Marc Robbins was he second caller on Matrixx's conference call. Below is DD on Marc Robbins and the Red Chip Review:
The Red Chip Review Investor Conference Showcases Investment Opportunities In High-Performance Small-Cap Arena
Twenty of the fastest-growing publicly traded companies present their stories to the public on June 19 in New York City at a conference hosted by THE RED CHIP REVIEW.
"This is a unique opportunity for individual investors to gain information on quality small-cap stocks directly from Company management," said Marc Robins, editor-in-chief and publisher of THE RED CHIP REVIEW, the event's sponsor. "Most investor conferences are targeted for retail brokers and institutional money managers. The mission of THE RED CHIP REVIEW is to make available to individual investors information that is generally available only to the profession."
At the June 19 conference, investors will meet the top executives from 20 of these promising companies that have made it through RED CHIP's demanding selection criteria and tough objective analysis ...
Imaging Technologies Corp. (Nasdaq: ITEC) RED CHIP RATING: A ITEC is an integrated provider to the digital imaging market with a focus on printer technologies, color and monochrome printer products and image storage products. The stock's price has been pressured and, at 10x trailing 1998 EPS, may be an attractive investment. Visit the Company's Web site at www.imagetechcorp.com . . .
In the same release, these analysts continued to disseminated the following false and misleading information concerning ITEC which was also based on and repeated information provided by defendants:
. . . Typically, companies followed by THE RED CHIP REVIEW are undervalued and under followed, yet they show exciting promise. Because they're smaller, they're usually more nimble companies, often in their early stages of development. They tend to be fast-growing, possess a leading technology, or in some way have a unique story.
THE RED CHIP REVIEW is the nation's leading source of information on small-cap stocks, providing in-depth research and analysis on approximately 300 publicly traded small capitalization companies across 28 industry sectors. THE RED CHIP REVIEW is published biweekly. Visit the RED CHIP Web site at www.redchip.com.
Defendants continued to perpetrate their scheme on or about June 16, 1998, by issuing the following press release, in pertinent part, over Business Wire:
Imaging Technologies Corporation Names Two New Corporate Directors
wyca.com
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This is an electronic approximation of the actual document. We apologize for any formatting irregularities or errors which may have occurred during the conversion process.
Kevin J. Yourman (147159)
James E. Tullman (175008)
Ronald T. Theda (193223)
WEISS & YOURMAN
10940 Wilshire Blvd., 24th Floor
Los Angeles, CA 90024
Telephone: (310) 208-2800
Michael D. Braun (167416)
STULL, STULL & BRODY
10940 Wilshire Blvd., Suite 2300
Los Angeles, CA 90024
Telephone: (310) 209-2468
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
NAHID NAZARIAN BEHFARIN, On behalf of Herself and All Others Similarly Situated,
Plaintiff,
vs.
IMAGING TECHNOLOGIES CORPORATION, BRIAN BONAR, HARRY J. SAAL, MICHAEL K. CLEMENS, GERRY BERG and CHRISTOPHER W. McKEE,
Defendants.
CASE NO. CV-99-2163 K (LSP)
CLASS ACTION
COMPLAINT FOR THE VIOLATION OF FEDERAL SECURITIES LAWS
JURY TRIAL DEMANDED
Plaintiff Nahid Nazarian Behfarin as and for her complaint, alleges the following upon personal knowledge as to herself and her own acts, and upon information and belief as to all other matters. Plaintiff's information and belief is based, inter alia, on the investigation conducted by plaintiff's attorneys, including a review of the press releases and public filings of defendant Imaging Technologies, Inc. ("Imaging Technologies," the "Company," or "ITEC") and articles pertaining to Imaging Technologies. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth after a reasonable opportunity for discovery.
NATURE OF THE CASE
This is a class action on behalf of all purchasers of the securities of Imaging Technologies (including those individuals who acquired their Imaging Technologies securities in exchange for shares, ADRs, or options in other companies which were acquired by the Company)(the "Class") between April 21, 1998 and October 9, 1998, inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants include: Imaging Technologies, Brian Bonar, Harry J. Saal, Michael K. Clemens, Gerry Berg and Christopher W. McKee.
As is more fully alleged throughout the Complaint, this action arises from damages incurred by the Class as a result of a scheme and common course of conduct by defendants which operated as a fraud and deceit on the Class during the Class Period. Defendants' scheme included rendering false and misleading statements and/or omissions concerning the financial condition and business prospects of the Company, as well as the financial benefits that would enure to Imaging Technologies and its shareholders.
In fact, defendants made numerous positive representations throughout the Class Period regarding the financial and business prospects of the Company, while either knowing, or with conscious or deliberate recklessness disregarding, the following facts: (a) the ongoing restructuring of ITEC was far more costly than defendants had represented to the investing community; (b) the Company's cash flow problems were severe; and (c) that growth was slowing.
Since the disclosure of these, and other, adverse facts would cause a severe collapse in the price of the Company's securities, defendants set out on a scheme to artificially inflate Imaging Technologies's stock price so that they could maintain their lucrative positions, could earn lavish stock option bonuses, and so that they could continue to acquire other companies for less than market value with stock that was artificially inflated.
As a result of defendants' false statements, misrepresentations, and omissions, the price of Imaging Technologies's securities were artificially inflated during the Class Period. In fact, the Company's securities traded as high as $4 3/4 on June 29, 1998, and was maintained at an artificially inflated level until the Company disclosed the dismal financial condition of the Company on or about October 9, 1998. These disclosures caused the stock price of Imaging Technologies to plummet approximately 40% in one day from $1 3/4 to $15/16 on October 8, 1998, on volume of 458,000 shares. This represented a drop of over 80% from the stock's high of $4 3/4 on June 29, 1998.
Due to defendants' deceptive and illegal conduct, plaintiff and the other Class members purchased their Imaging Technologies securities at grossly inflated prices. Had plaintiff and the other Class members been aware of the truthful condition of the Company and the adverse impact that defendants' omissions were having on the Company, they would not have purchased their shares, or at least not at the artificially inflated prices at which they purchased those shares.
JURISDICTION AND VENUE
The claims herein arise under §§ 10(b) and 20(a) (15 U.S.C. §§78j(b) and 78t(a)) of the Securities and Exchange Act of 1934 (15 U.S.C. §78) (the "Exchange Act") and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5).
This Court has subject matter jurisdiction of this action pursuant to 15 U.S.C. §78u.
Venue is proper in this District pursuant to 28 U.S.C. §1391(b) because defendant Imaging Technologies maintains its corporate offices in this district and the violations of law complained of herein occurred primarily in this district, including the dissemination of materially false and misleading statements and the omission of material information complained of herein.
In connection with the conduct complained of herein, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails and interstate telephone communications, and the facilities of a national securities exchange.
PARTIES
Plaintiff Nahid Nazarian Behfarin purchased shares of Imaging Technologies securities, as indicated in her certification attached hereto, during the Class Period and was damaged thereby.
Defendant Imaging Technologies develops, manufactures and distributes high quality printer products for use in graphics and publishing, digital photography and other technical markets. Defendant Imaging Technologies maintains its principal executive offices at 11031 Via Frontera, San Diego, California 92127.
Defendant Brian Bonar ("Bonar") at all relevant times was Chief Executive Officer and a Director of the Company. He directly owns 214,464 shares of Company stock and has options for another 1,350,000 shares.
Defendant Harry J. Saal ("Saal") at all relevant times was Chairman of the Board of the Company. He owns 2,510,759 shares of Company stock.
Defendant Michael K. Clemens ("Clemens") at all relevant times was Senior Vice President and Chief Financial Officer of the Company.
Defendant Gerry Berg ("Berg") at all relevant times was Senior Vice President of Worldwide Business Development of the Company.
Defendant Christopher W. McKee ("McKee") at all relevant times was Vice President of Finance and Administration at the Company.
Defendants Bonar, Saal, Clemens, Berg, and McKee (collectively the "Individual Defendants") were at all relevant times during the Class Period controlling persons of Imaging Technologies within the meaning of § 20(a) of the Exchange Act. By reason of their stock ownership, management positions, and/or membership on Imaging Technologies's Board, the Individual Defendants were controlling persons of Imaging Technologies and had the power and influence, and exercised the same, to cause it to engage in the illegal conduct complained of herein. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each "group published" information, the result of the collective action of the Individual Defendants.
As officers, directors and/or controlling persons of a Company registered with the Securities Exchange Commission ("SEC") under the federal securities laws, whose securities SEC, traded on the NASDAQ, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate truthful information promptly and accurately with respect to the Company's operations, products, markets, management, earnings and business prospects, to correct any previously issued statements that had become materially misleading or untrue, and to disclose any trends that would materially affect earnings and the financial results of Imaging Technologies, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information.
Under rules and regulations promulgated by the SEC under the Exchange Act, the Individual Defendants also had a duty to report all trends, demands or uncertainties that were likely to influence: (a) Imaging Technologies's liquidity; (b) Imaging Technologies's net sales, revenues and/or income; and (c) previously reported financial information such that it would not be indicative of operating results. The Individual Defendants' representations during the Class Period violated these specific requirements and obligations.
The Individual Defendants, because of their positions with the Company, controlled and/or possessed the power and authority to control the contents of Imaging Technologies's quarterly and annual reports, press releases and presentations to securities analysts, which information was conveyed through the analysts to the investing public. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected.
Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew, or with conscious or deliberate recklessness disregarded, that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading.
Defendants are also each liable as individual participants in a fraudulent scheme and course of conduct that operated as a fraud and/or deceit upon the Class. Because of their executive, managerial and/or directorial positions with the Company, each of the defendants had access to the adverse, non-public information about the business, finances and business prospects of Imaging Technologies as particularized herein and acted to misrepresent, misstate or conceal such information from plaintiff and the investing public.
It is also appropriate to treat the defendants as a group for pleading purposes under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading information complained of herein was disseminated through the collective actions of the defendants. Defendants were involved in the drafting, producing, reviewing, and/or disseminating of the false and misleading information detailed herein, knew, or with conscious or deliberate recklessness disregarded, that such materially misleading statements were being issued by the Company, and/or approved or ratified these statements in violation of the federal securities laws. Defendants' false and misleading statements and omissions of fact consequently had the effect of, both on their own and in the aggregate, artificially inflating the price of the securities of Imaging Technologies at all times during the Class Period.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a Class consisting of all persons and entities who purchased or otherwise acquired Imaging Technologies securities from April 21, 1998 through October 9, 1998, inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are defendants, officers and directors of the Company, members of their immediate families, and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.
During the Class Period, millions of shares of common stock of Imaging Technologies were traded on an efficient and developed securities market. Thousands of brokers nationwide have access to trading information about Imaging Technologies through the system. Within minutes of any transaction taking place, this system displays the most recent trades and prices.
The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes that there are thousands of members of the Class. Imaging Technologies currently has over 19,000,000 million shares of common stock outstanding and actively traded on the NASDAQ, an efficient market, under the ticker symbol "ITEC".
Plaintiff's claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein.
Plaintiff will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in Class and securities litigation. Plaintiff has no interests that are adverse or antagonistic to those of the Class.
A Class action is superior to other available methods for the fair and efficient adjudication of this controversy. Because the damages suffered by many individual Class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the Class members to individually seek redress for the wrongful conduct alleged herein.
Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are:
(i) whether the federal securities laws were violated by defendants' acts as alleged herein;
(ii) whether defendants participated in and pursued the common course of conduct complained of herein;
(iii) whether documents, press releases and other statements disseminated to the investing public and the Company's shareholders during the Class Period misrepresented the business condition of Imaging Technologies;
(iv) whether defendants failed to correct prior statements when subsequent events rendered those prior statements untrue or inaccurate;
(v) whether defendants acted willfully or with conscious or deliberate recklessness in misrepresenting and/or omitting to state material facts;
(vi) whether the market price of Imaging Technologies's securities during the Class Period were artificially inflated due to the misrepresentations and/or non-disclosures complained of herein; and
(vii) whether the members of the Class have sustained damages, and, if so, what is the proper measure thereof.
Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:
(i) defendants made public misrepresentations or omitted material facts during the Class Period, as alleged herein;
(ii) the misrepresentations and/or omissions were material;
(iii) Imaging Technologies's securities were traded in an efficient market;
(iv) the misrepresentations and/or omissions alleged tended to induce reasonable investors to misjudge the value of Imaging Technologies shares; and
(v) plaintiff and members of the Class acquired their shares between the time defendants made the misrepresentations and/or omissions and the time the truth was revealed, without knowledge of the falsity of the misrepresentations.
BACKGROUND
Founded in 1982, ITEC develops, manufactures and distributes high quality printer products for use in graphics and publishing, digital photography and other 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. The Company had an accumulated deficit of $33,987,000 in June 1998. However, the Company has survived through periodic infusions of capital. Thus, in June of 1998, ITEC also had cumulative "paid-in" capital of $35,859,000.
The Company's growth has been primarily fueled by four acquisitions, beginning in January 1997. The Company financed these acquisitions with cash and Company securities, which in September of 1997 traded as high as $7 per share. For example, one acquisition was that of Color Solutions, which the Company announced on January 5, 1998 in Business Wire:
Imaging Technologies Corp. (NASDAQ:ITEC) Monday announced completion of the acquisition of Color Solutions Inc., a 3-year-old color management software development firm located in Cardiff by the Sea, Calif. Color Solutions' products provide accurate and repeatable color rendering, across a wide range of peripheral devices and software applications. The Company's ColorBlind software allows users to precisely calibrate peripherals such as scanners, monitors, digital cameras, printers and other specialized color digital devices, all based on ICC color standards . . . Imaging Technologies Corp. purchased the stock of privately held Color Solutions Inc. with ITEC common stock.(1)
The Company's strategy appeared to be successful as it reported, through Business Wire on January 29, 1998, record sales and profits:
Jan. 29, 1998--Imaging Technologies Corporation (NASDAQ:ITEC) today reported financial results for the second quarter of fiscal 1998, ended December 31, 1997. ITEC reported net income of $1,080,000, or $0.08 per share, compared to $293,000 or $0.03 per share for the second quarter of fiscal 1997, ended December 31, 1996, which represents an increase of 269%. Gross revenues for the second quarter of fiscal 1998 were $9,750,000, compared to $7,514,000 for the second quarter of fiscal 1997, which represents an increase of 30%. For the six months ended December 31, 1997, ITEC reported net income of $1,848,000, or $0.14 per share, compared to a loss of $809,000 or $0.10 per share for the first six months of fiscal 1997. Gross revenues for the first six months of fiscal 1998 were $17,544,000, compared to $15,395,000 for the corresponding Period in fiscal 1997, an increase of 14%. "For the past three years, we have concentrated our talent and resources on creating a stronger, more diversified Company to serve the growing digital imaging marketplace," said Dr. Harry J. Saal, Chairman of Imaging Technologies. "Today, ITEC is showing the positive results emerging from that strategy." "Imaging Technologies continues to show strong financial growth in all areas of the Company," said Dr. Edward W. Savarese, Chief Executive Officer of ITEC. "With our recent acquisitions, we will capitalize utilizing our key technologies in high-resolution graphic printing, color management software, printer controllers, digital imaging and storage technology."
However, despite defendants' aggressive acquisition strategies, ITEC began to
suffer from a decline in the value of its stock. For example, in September of 1997, the Company's stock traded as high as $7 per share. But, by March 1998, the stock had declined significantly and traded as low as $2 7/8 per share . The Company's growth by acquisition strategy was in jeopardy because the currency of ITEC's mergers, its stock, was plummeting in value.
In April 1998, the Company appointed a new Chief Executive Officer ("CEO"), Brian Bonar, who began a reorganization. ITEC consolidated all of its independent operating subsidiaries into a single organization to save money by eliminating workers and redundant operations. This strategy would later prove devastating as it vastly underestimated the hidden costs of such an ambitious change, such as losing dislocated workers, retraining staff, and losing established relationships.
Consequently, at this time, defendants engaged in a scheme to defraud the investors in ITEC by disseminating false, incomplete and misleading information about the Company's management, operations and business conditions in order to inflate and/or maintain the value of the Company's stock.
SUBSTANTIVE ALLEGATIONS
Defendants initiated their scheme on April 21, 1998, the first day of the Class Period, when the Company's new "business strategy" was disseminated over Business Wire:
April 21, 1998--Imaging Technologies Corp. (NASDAQ:ITEC) today announced a plan to realign management and create a divisional structure within the organization.
The plan calls for consolidating the independent operating subsidiaries that have been acquired under the umbrella of Imaging Technologies Corp. The consolidation will take advantage of economies of scale in manufacturing and finance, as well as improve sales and distribution channels. Brian Bonar, recently appointed chief executive of ITEC, detailed this plan at the quarterly management meeting held in San Diego last week.
"ITEC will no longer be independent subsidiaries," according to Bonar, chief executive officer. "The 'New ITEC' will be one organization offering an integrated family of imaging solutions. By breaking down the barriers between the subsidiaries and organizing the Company around functions, we can achieve higher returns through our established channels and improve cross selling capabilities. This new structure will make ITEC stronger and more competitive."
While this announcement, and defendants subsequent statements, defendants began laying the foundation for their scheme to convince the market that the stock price of ITEC did not deserve further decline and was in fact undervalued. Shortly thereafter, on April 30, 1998, defendants issued the following press release over Business Wire which stated:
Imaging Technologies Corp. (ITEC) (NASDAQ:ITEC), Thursday announced that it will demonstrate its new Xtinguisher(tm) line of network print servers at the On Demand Digital Printing & Publishing Conference at the Jacob Javits Center in New York, May 5-7, 1998. . .
"The Xtinguisher Series is part of a new generation of 'ITEC-Integrated' products that take advantage of the Company's key technical strengths in controller expertise and color management," said Brian Bonar, chief executive officer of Imaging Technologies. "We now offer the full spectrum of both embedded and external controllers solutions. By working in concert with our development partners, we can capitalize on existing strengths and gain a competitive advantage in a marketplace that has long been dominated by a single player."
"ITEC responded to the market by delivering a complete network imaging solution that integrates our sophisticated ColorBlind(r) color management software into a Windows(r) NT-based server with a Web-based GUI," said Richard Stabile, Director of ITEC's OEM Partners Division.
Defendants continued with their plan on or about May 4, 1998, by disseminating an article in Business Wire which stated in pertinent part:
ITEC announces results of successful new product launch
May 4, 1998-- New Color Laser Printer for the Office Market Receives Strong Reception at European Trade Fair With Initial Orders For Over 1000 Next Generation Color Laser Printers
Imaging Technologies Corp. (NASDAQ:ITEC) today announced the results of the highly successful launch of its next generation color laser printers at Europe's largest technology trade show, the CeBIT World Business Fair. . .
"The ColorImage(R) Series printers 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 into a single package," said Brian Bonar, chief executive officer of Imaging Technologies. "This printer, and others that will be introduced soon, take advantage of ITEC's core technologies to add unique features and value. By incorporating technology within various divisions of the Company, we can gain a competitive advantage and the ability to produce exciting new imaging products. The reception the ColorImage(R) 2400 received in Europe is evidence of that."
Shortly thereafter, on or about May 13, 1998, defendants issued the following statements concerning the Company and its prospects in Business Wire:
Imaging Technologies Corp. Reports Record Sales and Record Profits for Third Quarter of Fiscal 1998
May 13, 1998: Imaging Technologies Corp. (NASDAQ: ITEC), pioneer in the development of high-quality digital imaging solutions, today reported record sales and profits for the third quarter of fiscal 1998, which ended March 31, 1998. Net income for the third quarter was $1,121,000, a 32% increase over net income of $848,000 for the third quarter of fiscal 1997. Earnings per share (diluted) increased to $.08 per share from $.07 per share for the third quarter of fiscal 1997. Revenues for the quarter were $10,772,000, a 30% rise over revenues of $8,321,000 in fiscal 1997.
Nine-month fiscal 1998 net income was $2,971,000, compared to $39,000 for the first nine months of fiscal 1997. Earnings per share (diluted) increased to $.22 per share from $0.0 per share for the first three quarters of fiscal 1997. Revenues for the nine month Period were $28,320,000, compared to $23,717,000, reported in the first nine months of fiscal 1997.
Brian Bonar, chief executive officer of Imaging Technologies said, "we will continue to press forward with our strategy of building a stronger, more focused Company to serve the worldwide needs of digital imaging. The key to our success is the ability to leverage diversified technical resources from across the corporation to create new and unique solutions."
In the same release, defendant Bonar further highlighted ITEC's strategy of growth by acquisition:
Bonar said the third quarter of fiscal 1998 was an extremely active one for ITEC. "We undertook a number of actions that can accelerate the Company's growth and competitiveness as we implement plans for Fiscal 1999. Among these efforts: Integration of Color Solutions and McMican Corp., two companies acquired during the second fiscal quarter. Color Solutions develops color management software which references ICC profiles to accurately reproduce color across a wide range of peripheral devices. McMican manufactures digital memory storage modules for digital cameras, printers and handheld personal computers."
Both acquisitions were key elements in the Company's strategic plan.
On May 21, 1998, defendants' continued to tout their strategy of growth through acquisition as they announced in Business Wire the acquisition of Cence Limited:
Imaging Technologies Corp. (NASDAQ:ITEC), pioneer in the development of high-quality digital imaging solutions, today announced the acquisition of Cence Limited, a printer and computer maintenance firm headquartered in the United Kingdom.
Cence will become an important customer service component in the Company's recently established European Headquarters division, ITEC Europe Ltd., located near London.
"ITEC has an ever increasing installed base of printers, and imaging solutions on the European Continent," according to Brian Bonar, chief executive of Imaging Technologies Corp. "Europe already represents a significant source of revenue for the Company, and ITEC Europe needs the resources of Cence and the experience of David Travers to effectively serve our growing customer base."
By June 2, 1998, defendants' campaign to boost the Company's stock price began to attract the interest of analysts. For example, the Company was featured at the Red Chip Investor Conference as announced in PR Newswire. Moreover, the following information, which was based on and repeated information provided by defendants, was disseminated to the investment community:
The Red Chip Review Investor Conference Showcases Investment Opportunities In High-Performance Small-Cap Arena
Twenty of the fastest-growing publicly traded companies present their stories to the public on June 19 in New York City at a conference hosted by THE RED CHIP REVIEW.
"This is a unique opportunity for individual investors to gain information on quality small-cap stocks directly from Company management," said Marc Robins, editor-in-chief and publisher of THE RED CHIP REVIEW, the event's sponsor. "Most investor conferences are targeted for retail brokers and institutional money managers. The mission of THE RED CHIP REVIEW is to make available to individual investors information that is generally available only to the profession."
At the June 19 conference, investors will meet the top executives from 20 of these promising companies that have made it through RED CHIP's demanding selection criteria and tough objective analysis ...
Imaging Technologies Corp. (Nasdaq: ITEC) RED CHIP RATING: A ITEC is an integrated provider to the digital imaging market with a focus on printer technologies, color and monochrome printer products and image storage products. The stock's price has been pressured and, at 10x trailing 1998 EPS, may be an attractive investment. Visit the Company's Web site at www.imagetechcorp.com . . .
In the same release, these analysts continued to disseminated the following false and misleading information concerning ITEC which was also based on and repeated information provided by defendants:
. . . Typically, companies followed by THE RED CHIP REVIEW are undervalued and under followed, yet they show exciting promise. Because they're smaller, they're usually more nimble companies, often in their early stages of development. They tend to be fast-growing, possess a leading technology, or in some way have a unique story.
THE RED CHIP REVIEW is the nation's leading source of information on small-cap stocks, providing in-depth research and analysis on approximately 300 publicly traded small capitalization companies across 28 industry sectors. THE RED CHIP REVIEW is published biweekly. Visit the RED CHIP Web site at www.redchip.com.
Defendants continued to perpetrate their scheme on or about June 16, 1998, by issuing the following press release, in pertinent part, over Business Wire:
Imaging Technologies Corporation Names Two New Corporate Directors
Adobe and Network General Executives Join ITEC's Board (NASDAQ:ITEC) Imaging Technologies Corporation, a worldwide developer of digital imaging solutions, today announced the appointment of Stephen A. MacDonald and David M. Carver to its Board of Directors. At the same time, the Company announced the resignation of two directors, ITEC's founder, Dr. Edward W. Savarese, and Frank Kavanaugh. The new six-member board will now be comprised of four outside and two inside directors led by Dr. Harry J. Saal, Chairman.
"MacDonald and Carver have experience that extends to the core of the digital imaging marketplace," said Harry Saal. "They bring added strength and depth as well as enhanced industry knowledge to the Board."
Steve and David both bring to ITEC practical experience in taking a concept and building it into a multi-million dollar industry leader," said Brian Bonar, Chief Executive Officer of Imaging Technologies. "They have impeccable credentials within the industry. Their experience and insight into the strategic management of technology companies will help us implement ITEC's plans for continued growth within the digital imaging market. I am personally very fortunate to have the support of individuals of this caliber on the ITEC Team."
The defendants made further positive, yet false and misleading, statements in subsequent press releases. On or about June 26, 1998, defendants issued the following press release over Business Wire which noted:
Imaging Technologies Corporation Names New Corporate Director; Prominent Business and Technology Attorney Joins ITEC's Board
Imaging Technologies Corp. (NASDAQ:ITEC), a worldwide developer of digital imaging solutions, today announced the appointment of Warren T. Lazarow, a practicing attorney and a partner with the Palo Alto office of Brobeck, Phleger & Harrison LLP, to the Board of Directors.
"Warren brings to ITEC hands-on experience in multi-million dollar mergers and acquisitions with emerging growth firms," said Brian Bonar, chief executive officer of Imaging Technologies. "He has access to the worldwide capital markets, plus a strong background in international trade."
Warren Lazarow represents a broad range of technology companies for Brobeck, Phleger & Harrison LLP, an international legal firm specializing in emerging growth companies. A substantial portion of his practice focuses on the software and telecommunications industries. Lazarow has worked on public offerings that have raised over $2.6 billion in the capital markets, and has participated in approximately 75 merger and acquisition transactions valued from $1 million to more than $600 million.
By June of 1998, defendants' scheme to inflate the value of the Company's stock was progressing better then they had hoped. In fact, the value of ITEC's securities had almost doubled from earlier in the year as it appeared that the Company had successfully continued its expansion by acquiring other companies with ITEC securities. Moreover, defendants continued their overly optimistic spin concerning the Company's operations on or about July 20, 1998, when they announced the following through Business Wire:
Imaging Technologies To Present at San Diego Technology Investment Conference
Imaging Technologies Corporation, (Nasdaq:ITEC) pioneer in the development of high-quality digital imaging solutions, today announced plans to make a financial presentation to investment brokers, financial advisors, and money managers at the First Annual San Diego Technology Investment Conference to be held on July 25th. Brian Bonar, Chief Executive Officer of ITEC, will address the forum to discuss the Company's expanding range of digital imaging products, corporate strategies, and opportunities for continued growth.
More than twenty of the fastest-growing publicly traded technology companies in San Diego County will be showcased at this all day event. Each Company will have the opportunity to present their story to the public...
ITEC was recently selected as one of the 1998 Orange Coast Technology Fast 50. The "Fast 50" recognizes achievements of the fastest growing firms in the Orange Coast Region, which encompasses Orange and San Diego Counties in California...
Not long thereafter, in a July 23, 1998 press release over Business Wire, defendants' announced they had retained an investment bank to implement a new financing strategy. Defendants continued to tout the Company's growth and profitability and boasted about, among other things, their "strong business plan" and their ability to grow and be profitable. However, as would be announced later, the Company was suffering from large cash flow problems:
Imaging Technologies Corporation Retains Black & Company to Provide Investment Banking Services
July 23, 1998-- Imaging Technologies Corp. (NASDAQ:ITEC), pioneer in the development of high-quality digital imaging solutions, today announced that it has engaged Black & Company of Portland, Ore., to provide financial advisory and investment banking services.
ITEC has specifically retained Black & Co. to review the Company's strategic financing goals and develop a plan to enhance shareholder value.
"We have a strong business plan and an experienced management team in place," said Brian Bonar, chief executive officer of Imaging Technologies. "The Company is growing and profitable. We need Black & Company's support to develop and implement an aggressive financing strategy to ensure our continued success."
Even as late as August 18, 1998, a point in time when defendants were encountering severe cash flow problems, which were not revealed to the public, defendants continued to tout the Company's financial condition in a press release through Business Wire:
Imaging Technologies Corporation Names New Chief Financial Officer; Former CFO of SyQuest Technology Joins the ITEC Team
Imaging Technologies Corp. (NASDAQ:ITEC), pioneer in the development of digital imaging solutions, today announced the appointment of Michael K. Clemens as chief financial officer...
"ITEC's tremendous growth opportunities require a strong financial manager like Michael," said Brian Bonar, chief executive officer of Imaging Technologies. "He rounds out our management team. Each individual is a seasoned professional who has been carefully chosen to support and implement our strategic plan."
"Working for ITEC and Brian Bonar is an exciting opportunity for me," said Clemens. "They are demonstrating strong market leadership and as a Company, I look forward to helping lead the financial growth in the months to come."
As the Company's restructuring woes drained cash and Asian problems began to cause accounts receivables to go unpaid, the Company nearly exhausted its credit lines. In order to deal with the cash crunch and survive as a going concern, the Company was forced to raise capital. Because banks would no longer fund the Company, defendants turned to selling equity in the form of convertible preferred stock. Unbeknownst to the investing public, defendants were so desperate for money that they issued preferred stock which they knew would depress the price of the stock, all the while maintaining their optimism about the Company's prospects to the public.
Defendants announced the private placement of these preferred securities in the following press release in Business Wire, on September 22, 1998, in which they misleadingly stated the deal would "solidify" ITEC's finances. However, at this time defendants failed to disclose the details to the public about the mechanics of the conversion price should the stock price decline below $2.025:
Imaging Products Manufacturer Raises $4.38 Million in Private Placement to Repurchase Shares and Support Product Development
(Nasdaq:ITEC) Imaging Technologies Corporation, pioneer in the development of digital imaging solutions, announced today that it has redeemed all outstanding shares of the Company's Series C Cvertible Preferred Stock (Series C Shares). Owners of the Series C Shares received $2.23 million in cash and subordinated notes. ITEC financed the redemption through a $4.38 million private placement of newly issued shares of common stock and subordinated notes.
"The redemption of the outstanding Series C Shares and the additional capital raised further solidifies the Company's financial position," said Michael K. Clemens, Chief Financial Officer of Imaging Technologies . . .
In the same release, defendants explained the mechanics of the deal as follows while leaving out material facts regarding the "poison" adjustments:
The $4.38 million in funding came from several private investors. In exchange, ITEC issued a total of 500,000 shares of 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, $675,000, mature in two years and are convertible, at the option of each investor, at any time into shares of Imaging Technologies' 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. The Company expects the net proceeds from this financing to be approximately $4 million.
In August 1997, ITEC issued 500 shares of Series C Stock as part of a $5 million financing. The Series C Shares were convertible into the Company's common stock at the option of the investors. In today's transaction, the Company redeemed all 237 outstanding Series C Shares paying $2.23 million in cash and issuing subordinated promissory notes in the amount of $1 million to the holders of the Series C Shares. The notes bear interest at 16% per year, mature in one year and are not convertible. The Company also issued 128,161 shares of common stock and warrants to purchase 300,000 shares of common stock (200,000 of which have an exercise price of $2.025 per share and 100,000 of which have an exercise price of $4.00 per share) to the holders of the Series C Shares. (Emphasis in original.)
While defendants continuously touted the Company's financial condition throughout the Class Period, they purposefully failed to mention that the Company was suffering from severe and ongoing cash flow problems that would be announced only weeks later. On the contrary, defendants went so far as to misleadingly state that the offering "further solidified" the Company's finances.
Then, on or about September 24, 1998 over Business Wire, defendants continued to perpetrate their scheme by again omitting to disclose ITEC's cash flow problems when they hired a new Vice President of Finance, though the cash flow problems had to be known or were at least ignored with conscious and/or deliberate recklessness as they were disclosed only 2 weeks later. Defendants' statement was false and misleading because it touted the Company's "expansion efforts," while the Company actually was experiencing cash flow problems that would obviously preclude any such expansion:
Imaging Technologies Corp. Names New Vice President Finance and Operations
Imaging Technologies Corp. (Nasdaq:ITEC), pioneer in the development of digital imaging solutions, today announced the appointment of Christopher W. McKee as Vice President of Finance and Operations.
"Chris brings to ITEC exceptional technical skills in automating financial and manufacturing operations," said Michael K. Clemens, Chief Financial Officer of Imaging Technologies. "His experience in running multinational, multifaceted financial information systems and enterprise resource planning will be critical in ITEC's expansion efforts."
Unfortunately for the investing community, the myriad of positive statements which were disseminated throughout the Class Period concerning the Company's financial health and business prospects, were false and misleading. The positive statements about the Company's progress were false because the "restructuring" of ITEC was far more costly than represented, the cash flow problems of the Company were severe and the Company's growth was dramatically slowing.
THE TRUTH REVEALED
On October 9, 1998, the Company stunned the financial community with the following surprise announcement over Business Wire. On ten times the normal trading volume, the ITEC stock declined more than 40% from $1 3/4 to $15/16:
Imaging Technologies Corporation Reports Fiscal 1998 Financial Results
(Nasdaq:ITEC), pioneer in the development of digital imaging solutions, today reported financial results for fiscal 1998, which ended June 30, 1998.
Sales revenues for the year were $34,417,000, a 7% increase over revenues of $32,237,000 in fiscal 1997. Operating income for fiscal 1998, before special charges, fell to a loss of ($863,000), this compares with operating income of $512,000 for fiscal 1997. Earnings per share (diluted) decreased to a loss of ($.90) per share for fiscal 1998, from $.06 per share for fiscal 1997.
The Company announced that in the fourth quarter of fiscal 1998, it took special charges of $5,157,000 for contract losses and licensing receivables primarily related to the Asian economic crisis and $3,784,000 for restructuring costs associated with reorganizing and streamlining corporate operations. "While we do not like to report a loss, the write-offs taken in the fourth quarter were necessary to realign the business, and give us a stronger position going forward," said Brian Bonar, Chief Executive Officer of Imaging Technologies.
In this same release, Bonar continued by finally disclosing the pertinent facts that had been withheld from the investing public. These included: (a) lower sales; (b) contract cancellations not primarily related to the Asian crisis; (c) an ongoing liquidity crunch; (d) the Company's inability to collect payments on its receivables; and (e) the accrual of 18 months worth of admittedly undisclosed costs relating to the mergers:
"ITEC experienced a number of significant financial events in the fourth quarter, including lower than expected revenues and incurred losses from contract cancellations and nonpayment by customers primarily as a result of the continued weakening of the Asian economy," according to Bonar. "As of the end of the first quarter of fiscal 1999, which ended September 30, the Company's business continues to be in a transitional phase and there are important short-term operational and liquidity challenges."
Bonar described the conditions in Asia that led to the write down of receivables. "ITEC has long-term, established relationships with some of the larger printer manufacturers in Japan and Korea," he said. "As the economic situation in these countries continues to deteriorate we are faced with the reality that many of these customers have serious financial problems and are now unable to support product development contracts awarded to ITEC."
Included in these special charges are restructuring costs related to the relocation and realignment of ITEC's administrative, manufacturing, and distribution operations as well as the write off of related assets. These additional costs include the accrual of costs related to workforce reductions and facilities relocation, and reserves for excess space and manufacturing capacity. During the past 18 months, ITEC has acquired four separate businesses, expanding the Company's strategic position in the digital imaging market . . .
In ignorance of the adverse facts concerning ITEC's business condition, relating to the Company's reorganization costs, slowing sales and cash flow problems, which were concealed by defendants throughout the Class Period, plaintiff and the other members of the Class purchased their ITEC securities at artificially high prices, relying on the statements made and/or the integrity of the market and were damaged thereby.
Had plaintiff and the other members of the Class known of the materially adverse information not disclosed by the defendants, they would not have purchased their ITEC securities at the artificially inflated prices that they did.
UNDISCLOSED FACTS
Defendants optimistic statements, made throughout the Class Period, were false and misleading because of the following undisclosed facts: (a) the Company was suffering from escalating costs; (b) the "poison" preferred securities served to depress the overall value of the Company's stock; (c) the Company was losing contracts unrelated to the Asian crisis; (d) the Company suffered from an inability to collect on its accounts receivables; and (e) the Company was facing a massive liquidity crisis.
DEFENDANTS' SCIENTER
During the Class Period, each of the Individual Defendants who were senior executives and/or directors of Imaging Technologies were privy to confidential and proprietary information concerning Imaging Technologies, its operations' finances, financial condition, products and business prospects, including terms of sales, customer returns, price protection promotions, credit allowances and customer inventory levels. These defendants also had access to and knew of, or were consciously or deliberately reckless in not knowing of, material adverse non public information concerning Imaging Technologies's financial condition.
Each of the Individual Defendants was provided with copies of Imaging Technologies's management reports, press releases and SEC filings alleged herein to be misleading prior to, or shortly after their issuance. All of the Individual Defendants had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein as "group published" information and are therefore responsible and liable for the representations contained therein.
During the Class Period, defendants directly and indirectly engaged and participated in a continuous course of conduct to misrepresent the results of Imaging Technologies's operations and to conceal adverse material information regarding the finances, financial condition, and results of operations of Imaging Technologies as specified herein. Defendants employed devices, schemes, and artifices to defraud, and engaged in acts, practices, and a course of conduct as herein alleged in an effort to increase and maintain an artificially high market prices for the common stock of the Company. This included the formulation, making, and/or participation in the making of untrue statements of material facts, and the omission to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, which operated as a fraud and deceit upon plaintiff and the other members of the Class.
The defendants are liable, jointly and severally, as direct participants in the wrongs complained of herein. Defendants had a duty promptly to disseminate accurate and truthful information with respect to ITEC's products, operations, financial condition and business prospects or to cause and direct that such information be disseminated so that the market price of ITEC stock would be based on truthful and accurate information.
As officers, directors and/or controlling persons of a publicly held Company whose securities are registered with the SEC under the Exchange Act, traded on the NASDAQ National Market System, and governed by the provisions of the Exchange Act, defendants had a duty to promptly disseminate accurate and truthful information with respect to the Company's operations, business, products, markets, management, earnings and business prospects, to correct any previously issued statements from any source that had become untrue, and to disclose any trends that would materially affect earnings and financial operating results of ITEC, so that the market price of the Company's publicly traded securities would be based upon truthful and accurate information.
Since early 1998, at the latest, the Individual Defendants, were aware of the existence of inadequate internal controls and/or with conscious or deliberate recklessness disregarded their obligation to implement adequate controls to ensure that revenues were properly recorded in compliance with Generally Accepted Accounting Principles ("GAAP"). These defendants had a responsibility to maintain sufficient accounting controls to accurately report Imaging Technologies's financial results. The representations made by defendants in Imaging Technologies's financial statements and in other financial disclosures to the public were the representations of Imaging Technologies's management. Contrary to the requirements of GAAP and SEC rules, defendants failed to implement and maintain an adequate internal accounting control system.
By virtue of their positions with ITEC and because of the significant reputational and monetary benefits, including Bonar's lavish stock options, they stood to gain from a positive public perception of Imaging Technologies and as a result of artificially inflated stock prices, defendants also had both the opportunity and motive to commit the acts alleged herein. Defendants were aware of Imaging Technologies's true financial condition yet knew, or with conscious or deliberate recklessness disregarded, the limitations of the Company. The air of accomplishment and success created as a result of defendants' material misrepresentations made Imaging Technologies more attractive to potential investors, and served to maintain its stock price at artificial levels.
Each defendant had the opportunity to commit and participate in the fraud. The Individual Defendants were senior officers and/or directors of Imaging Technologies and they controlled press releases, corporate reports, communications with analysts, public filings, and the reporting of the Company's financials. Thus, these defendants, controlled the public dissemination of Imaging Technologies's false and misleading statements to the investing public as alleged herein which artificially inflated the price of Imaging Technologies's stock.
Each of these defendants also had the motive to commit and participate in the fraud in order to gain pecuniary benefits. The continued receipt of salary and employment, including Bonar's lavish stock options, in the Company were significant motives to inflate the Company's stock and avoid bankruptcy.
As a small Company with limited outside information and news concerning the Company, Imaging Technologies stock price was particularly sensitive to defendants' statements regarding Imaging Technologies's revenues, business and profits.
STATUTORY SAFE HARBOR
The statutory safe harbor providing for forward-looking statements under certain circumstances does not apply to any of the false forward-looking statements pleaded in this Complaint. None of the forward-looking statements pleaded herein were sufficiently identified as a "forward-looking statement" when made. Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from that in the forward-looking statements Company those statements. To the extent that the statutory safe harbor does apply to any forward-looking statements pleaded, the defendants are liable for those false forward-looking statements because at the time each of those statements was made, the speaker actually knew the forward-looking statement was false and the forward-looking statement was authorized and/or approved by an executive officer of Imaging Technologies who actually knew that those statements were false when made.
COUNT I
(Violations of Section 10(b) of the Exchange Act
and Rule 10-5 Promulgated Thereunder)
Plaintiff repeats and realleges the allegations above as though fully set forth herein.
During the Class Period, defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and the other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Imaging Technologies; and (iii) cause plaintiff and other members of the Class to purchase Imaging Technologies securities at inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein.
Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for Imaging Technologies securities in violation of §10(b) of the Exchange Act and Rule 10b-5.
The statements made by defendants during the Class Period were materially false and misleading because at the time they were made, the Company and persons acting as corporate officers knew, or with conscious or deliberate recklessness ignored, but failed to disclose, the matters set forth herein.
In ignorance of the artificially high market prices of Imaging Technologies' publicly traded securities, and relying directly on defendants or indirectly on the false and misleading statements made by defendants, upon the integrity of the market in which the securities trade, on the integrity of the regulatory process and the truth of representations made to appropriate agencies throughout the Class Period and/or on the absence of material adverse information that was known to defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired Imaging Technologies securities during the Class Period at artificially high prices and were damaged thereby.
Had plaintiff and the other members of the Class and the marketplace known of the true financial condition, business prospects and character of leadership of Imaging Technologies which were not disclosed by defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their Imaging Technologies securities during the Class Period, or would have not done so at the artificially inflated prices which they paid. Hence, plaintiff and the Class were damaged by defendants' violations of §10(b) and Rule 10b-5.
COUNT II
(Violation of Section 20(a) of the Exchange Act
Against the Individual Defendants)
Plaintiff incorporates by reference the above paragraphs above as if set forth fully herein. This Count is asserted against the Individual Defendants.
The Individual Defendants acted as controlling persons of Imaging Technologies within the meaning of §20 of the Exchange Act as alleged herein. By reasons of their executive, managerial positions with Imaging Technologies, these defendants had the power and authority to cause the Company to engage in the wrongful conduct complained of herein.
By reasons of the aforementioned wrongful conduct, the Individual Defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of their wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with purchasing the Company's securities during the Class Period.
WHEREFORE, plaintiff prays for relief and judgment, as follows:
1. Determining that this action is a proper Class action, certifying plaintiff as Class representative under Rule 23 of the Federal Rules of Civil Procedure and her counsel as Class counsel;
2. Awarding compensatory damages in favor of plaintiff and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
3. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
4. Such other and further relief as the Court may deem just and proper.
DATED: October 11, 1999
Kevin J. Yourman (147159)
James E. Tullman (175008)
Ronald T. Theda (193223)
WEISS & YOURMAN
By: ________________________
Vahn Alexander
10940 Wilshire Blvd., 24th Floor
Los Angeles, CA 90024
Telephone: (310) 208-2800
Michael D. Braun (167416)
STULL, STULL & BRODY
10940 Wilshire Blvd., Suite 2300
Los Angeles, CA 90024
Telephone: (310) 209-2468
Attorneys for Plaintiff
JURY DEMAND
Plaintiff hereby demands a trial by jury.
DATED: October 11, 1999
Kevin J. Yourman (147159)
James E. Tullman (175008)
Ronald T. Theda (193223)
WEISS & YOURMAN
By: ________________________
Vahn Alexander
10940 Wilshire Blvd., 24th Floor
Los Angeles, CA 90024
Telephone: (310) 208-2800
Michael D. Braun (167416)
STULL, STULL & BRODY
10940 Wilshire Blvd., Suite 2300
Los Angeles, CA 90024
Telephone: (310) 209-2468
Attorneys for Plaintiff
1. Emphasis added unless otherwise noted.
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