date required to be met, or has become impossible to satisfy. In the event of such termination and abandonment under any of clauses (a) through (c) no party hereto shall have any liability or further obligations to any other party to this Agreement, except as provided in Section 6.5 and except that nothing herein will relieve any party from liability for any breach of this Agreement. 6.3 AMENDMENTS AND SUPPLEMENTS. At any time before or after approval and adoption of this Agreement by the respective shareholders of CSI and ITEC Sub and prior to the Effective Time, this Agreement may be amended or supplemented by (and only by) a written instrument signed by CSI, ITEC and ITEC Sub and approved by their respective Boards of Directors, except that, after the shareholders of CSI have approved this Agreement, there shall be no amendment which changes the ratio at which CSI Common Stock is to be converted into ITEC securities as provided in Article 1, without the further approval of such shareholders. 6.4 EXTENSIONS AND WAIVERS. At any time prior to the Effective Time, the parties hereto, by act or order by their respective Boards of Directors, may (i) extend the time for the performance of any of the obligations or other acts of the parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions contained herein except the conditions set forth in Section 5.3.1 hereof. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. 6.5 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS. Except for the obligations of the parties contained in Sections 4.2, 4.3, 4.4, 4.6, 4.7 and 4.9 hereof, the respective representations and warranties of CSI, ITEC and ITEC Sub contained in Articles 2 and 3 and their respective agreements contained in Article 4 shall expire with, and be terminated by, the Merger, and none of CSI, ITEC and ITEC Sub shall have any liability whatsoever with respect to such representations, warranties or agreements after the Effective Time. The obligations of the parties contained in Sections 4.2 and 4.8 shall survive termination of this Agreement. 6.6 EXPENSES. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, and costs and expenses appropriately characterized as joint expenses shall be paid in equal shares by CSI and ITEC. 6.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. 21 6.8 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered by hand or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice) and shall be deemed given on the date on which so hand-delivered or on the third business day following the date on which so mailed: To ITEC or ITEC Sub: 1031 Via Frontera San Diego, California 92127 Attention: Brian Bonar To CSI: 120 Birmingham Drive, Suite 210 Cardiff By The Sea, California 92007 Attention: Hiram French and Franz Herbert With copy to: Wenthur & Chachas 4180 La Jolla Village Drive La Jolla, California 92037 6.9 EQUITABLE REMEDIES. ITEC and CSI acknowledge and agree that the legal remedies available to ITEC and CSI in the event ITEC or CSI violate the covenants and agreements made in this Agreement would be inadequate and that ITEC or CSI would be entitled, without posting any bond or other security, to temporary, preliminary and permanent injunctive relief, specific performance and other equitable remedies in the event of such a violation, in addition to any other remedies which ITEC or CSI may have at law or in equity. 6.10 SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provision of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only so broad (but fully as broad) as is enforceable. 6.11 ENTIRE AGREEMENT, ASSIGNABILITY, ETC. This Agreement (i) constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof (including without limitation the letter of intent), (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder, and (iii) shall not be assignable by operation of law or otherwise. 22 AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION SIGNATURE PAGE IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. IMAGING TECHNOLOGIES CORPORATION Attest: /s/ Ralph R. Barry By /s/ Brian Bonar - ------------------------------- ------------------------------------ Title: Secretary Brian Bonar, President and Chief Operating Officer 23 AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION SIGNATURE PAGE IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. COLOR SOLUTIONS, INC. Attest: /s/ Franz Herbert By /s/ Hiram French - ------------------------------- ------------------------------------ Title: Secretary Hiram French, President By /s/ Franz Herbert ------------------------------------ Franz Herbert, Chief Technical Officer By /s/ Dan Caldwell ------------------------------------ Dan Caldwell Vice President 24 AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION SIGNATURE PAGE IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. ITEC SUB Attest: /s/ Ralph R. Barry By /s/ Brian Bonar - ------------------------------- ------------------------------------ Title: Secretary Brian Bonar, President 25 FORM OF OFFICERS' CERTIFICATE OF APPROVAL OF AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION OF ITEC SUB, INC. (A NEVADA CORPORATION) The undersigned certify that: 1. They hold the corporate office at ITEC Sub, Inc., a Nevada corporation (the "Corporation") designated under their signatures below. 2. The Agreement and Plan of Merger and Plan of Reorganization (the "Agreement of Merger"), to which this certificate is attached was duly approved by the Board of Directors of the Corporation on November 30, 1997. 3. The Corporation has one (1) class of stock, common stock ("Common Stock"). The total number of shares of Common Stock presently outstanding is 1,000,000 shares. The principal terms of the Agreement of Merger to which this certificate is attached were approved by the vote of all the issued and outstanding Common Stock of the Corporation. 4. No vote of the shareholders of the parent of the Corporation was required. We further declare under the penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: November 30, 1997 /s/ Brian Bonar ---------------------------------------- Brian Bonar President Date: November 30, 1997 /s/ Ralph R. Barry ---------------------------------------- Ralph R. Barry Vice President and Secretary ITEC SUB INC. CORPORATE RESOLUTION RESOLVED, that on November 30, 1997 the Board of Directors of ITEC Sub, Inc., a Nevada corporation (the "Company") appointed the following to serve at the discretion of the Board as officers of the Company until such time as they may be replaced: Brian Bonar, President Ralph R. Barry, Vice President and Secretary RESOLVED, that the Board ratified its previous authorization for the Agreement and Plan of Merger and Plan of Reorganization dated November 30, 1997. The Board hereby directs and authorizes the Officers of the Company, jointly or individually, to execute any documents necessary to complete the merger. ITEC SUB, INC. /s/ Ralph R. Barry Secretary FORM OF OFFICERS' CERTIFICATE OF APPROVAL OF AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION OF COLOR SOLUTIONS, INC. (A CALIFORNIA CORPORATION) Hiram T. French and Franz H. Herbert certify that: 1. They are President and Secretary, respectively, of Color Solutions, Inc., a California corporation (the "Corporation"). 2. The Agreement and Plan of Merger and Plan of Reorganization (the "Agreement of Merger"), to which this certificate is attached was duly approved by the Board of Directors of the Corporation on November 30, 1997. 3. The Corporation has one (1) class of stock, common stock ("Common Stock"). The total number of shares of Common Stock presently outstanding is 3,030 shares. The principal terms of the Agreement of Merger to which this certificate is attached were approved by the vote of all the issued and outstanding Common Stock of the Corporation. We further declare under the penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: November 30, 1997 /s/ Hiram T. French ---------------------------------------- Hiram T. French, President Date: November 30, 1997 /s/ Franz H. Herbert ---------------------------------------- Franz H. Herbert, Secretary COLOR SOLUTIONS, INC. CORPORATE RESOLUTION RESOLVED, that the Board of Directors of Color Solutions, Inc., a California corporation, on November 30, 1997 ratified its previous authorization for the Agreement and Plan of Merger and Plan of Reorganization dated November 30, 1997. The Board hereby directs and authorizes the Officers of the Company, jointly or individually, to execute any documents necessary to complete the merger. COLOR SOLUTIONS, INC. /s/ Franz H. Herbert Secretary EX-21 18 EXHIBIT 21 EXHIBIT 21 - LIST OF SUBSIDIARIES OF THE COMPANY 1. Prima International, a California corporation and a wholly-owned subsidiary of ITEC. 2. Laser Printer Accessories Corporation, a Delaware corporation and a wholly-owned subsidiary of ITEC (Inactive). 3. Personal Computer Products, Inc., doing business as PCPI Technologies, a California corporation and a wholly-owned subsidiary of ITEC. 4. Co-Processors, Inc., a California corporation and a wholly-owned subsidiary of ITEC (Inactive). 5. NewGen Imaging Systems, Inc., a California corporation and a wholly-owned subsidiary of ITEC. 6. Color Solutions, Inc., a California corporation and a wholly-owned subsidiary of ITEC. 7. McMican Corporation, a California corporation and a wholly-owned subsidiary of ITEC. 8. AMT Accel UK Ltd., located in ITEC House, Unit 9 Milbanke Court, Milbanke Way, Bracknell, Berkshire RG12 1RP. 9. ITEC Europe Ltd., is located in ITEC House, Unit 9 Milbanke Court, Milbanke Way, Bracknell, Berkshire RG12 1RP. 45 EX-23 19 EXHIBIT 23 EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors, Imaging Technologies Corporation We hereby consent to the incorporation by reference in each of the Registration Statements on Form S-8 (No.'s 2-93993, 33-25980, 33-41396, 33-57372, 33-86262, 33-86376 333-00871, 333-00873 and 333-00879) of Imaging Technologies Corporation of our report dated October 5, 1998 appearing in the June 30, 1998 Annual Report, of this Form 10-K. BOROS & FARRINGTON APC SAN DIEGO, CALIFORNIA October 13, 1998 EX-27 20 EXHIBIT 27
5 1,000 YEAR JUN-30-1998 JUN-30-1998 3,023 0 5,526 1,393 6,287 14,844 3,148 1,623 20,961 14,529 0 0 2,780 62 1,762 20,961 30,740 34,417 22,536 35,280 0 5,554 341 (10,145) 18 (10,163) 0 0 0 (10,163) (.90) (.90)
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