SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x][X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[X][ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ][X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
IMAGING TECHNOLOGIES CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
---------------------------------------------------------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x][X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
[ITEC LETTERHEAD]
February 19,IMAGING TECHNOLOGIES CORPORATION
15175 Innovation Drive
San Diego, California 92128
Fax: (619) 207-6505
Telephone: (619) 613-1300
April 28, 1999
Dear Stockholder of Imaging Technologies Corporation:
It is a pleasure to send to you the attached notice and proxy materials with
regard to the Annual Meeting of Stockholders (the "Meeting") of Imaging
Technologies Corporation (the "Company").
The matters to be considered at the Meeting include election of directors,
approval of an amendment to the Company's certificate of incorporation, approval
of a stock option plan, approval of the issuance of all shares of Company Common
Stock which the Company would be entitled to issue upon conversion of the
Company's Series D Convertible Preferred Stock and the Company's Series E
Convertible Preferred Stock and ratification of the selection of the Company's
independent auditors. The Company's board of directors unanimously recommends
that you vote FOR all of the above-mentioned proposals.
I hope you will be able to attend the Meeting. Whether or not you plan to attend
the Meeting, however, we request that you sign, date and return the enclosed
Proxy card as soon as possible.
If you should have any questions in regard to any of the above-mentioned
proposals, please do not hesitate to call either Bruce Ahern of Customer
Relations or me at (619) 613-1300.
We are grateful for the confidence you have shown in us.
Sincerely yours,
/s/ Brian Bonar
-------------------------------------
Brian Bonar
President and Chief Executive Officer
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IMAGING TECHNOLOGIES CORPORATION
11031 Via Frontera15175 Innovation Drive
San Diego, California 9212792128-3401
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held March 29,May 27, 1999
---------------
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders
(the "Meeting") of IMAGING TECHNOLOGIES CORPORATION, a Delaware corporation (the
"Company"), will be held at the Radisson Suites - Rancho Bernardo, 11520 W.
Bernardo Court,Company's principal executive offices at 15175
Innovation Drive, San Diego, California, on Monday, March 29,Thursday, May 27, 1999, 11at 10 a.m.,
local time, to consider and act upon the following:
1. The election of five persons named in the accompanying Proxy
Statement to serve as directors of the Company and until their
successors are duly elected and qualified;
2. To amend the Company's Certificate of Incorporation to
increase the number of the Company's preferred stock
authorized to be issued from 10,000 shares to 100,000 shares;
3. To approve the Company's 1998 Stock Option Plan (the "1998
Stock Option Plan"), pursuant to which 1,500,000 shares of the
Company's common stock will be reserved for issuance over the
term of the 1998 Stock Option Plan;
4. To approve the issuance of all shares of Company Common Stock
which the Company would be entitled to issue upon conversion
of the Company's Series D Convertible Preferred Stock;
5. To approve the issuance of all shares of Company Common Stock
which the Company would be entitled to issue upon conversion
of the Company's Series E Convertible Preferred Stock;
6. To ratify the appointment of Boros & Farrington APC as the
Company's independent auditors for the 1998 fiscal year ending
June 30, 1999; and
7. To consider and transact such other business as may properly
come before the Meeting or any adjournment(s) thereof.
A Proxy Statement, form of Proxy and the Annual Report to Stockholders
of the Company for the fiscal year ended June 30, 1998 are enclosed herewith.
Only holders of record of common stock, $0.005 par value, at the close of
business on February 15,April 23, 1999 are entitled to receive notice of and to attend the
Meeting and any adjournment(s) thereof. The stock transfer books of the Company
will remain open between the record date and the date of the Meeting. At least
10 days prior to the Meeting, a complete list of the stockholders entitled to
vote will be available for inspection by any stockholder, for any purpose
germane to
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the Meeting, during ordinary business hours, at the executive offices of the
Company. Should you receive more than one Proxy because your shares are
registered in different names and addresses, each Proxy should be signed and
returned to assure that all your shares will be voted. You may revoke your Proxy
at any time prior to the Meeting. If you attend the Meeting and vote by ballot,
your Proxy will be revoked automatically and only your vote at the Meeting will
be counted. If you do not expect to be present at the Meeting, you are requested
to fill in, date and sign the enclosed -3-
Proxy, which is solicited by the Board of
Directors of the Company, and to mail it promptly in the enclosed envelope.
In the event there are not sufficient votes for a quorum or to approve
or ratify any of the foregoing proposals at the time of the Meeting, the Meeting
may be adjourned by a vote of the majority of the votes cast by the stockholders
entitled to vote thereon. Whether or not you expect to attend the Meeting, to
assure that a quorum is present at the Meeting or an adjournment thereof and
there are sufficient votes to vote on all of the foregoing proposals, please
sign, date and return promptly your Proxy (even after May 27, 1999, the original
Meeting date) in the stamp-addressed envelope provided.
By Order of the Board of Directors
/s/ Brian Bonar
Brian Bonar
President and Chief Executive Officer
Dated: February __,April 28, 1999
IMPORTANT
The return of your signed Proxy as promptly as possible will greatly facilitate
arrangements for the Meeting. No postage is required if the Proxy is returned in
the envelope enclosed for your convenience and mailed in the United States.
-4--2-
IMAGING TECHNOLOGIES CORPORATION
11301 Via Frontera15175 Innovation Drive
San Diego, California 9212792128-3401
----------------------------------------
Proxy Statement
Annual Meeting of Stockholders
March 29,May 27, 1999
----------------------------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Imaging Technologies Corporation, a
Delaware corporation (the "Company"), to be voted at the Annual Meeting of
Stockholders of the Company (the "Meeting") which will be held at the Radisson
Suites - Rancho Bernardo, 11520 W. Bernardo Court,Company's
principal executive offices at 15175 Innovation Drive, San Diego, California on
Monday, March 29,Thursday, May 27, 1999 at 1110 a.m., local time, and any adjournment(s) thereof,
for the purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders and in this Proxy Statement.
The principal executive offices of the Company are located at 1130 Via
Frontera,15175
Innovation Drive, San Diego, California 92127.92128-3401. The approximate date on
which this Proxy Statement and accompanying Proxy will first be sent or given to
stockholders is March 1,April 29, 1999.
VOTING SECURITIES
Voting
The specific proposals to be considered and acted upon at the Meeting
are summarized in the accompanying Notice of Annual Meeting of Stockholders and
are described in more detail in this Proxy Statement. On February 15,April 23, 1999, the
record date for determination of stockholders entitled to notice of and to vote
at the Meeting, 16,320,15519,821,915 shares of the Company's common stock, par value
$0.005 (the "Common Stock"), were issued and outstanding and 2,150.52,176.5 shares of
the Company's preferred stock, par value $1,000, were issued and outstanding of
which 420.5 were shares of 5% Convertible Preferred Stock, 1,200875 were shares of
Series D Convertible Preferred StocksStock (the "Series D Preferred"Stock") and 530881 were shares
of Series E Convertible Preferred Stock (the "Series E Preferred"Stock"). Each stockholder
is entitled to one vote for each share of Common Stock held by such stockholder
on February 15,April 23, 1999. Each stockholder of the Series D PreferredStock and Series E PreferredStock is
entitled to one vote for each whole share of Common Stock into which each share
of Series D PreferredStock and Series E PreferredStock held by each stockholder is convertible on
the date immediately prior to February 15,April 23, 1999, which will be approximately 2,910
votes per share of issued and outstanding Series D PreferredStock and approximately 1,951
votes per share of issued and outstanding Series E Preferred;Stock; provided, however,
that in no event shall a stockholder of Series D PreferredStock be entitled to vote more
than 9.999% of the number of shares entitled to be voted on any particular
matter.
Notwithstanding anything to the contrary in the foregoing paragraph, in
voting for directors, each stockholder currently has the right to cumulate his
votes and give one nominee a number of votes equal to the number of directors to
be elected multiplied by the number of shares he holds, or to distribute his
votes on the same principle among the nominees to be elected in such manner as
he may see fit. California corporate law,
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made applicable to the Company by virtue of Section 2115 of the California
Corporations Code, allows a stockholder to cumulate his or her votes with
respect to the election of directors if the director nominee has been placed in
nomination prior to voting and if any stockholder present at the Meeting has
given notice at the Meeting of their intention to cumulate votes. Such notice
allows all votes cast in the election to be counted cumulatively. If no such
notice if given, no cumulative voting will be used in the election of directors.
While the notice of intention to cumulate votes may be presented orally at the
Meeting, it is prudent for any stockholder intending to cumulate his or her
votes to present a written notice of such intention to the Chairman of the
Meeting prior to the beginning of voting, but after all candidates have been
placed in nomination. The persons named in the enclosed Proxy card may or may
not elect to give such notice and vote the shares they represent in such a
manner. In addition, non-management Proxy holders present at the Meeting may
also provide the requisite notice of intention to cumulate votes. Stockholders
who wish to cumulate their votes must be present at the Meeting or must give
Proxies to non-management Proxy holders along with a written statement that such
non-management Proxy holders have the authority to give notice of their
intention to cumulate votes. Discretionary authority to cumulate votes is being
solicited by the Board of Directors of the Company (the "Board") and it is
intended that the Proxies received by the management Proxy holders pursuant to
the solicitation will be voted in the manner best designed to cause the election
of the maximum number of the Board's nominees.
The attendance, in person or by proxy, of the holders of a majority of
the outstanding voting shares of Common Stock, including the number of shares of
Common Stock entitled to be voted by the holders of the Series D PreferredStock and the
Series E Preferred,Stock, entitled to vote at the Meeting is necessary to constitute a
quorum. A vote of a majority of the outstanding voting shares of Common Stock,
including the number of shares of
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Common Stock entitled to be voted by the holders of the Series D Stock and the
Series E Stock, entitled to vote at the Meeting will be required for the
approval of the amendment to the Company's certificate of incorporation. A vote
of the holders of a majority of the voting powernumber of the issued
and outstanding shares of Common
Stock, including the number of shares of Common Stock entitled to be voted by
the holders of the Series D PreferredStock and the Series E Preferred,Stock, present in person or
represented by proxy at the Meeting and entitled to vote at the Meeting will be
required for the election of directors, approval of the
amendment to the Company's certificate of incorporation, approval of a stock option plan and
approval of the issuance of all shares of Company Common Stock which the Company would
be entitled to issue upon conversion of the Company's
Series D Convertible Preferred Stock and the Company's Series E
Convertible
Preferred Stock.
Although the Company is a Delaware corporation, under Section 2115 of
the California Corporations Code, certain provisions of the California
Corporation Code apply to the Company because of the residence of the Company's
stockholders and the extent of its business operations and assets in California.
The provisions pertaining to certain requirements of cumulative voting apply to
the Company.
Stockholders have cumulative voting rights when voting for directors.
Accordingly, any stockholder may multiply the number of votes he or she is
entitled to vote by the number of directors to be elected and allocate votes
among the candidates in any manner. However no voting stockholder may cumulative
votes unless the name(s) of the director candidate or candidates have been
placed in nomination prior to the voting and the stockholder has given notice at
the Meeting prior to voting of the stockholder's intention to cumulate its
shares. If any one stockholder has given a notice of its intention to cumulate
votes then all stockholders may cumulate their votes for director candidates in
nomination. Stockholders may exercise such cumulative voting rights, either in
person or proxy after providing the proper notice. The five director nominees
receiving the highest number of votes will be elected.
The Board intends to vote proxies equally for the five nominees unless
otherwise instructed on the Proxy Card. If you do not wish your votes to be
voted for particular nominees, please identify the exceptions in the designated
place on the Proxy Card. If at the time of the Meeting one or more of the
nominees have become unavailable to serve, votes represented by Proxies will be
voted for the remaining nominees and for any substitute nominee or nominees
designated by the Board. Directors elected at the Meeting will hold office until
the next Annual Meeting of Stockholders or until their successors have been
elected and qualified.
All votes will be tabulated by the inspector of election appointed for
the Meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
as present for purposes of determining the presence or absence of a quorum for
the transaction of business. Abstentions will be counted towards the tabulations
of votes cast on proposals presented to the stockholders and will have the same
effect as negative votes except in regard to the election of directors, whereas
broker non-votes will not be counted for purposes of determining whether a
proposal has been approved.
Proxies
If the enclosed form of Proxy is properly signed and returned, the
shares represented thereby will be voted at the Meeting in accordance with the
instructions specified thereon. If the Proxy does not specify how the shares
represented thereby are to be voted, the Proxy will be voted FOR the election of
the directors proposed by the Board unless the authority to vote for the
election of such directors is withheld and, if no contrary instructions are
given, the Proxy will be voted FOR the approval of Proposals 1, 2, 3, 4, 5 and 6
described in the accompanying Notice and Proxy Statement. You may revoke or
change your Proxy at any
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time before the Meeting by filing with the Chief
Financial OfficerGeneral Counsel of the Company at the
Company's principal executive offices at 11031 Via Frontera,15175 Innovation Drive, San Diego,
California 92127,92128-3401, a notice of revocation or another signed Proxy with a
later date. You may also revoke your Proxy by attending the Meeting and voting
in person.
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Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the form of
Proxy and any additional solicitation materials furnished to the stockholders.
Copies of solicitation materials will be furnished to brokerage houses,
fiduciaries and custodians holding shares in their names that are beneficially
owned by others so that they may forward this solicitation material to such
beneficial owners. The Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. In addition to
the solicitation of Proxies by mail, Proxies may be solicited without extra
compensation paid by the Company by directors, officers and employees of the
Company by telephone, facsimile, telegraph or personal interview. The Company
also intendshas engaged the proxy solicitation firm of W.F. Doring & Co., Inc. to
engage a proxy solicitorsolicit votes for the Meeting for a fee of approximately $10,000,$5,000, plus
reimbursement of certain expenses.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 1999 Annual Meeting of
StockholderStockholders must be received by the Company at its executive offices not later
than October 29, 1999a reasonable time before the Company begins to print and mail its proxy
materials in order that such proposals may be included in the Proxy Statement
and form of Proxy relating to such meeting.
-7--3-
MATTERS TO BE CONSIDERED AT THE MEETING
PROPOSAL 1
ELECTION OF THE BOARD
Nominees For Election as Directors
The persons named below are nominees for director to serve until the
next annual meeting of stockholders and until their successors have been elected
and qualified. Management has selected five nominees, all of whom are currently
directors of the Company. Each person nominated for election has agreed to serve
if elected, and management has no reason to believe that any nominee will be
unavailable to serve. Unless otherwise instructed, the Proxy holders will vote
the Proxies received by them for the nominees named below. The proxies received
by the Proxy holders cannot be voted for more than five directors, and, unless
otherwise instructed, the Proxy holders will vote such proxies for the nominees
named below. The five candidates receiving the highest number of affirmative
votes of the shares entitled to vote at the Meeting will be elected directors of
the Company.
If, however, any of those named are unable to serve, or for good cause
decline to serve at the time of the Meeting, the persons named in the enclosed
Proxy will exercise discretionary authority to vote for substitutes. The Board
is not aware of any circumstances that would render any nominee unavailable for
election.
The following table sets forth certain information regarding the
nominees for election as directors.
Name Age Since Director Title
- ---- --- ----- --------------
Harry J. Saal 55 1983 Director, Chairman of the
Board
Brian Bonar 51 1995 Director, President and Chief
Executive Officer
A. L. Dubrow 65 1997 Director
David M. Carver 51 1998 Director
Warren T. Lazarow 39 1998 Director
Harry J. Saal has served as a director of the Company since 1983 and
became the Company's Chairman of the Board in December 1995. From September 1993
through November 1995, Dr. Saal was President and Chief Executive Officer of
Smart Valley, Inc., a company which helped create an electronic community in the
San Francisco Bay Area. In addition, from 1986 until 1993, Dr. Saal was the
President and a director of Network General Corporation, a company engaged in
the design, manufacture and sale of diagnostic systems for local area networks
(and related products). Dr. Saal serves as a director of Inprise Corporation.
Brian Bonar has served as a director of the Company since August 1995.
From August 1992 through April 1994, Mr. Bonar served as the Company's Director
of Technology Sales and from April 1994
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through September 1994, as the Company's Vice President, Sales and Marketing. In
September 1994, Mr. Bonar became the Company's Executive Vice President, Sales,
Marketing and, Engineering and in July 1997, Mr. Bonar was
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appointed as the
Company's President and Chief Operating Officer. In April 1998, he was appointed
as the Company's Chief Executive Officer. From 1991 to 1992, Mr. Bonar was Vice
President of Worldwide Sales and Marketing for Bezier Systems, Inc., a San Jose,
California-based manufacturer and marketer of laser printers. From 1990 to 1991,
he was Worldwide Sales Manager for Adaptec, Inc., a San Jose-based laser printer
controller developer. From 1988 to 1990, Mr. Bonar was Vice President of Sales
and Marketing for Rastek Corporation, a laser printer controller developer
located in Huntsville, Alabama. From 1984 to 1988, Mr. Bonar was employed as
Executive Director of Engineering at QMS, Inc., an Alabama-based developer and
manufacturer of high-performance color and monochrome printing solutions. Prior
to these positions, Mr. Bonar was employed by IBM, U.K. Ltd. for approximately
17 years.
A. L. Dubrow has served as a director of the Company since February
1997, at which time he was appointed as the Company's Vice President, Special
Projects, a post in which he served until the middle of 1997. In 1996, Mr.
Dubrow was involved in the acquisition and restructuring of NewGen Systems, Inc.
and served as its President and Chief Executive Officer prior to such
acquisition. From 1977 to April 1995, Mr. Dubrow was part of the senior
management of BW/IP, an operation acquired from Borg Warner, where Mr. Dubrow
served as General Manager from 1977 to 1992 and as Chief Operating Officer until
April 1995.
David M. Carver has served as a director of the Company from June 1998.
From November 1995 through December 1997, Mr. Carver served in several key
management positions, including Executive Vice President and Chief Operating
Officer, of Network General Corporation, the $250-million software firm which in
December 1997 merged with McAfee Associates to form Network Associates. From
March 1994 to October 1995, Mr. Carver worked as an independent consultant for
Institutional Venture Partners developing investment strategies for Internet
business opportunities. Mr. Carver also spent 20 years with the Hewlett-Packard
Company holding numerous management positions in the areas of sales and
marketing.
Warren T. Lazarow has served as a director of the Company since June
1998. Since 1994, Mr. Lazarow has been a partner at the law firm of Brobeck,
Phleger & Harrison LLP, an international legal firm specializing in emerging
growth companies. Mr. Lazarow represents a broad range of technology companies.
Mr. Lazarow received his law degree from Brooklyn Law School and his A.B.
degree, cum laude, from the Woodrow Wilson School of Public and International
Affairs at Princeton University.
Board Committees and Meetings
The Board held twelve meetings and acted by unanimous written consent
on three occasions during the fiscal year ended June 30, 1998 (the "1998 Fiscal
Year"). The Board has an Audit Committee and a Compensation Committee. Each
director attended or participated in seventy-five percent or more of the
aggregate of (i) the total number of meetings of the Board and (ii) the total
number of meetings held by all committees of the Board on which such director
served during the 1998 Fiscal Year.
The Audit Committee currently consists of three directors, Mr. Dubrow,
Mr. Carver and Mr. Lazarow, and is primarily responsible for approving the
services performed by the Company's independent auditors and reviewing their
reports regarding the Company's accounting practices and systems of internal
accounting controls. The Audit Committee held two meetings during the 1998
Fiscal Year.
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The Compensation Committee of the Company's Board (the "Compensation
Committee") currently consists of two directors, Dr. Saal and Mr. Carver, and is
primarily responsible for reviewing and approving the Company's general
compensation policies and setting compensation levels for the Company's
executive officers. The Compensation Committee is also responsible for the
administration and award of stock options under the
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Company's stock option
plans, as well as, the award of stock options and warrants issued pursuant to
individual stock option and warrant agreements. The Compensation Committee held
two meetings and did not act by unanimous written consent during the 1998 Fiscal
Year.
Director Compensation
Directors who are not employees of the Company or one of its
subsidiaries receive meeting fees for each Board meeting or Board committee
meeting attended. The per meeting fee is $4,500 plus travel expenses for Dr.
Saal and is $2,500 plus travel expenses for Messrs. Carver and Lazarow. No fees
were paid in the 1998 Fiscal Year and as of such fiscal year end, $63,000 of
unpaid meeting fees were accrued and unpaid to Dr. Saal and $5,000 of unpaid
meeting fees were accrued and unpaid to each of Messrs. Carver and Lazarow.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF THE NOMINEES LISTED ABOVE.
PROPOSAL 2
APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED
PREFERRED STOCK
On January 7, 1998, the Board adopted a resolution by unanimous written
consent approving a proposal to amend Article Fourth of the Company's
Certificate of Incorporation (the "Certificate") to increase the number of
shares of Preferred Stock which the Company is authorized to issue from 10,000
shares to 100,000 shares. The Board determined that such amendment is advisable
and directed that the proposed amendment be considered at the Meeting.
Purposes and Effects of Increasing the Number of Authorized Shares of Preferred
Stock
The proposed amendment would increase the number of shares of Preferred
Stock which the Company is authorized to issue from 10,000 shares to 100,000
shares. The additional 90,000 shares will be a part of the existing Preferred
Stock and, if and when issued, shall be divided into series. Such series of
Preferred Stock will have the rights, preferences, privileges and restrictions
granted to or imposed by the Certificate or by the Board acting pursuant to the
Certificate.
Reference is made to the proposed amendment to Article Fourth of the
Company's Certificate which is substantially set forth in the form listed under
the heading "Proposed New Article Fourth to the Company's Certificate of
Incorporation" in Exhibit A to this Proxy Statement.
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The Company has no present plans, arrangements or understandings for
the issuance or use of the proposed additional shares of Preferred Stock.
However, the Board believes that the adoption of the proposed amendment is
advantageous to the Company and its stockholders. The proposed amendment would
provide additional authorized shares of Preferred Stock that could be used from
time to time, without further action or
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authorization by the stockholders
(except as may be required by law or by any stock exchange on which the
Company's securities may then be listed), for corporate purposes which the Board
may deem desirable, including, without limitation, financings and acquisitions.
The authority possessed by the Board to issue Preferred Stock could
also potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or costly to achieve. However, depending on, among
other things, the voting rights and the conversion rights assigned to the
Preferred Stock, the issuance of Preferred Stock may adversely effect the market
price of the Common Stock and may result in dilution of the voting power of the
holders of Common Stock, including the possibility of the loss of voting control
to the holders of Preferred Stock.
If the proposed amendment is adopted, there will be 98,449.597,218.5 authorized
shares of Preferred Stock that will not be outstanding or reserved for issuance.
As of the record date, February 15,April 23, 1999, the Company had 2,150.52,176.5 shares of
Preferred Stock issued and outstanding.
STOCKHOLDER APPROVAL
In accordance with the Delaware General Corporation Law and the
Company's Certificate of Incorporation, the affirmative vote of a majority of
the outstanding shares of Common Stock entitled to vote thereon is required to
adopt this Proposed Amendment. Abstentions and broker non-votes are not
considered cast.proposed amendment.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL.
PROPOSAL 3
APPROVAL OF 1998 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's stockholders are being asked to approve the 1998 Stock
Option Plan (the "1998 Stock Option Plan"), pursuant to which 1,500,000 shares
of Common Stock will be reserved for issuance. The Board has authorized the
implementation of the 1998 Stock Option Plan as a comprehensive equity incentive
program to attract and retain the services of those persons essential to the
Company's growth and financial success. The 1998 Stock Option Plan became
effective upon adoptionwas adopted
by the Board on October 26, 1998 subjectand would become effective if the proposal is
approved by a majority of the shares of Common Stock entitled to stockholder
approvalvote at the
Meeting.
At the Company's 1996 Annual Meeting of Stockholders, the Company's
stockholders approved the implementation of the 1997 Stock Option Plan and 1997
Stock Purchase Plan; however, these plans have not been implemented and upon
approval ofif this
proposal is approved by stockholders, the 1997 Stock Option Plan and the 1997
Stock Purchase Plan willwould be terminated.
-7-
The following is a summary ofdescribes the principalmaterial features of the 1998 Stock
Option Plan. The summary, however, does not purport to be a complete description
of all the provisions of the 1998 Stock Option Plan. A complete form of the 1998
Stock Option Plan has been attached hereto as Exhibit B.
The following is a summary of certainthe material features of the 1998 Stock
Option Plan.
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Shares Subject to the Option Plan and Eligibility
The 1998 Stock Option Plan authorizes the grant of options to purchase
a maximum of 1,500,000 shares of the Company's Common Stock (subject to
adjustment as described below) to employees and directors of, and consultants
to, the Company or any of its subsidiaries. Upon expiration, cancellation or
termination of unexercised options, the shares of the Company's Common Stock
subject to such options will again be available for the grant of options under
the 1998 Stock Option Plan.
Type of Options
Options granted under the 1998 Stock Option Plan may either be
incentive stock options ("ISOs"), within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock
options, which do not qualify as ISOs ("NQSOs"). ISOs, however, may only be
granted to employees.
Administration
The 1998 Stock Option Plan is to be administered by the Compensation
Committee, which will consist of "non-employee directors" within the meaning of
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). It is also expected that Committee members will be
"outside directors," within the meaning of Section 162(m) of the Code. Those
administering the 1998 Stock Option Plan are referred to as the
"Administrators."
Among other things, the Administrators are empowered to determine,
within the express limits contained in the 1998 Stock Option Plan, the
employees, consultants and directors to be granted options, whether an option
granted to an employee is to be an ISO or a NQSO, the number of shares of Common
Stock to be subject to each option, the exercise price of each option, the term
of each option, the date each option shall become exercisable as well as any
terms and conditions relating to the exercisability of each option, whether to
accelerate the date of exercise of any option or installment and the form of
payment of the exercise price, to construe each stock option contract between
the Company and an optionee and, with the consent of the optionee, to cancel or
modify an option. The Administrators are also authorized to prescribe, amend and
rescind rules and regulations relating to the 1998 Stock Option Plan and make
all other determinations necessary or advisable for administering the 1998 Stock
Option Plan.
-8-
Terms and Conditions of Options
Options granted under the 1998 Stock Option Plan are subject to, among
other things, the following terms and conditions:
(a) The exercise price of each option is determined by the
Administrators; provided, however, that the exercise price of an ISO may not be
less than the fair market value of the Company's Common Stock on the date of
grant (110% of such fair market value if the optionee owns, or is deemed to own,
more than 10% of the voting power of the Company).
-12-
(b) Options may be granted for terms established by the Administrators;
provided, however, that the term of an ISO may not exceed ten years (five years
if the optionee owns, or is deemed to own, more than 10% of the voting power of
the Company).
(c) The maximum number of shares of the Company's Common Stock for
which options may be granted to an employee in any calendar year is 250,000. In
addition, the aggregate fair market value of shares with respect to which ISOs
may be granted to an employee which are exercisable for the first time during
any calendar year may not exceed $100,000.
(d) The exercise price of each option is payable in full upon exercise
or, if the Administrators permit, in installments. Payment of the exercise price
of an option may be made in cash, or, if the Administrators permit, in shares of
the Company's Common Stock or any combination thereof.
(e) Options may not be transferred other than by will or by the laws of
descent and distribution, and may be exercised during the optionee's lifetime
only by the optionee.
(f) Except as may otherwise be provided in the option contract related
to the option, if the optionee's relationship with the Company as an employee,
director or consultant is terminated for any reason other than death or
disability, the option may be exercised, to the extent exercisable at the time
of termination of such relationship at any time, within three months thereafter,
but in no event after the expiration of the term of the option; provided,
however, that if the relationship is terminated either for cause or without the
consent of the Company, the option will terminate immediately. Except as may be
provided in the option contract related to the option, an option is not affected
by a change in the status of an optionee so long as the optionee continues to be
an employee or director of, or a consultant to, the Company. Except as otherwise
provided in the optionee's option contract, in the case of the death of an
optionee while an employee, director or consultant (or, generally, within three
months after termination of such relationship, or within one year after
termination of such relationship by reason of disability), the optionee's legal
representative or beneficiary may exercise the option, to the extent exercisable
on the date of death, at any time within one year after such date, but in no
event after the expiration of the term of the option. Except as otherwise
provided in the optionee's option contract, an optionee whose relationship with
the Company is terminated by reason of disability may exercise the option, to
the extent exercisable at the effective date of such termination, at any time
within one year thereafter, but not after the expiration of the term of the
option.
(g) The Company may withhold cash and/or, with the consent of the
Administrators, shares of the Company's Common Stock having an aggregate value
equal to the amount which the Company determines is necessary to meet its
obligations to withhold any federal, state and/or local taxes or other amounts
incurred by reason of the grant, exercise or vesting of an option or the
disposition of shares acquired
-9-
upon the exercise of the option. Alternatively, the Company may require the
optionee to pay the Company such amount in cash promptly upon demand.
Adjustment in Event of Capital Changes
Appropriate adjustments are to be made in the number and kind of shares
available under the 1998 Stock Option Plan, in the number and kind of shares
subject to the 1998 Stock Option Plan and each outstanding option and in the
exercise prices of outstanding options, as well as the limitation on the number
of shares that may be granted to any employee in any calendar year, inIn the event of any change in the Company's Common Stock by
-13-
reason of
any stock dividend, stock split, combination, reclassification,
recapitalization, merger in which the Company is the surviving corporation,
spin-off, split-up, exchange of shares or the like. Inlike, the eventfollowing adjustments to
the 1998 Stock Option Plan shall be made to:
o the number and kind of (a)shares available under the 1998 Stock Option
Plan;
o the number and kind of shares subject to the 1998 Stock Option Plan;
o each outstanding option;
o the exercise prices of outstanding options; and
o the limitations on the number of shares that may be granted to any
employee in any calendar year.
Any outstanding options shall terminate upon the earliest occurrence of
any of the following events, unless other provision is made therefor in the
applicable event:
o the liquidation or dissolution of the CompanyCompany; or
(b)o a transaction (or series of related transactions) that is approved
by a majority of the members of the Board as elected by stockholders
prior to the first of such transactions (including, without
limitation, a merger, consolidation, sale of stock by the Company or
its stockholders, tender offer or sale of assets)
and in which either (i)either:
o the voting power (in the election of directors generally) of
the Company's voting securities outstanding immediately prior
to such transaction ceases to represent at least 50% of the
combined voting power (in the election of directors
generally) of the Company or such surviving entity
outstanding immediately after such transactiontransaction; or
(ii)o the registration of the Company's Common Stock under the
Securities Exchange Act of 1934 is terminated, any outstanding options shall
terminate upon the earliest of any such event, unless other provision is made
therefor in the transaction.terminated.
-10-
Duration and Amendment of the 1998 Stock Option Plan
No option may be granted under the 1998 Stock Option Plan after October
25, 2008. The Board may at any time terminate or amend the 1998 Stock Option
Plan; provided, however, that, without the approval of the Company's
stockholders, no amendment may be made which would (a)would:
o except as a result of the anti-dilution adjustments described above,
increase the maximum number of shares for which options may be
granted under the 1998 Stock Option Plan or increase the maximum
number of shares covered by options that may be granted to an
employee in any calendar year, (b)year;
o change the eligibility requirements for persons who may receive
options under the 1998 Stock Option PlanPlan; or
(c)o make any change for which applicable law requires stockholder
approval.
No termination or amendment may adversely affect the rights of an
optionee with respect to an outstanding option without the optionee's consent.
Federal Income Tax Treatment
The following is a general summary of the federal income tax
consequences under current tax law of NQSOs and ISOs. It does not purport to
cover all of the special rules, including the exercise of an option with
previously-acquired shares, or the state or local income or other tax
consequences inherent in the ownership and exercise of stock options and the
ownership and disposition of the underlying shares. In addition, the rules
summarized herein are based on laws, regulations, cases and rulings currently in
effect, all of which are subject to change possibly on a retroactive basis.
An optionee does not recognize taxable income for federal income tax
purposes upon the grant of a NQSO or an ISO.
Upon the exercise of a NQSO, the optionee recognizes ordinary income in
an amount equal to the excess, if any, of the fair market value of the shares
acquired on the date of exercise over the exercise price thereof, and the
Company generally is entitled to a deduction for such amount at that time. If
the optionee later sells shares acquired pursuant to the exercise of a NQSO, the
optionee recognizes long-term or short-term capital gain or loss equal to the
difference between the amount realized on such sale and the fair market value of
the shares on the date acquired (plus or minus any other adjustments to the
basis of the shares), depending on the period for which the shares were held.
Long-term capital gain is generally subject to more favorable tax treatment than
ordinary income or short-term capital gain.
-14-
Upon the exercise of an ISO, the optionee does not recognize taxable
income. If the optionee disposes of the shares acquired pursuant to the exercise
of an ISO more than two years after the date of grant and more than one year
after the transfer of the shares to the optionee, the optionee recognizes
long-term capital gain or loss and the Company is not be entitled to a deduction.
However, if the optionee disposes of such shares within another required holding
period, all or a portion of the gain is treated as ordinary income and the
Company generally is entitled to deduct such amount.
-11-
In addition to the federal income tax consequences described above, an
optionee may be subject to the alternative minimum tax, which is payable to the
extent it exceeds the optionee's regular tax. For this purpose, upon the
exercise of an ISO, the excess of the fair market value of the shares over the
exercise price therefor is an adjustment that increases alternative minimum
taxable income. In addition, the optionee's basis in such shares is increased by
such excess for purposes of computing the gain or loss on the disposition of the
shares for alternative minimum tax purposes. If an optionee is required to pay
an alternative minimum tax, the amount of such tax which is attributable to
deferral preferences (including the ISO adjustment) is allowed as a credit
against the optionee's regular tax liability in subsequent years. To the extent
the credit is not used, it is carried forward.
Valuation
On February 12,April 23, 1999, the closing price of the Company's Common Stock on
The Nasdaq SmallCap Market was $1.625$1.0625 per share.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the Stock Option Meeting is
required for approval of the 1998 Stock Option Plan. Should such stockholder
approval not be obtained, then the 1998 Stock Option Plan will terminate and all
options previously granted under the 1998 Stock Option Plan will terminate
without becoming exercisable for any of the shares of Common Stock subject to
those options and no further option grants or stock issuances will be made under
the 1998 Stock Option Plan. The Company's 1997 Stock Option Plan will, however,
continue to remain in effect, and option grants may be made pursuant to the
provisions of that plan, if implemented, until the available reserve of Common
Stock under such plan is issued.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
1998 STOCK OPTION PLAN. THE BOARD BELIEVES THAT IT IS IN THE BEST
INTERESTS OF THE COMPANY TO IMPLEMENT A COMPREHENSIVE EQUITY INCENTIVE
PROGRAM FOR THE COMPANY WHICH WILL PROVIDE A MEANINGFUL OPPORTUNITY FOR
OFFICERS, EMPLOYEES AND NON-EMPLOYEE BOARD MEMBERS TO ACQUIRE A
SUBSTANTIAL PROPRIETARY INTEREST IN THE ENTERPRISE AND THEREBY
ENCOURAGE SUCH INDIVIDUALS TO REMAIN IN THE COMPANY'S SERVICE AND MORE
CLOSELY ALIGN THEIR INTERESTS WITH THOSE OF THE STOCKHOLDERS.
-15--12-
PROPOSAL 4
APPROVAL OF THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
UPON CONVERSION OF SERIES D CONVERTIBLE PREFERRED STOCK
General
As of January 13, 1999, the Company entered into a Securities Purchase
Agreement (the "Series D Agreement") with certain investors contemplating a
potential fundingfor an aggregate
purchase price of up to $2.4 million (the "Series D Funding"). The Series D
Funding provides for the private placement by the Company of up to
1,200 units
(the "Units"), each Unit consistingunits. Each unit consists of (i)the following securities:
o one share of Series D Convertible Preferred Stock (the "Series D
Stock"); and
(ii)o 2,000 warrants (the "Series D Warrants" and, collectively, with the Series D Stock, the "Series D Securities") exercisable for shares of
Common Stock.
The Series D Stock is immediately convertible into shares of Common
Stock as more fully described below; provided, however, each of the investors
has agreed that in no event shall it be permitted to convert any shares of
Series D Stock in excess of the number of such shares upon the conversion of
which,
(i)o the number of shares of Common Stock owned by such investor (other
than shares of Common Stock issuable upon conversion of Series D
Stock or upon exercise of Series D Warrants) plus (ii)added to
o the number of shares of Common Stock issuable upon conversion of
such shares of Series D Preferred Stock or exercise of Series D Warrants,
would be equal to or exceed
(iii)o 9.999 percent of the number of shares of Common Stock then issued
and outstanding, including the shares that would be issuable upon
conversion of the Series D Stock or exercise of Series D Warrants
held by such investor.
The Company will not be able under the Series D Funding, to issue at a price below the market price
an aggregate amount of shares of Common Stock equal to 20 percent or more of the
outstanding Common Stock of the Company unless this proposal is approved by the
Company's stockholders. See below "Reason for Stockholder Approval".Approval." In the
event that approval is not obtained from stockholders, the Company is only obligated under
the Series D Agreement to convertwill issue,
upon proper notification from the investors, theCommon Stock upon conversion of
Series D Stock into Common Stockor exercise of Series D Warrants at a price below the applicable below market
conversion
price inup to the applicableagreed upon pro rata amounts so that no more thannot to exceed 20 percent of the
Company's Common Stock then outstanding will be issued. Any outstanding, and all additional shares of Common
Stock issued upon conversion of the Series D Stock which if converted would cause the Company to issue in excess
of 20 percentor exercise of the outstanding Common StockSeries D
Warrants of the Company will be convertibleissued at the applicable market price of the Common Stock
on the applicable conversion or exercise date.
The Company intends to use the proceeds from the sale of the securities
for working capital and general corporate purposes.
Three Tranches of-13-
Funding Pursuant to the Series D Agreement
Pursuant to the Series D Agreement, the Company agreed to issue and
sell to the Series D investors $2.4 million of Series D Stock and Series D
Warrants. To date, the Company has issued and sold $1.75 million of Series D
Stock and Series D Warrants. The Company shall issue and sell to the investors
the remaining $0.65 million of Series D Stock and the Series D Warrants in three tranches in
the following amounts: (i) $600,000 of the stated value of the Series D Stock in
the first tranche; (ii) $600,000 of the stated value of the Series D Stock in
the second tranche; and (iii) $1,200,000 of the stated value of the Series D
Stock in the third tranche. The first tranche was funded at the signing of the
Series D Agreement; the second tranche was funded on February 5, 1999; and the
third tranche would fund on a datewithin two
business days after the Company, among other things, (i)
providesSecurities and Exchange Commission ("SEC") has declared
effective a written notice to the investors requiring such investors to purchase
up to $1,200,000 of the stated value of the Series D Stock and (ii) has, and has
had for 30 days prior to receiving any funding pursuant to the third tranche, an
appropriate and effective
-16-
registration statement (the "Registration Statement") filed with the
Securities
and Exchange Commission (the "SEC").SEC.
Description of Series D Stock
The Series D Stock is immediately convertible into shares of the
Company's Common Stock at a floating conversion rate that is significantly below
market price as of April 23, 1999, which is the lesser of (A) $.50 and (B) an
amount equal to 70 percent of the closing bid price per share of Common Stock on
the Nasdaq SmallCap Market (the "Series D Closing Price") for the three trading days having the lowest Closing Priceclosing
bid price during the 30 trading days prior to the date on which the applicable
investor gives to the Company notice of conversion of Series D Stock; except that allStock. As a
result of this floating conversion rate, the lower the market price for a share
of Common Stock, the more shares of Common Stock will be issued upon conversion
of the Series D Stock. Accordingly, there is theoretically no limit on the
number of shares of Common Stock which may be issued upon conversion of the
Series D Stock. To the extent the Series D stockholders convert their Series D
Stock, converted priorthe market price of the Common Stock may decrease due to February 26,
1999 would be converted at $.50.the additional
shares of Common Stock coming into the market. A decrease in the market price of
the Common Stock could allow the Series D stockholders to convert their Series D
Stock into even more shares of Common Stock, perhaps further decreasing the
market price of the Common Stock. This downward pressure on the market price
caused by the conversion of Series D Stock could encourage short sales by the
Series D stockholders, which could result in the further downward pressure on
the market price of the Common Stock.
Each investor in Series D Stock shall have the right to vote, except as
otherwise required by Delaware law, on all matters on which holders of Common
Stock have the right to vote on with each such investor having the right to cast
one vote for each whole share of Common Stock into which each share of the Series D Preferred
Stock held by such investor is convertible immediately prior to the record date
for the determination of stockholders entitled to vote; provided, however, that
in no event shall a holder be entitled to vote more than 9.999 percent of the
number of shares entitled to be voted on any matter. The holders of Series D
Stock have no rights to receive dividends.
-14-
The following table describes the amount of shares of Common Stock into
which the Series D Stock is convertible at various percentages of the market
price as of April 23, 1999 and the percentages of the total outstanding Common
Stock represented by such conversion of Series D Stock following such conversion
and exercise of the Series D Warrants:
Percentage of the Outstanding
Common Stock represented by the
Number of Shares of Common Stock issuable
Shares of upon conversion of the Series D
Common Stock Stock following conversion of the
issuable upon Series D Stock and exercise of the
conversion of Series D Warrants (assuming the
Market Price per share of Conversion the Series D Series D Warrants are exercised at
Common Stock Price Stock $.875 per share)
-------------- ------- ------- -----------------
At $1.0625 per share, market price
at April 23, 1999 $.50 per share 4,800,000 19.5%
At $.7969 per share (75% of market
price at April 23, 1999) $.50 per share 4,800,000 19.5%
At $.5313 per share (50% of market
price at April 23, 1999) $.50 per share 4,800,000 19.5%
At $.2656 per share (25% of market $.2656 per share 9,036,145 28.9%
price at April 23, 1999)
Description of Series D Warrants
Upon the completion of each tranchethe issuance of all of the Series D Funding,Stock and
Series D Warrants, each of the investors will receivehave received the number of Series
D Warrants that directly corresponds with the dollar amount such investor
invested in the Series D Stock and Series D Warrants. The Series D Warrants have
an exercise price of $.875 and an exercise period of five years from the date of
issuance. The exercise price of the Series D Warrants will be adjusted and the
number of shares of Common Stock to be issued upon exercise of the Series D
Warrants will be adjusted upon the occurrence of, among other things, the merger
or sale of the Company, recapitalization, reorganization or reclassification of
the Company's capital. In the event the Company issues shares of Common Stock at
a price which is below the then market price (excluding shares of Common Stock
issuable upon conversion of Series D Stock and Series E Stock, as defined in
Proposal 5, and exercise of Series E Warrants, as defined in Proposal 5), the
exercise price shall be adjusted downward resulting in the issuance of
additional shares of Common Stock upon exercise of the Series D Warrants.
-15-
The following table describes the amount of shares of Common Stock for
which the Series D Warrants are exercisable at various percentages of the market
price as of April 23, 1999 and the percentages of the total outstanding Common
Stock represented by such tranche.exercise of the Series D Warrants following such
exercise and the conversion of the Series D Stock:
Percentage of the Outstanding
Common Stock represented by the
Shares of Common Stock issuable
upon exercise of the Series D
Warrants following conversion of
Number of Shares of the Series D Stock (assuming the
Common Stock issuable upon Series D Stock is converted at $.50
Exercise price of the exercise of the Series D per share) and exercise of the
Series D Warrants Warrants Series D Warrants
------------------- ---------- ------------------
At the exercise price of $.875 per
share 2,400,000 8.9%
At the exercise price of $.65625 per
share 3,200,000 11.5%
At the exercise price of $.4375 per
share 4,800,000 16.3%
At the exercise price of $.21875 per 9,600,000 28.1%
share
Reason for Stockholder Approval
Under the rules of the National Association of Securities Dealers,
issuers whose securities are listed on the Nasdaq Small Cap Market, the exchange
on which the Common Stock is listed, are required to obtain stockholder
approval, prior to the issuance of securities in connection with a transaction
other than a public offering involving:
(i)o the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock)
at a price less than (A)(i) the greater of book or (B)(ii) market
value of the stock, which together with sales by officers,
directors or substantial stockholders of the company equals 20
percent or more of common stock or 20 percent or more of the
voting power outstanding before the issuance; or
(ii)o the sale or issuance by the Company of common stock (or
securities convertible into or exercisable to purchase common
stock) equal to 20 percent or more of the common stock or 20
percent or more of the voting power outstanding before the
issuance for less than (i) the greater of (x) book value or (y)(ii)
market value of the stock.
Based on the closing bid price per share of Common Stock on the Nasdaq
SmallCap Market on February 11,April 23, 1999, and assuming that eachall of the three
tranches of Series D FundingStock
and Series D Warrants were to occur,issued, the Common Stock issuable pursuant to the
Series D Agreement would be more than 20 percent of the shares of outstanding
-16-
Common Stock as of February 11,April 23, 1999 (assuming, and after taking into account, the
full conversion of the Series D Stock and the exercise of all of the Series D
Warrants, issued pursuant to the Series D Funding)Agreement). On a fully diluted basis,
the Common Stock issuable pursuant to the full conversion and exercise of the
Series D SecuritiesStock and Series D Warrants at April 23, 1999 would be approximately
30.626.7 percent of the Common Stock outstanding following such conversion and
exercise. Accordingly, the full conversion and exercise of the Series D Stock
and Series D Warrants into shares of Common Stock would result in substantial
dilution to the interests of the holders of Common Stock.
Therefore, the Board seeks stockholder approval of the Company's
issuance of shares of Common Stock pursuant to the conversion or exercise, as
applicable, of the Series D SecuritiesStock and Series D Warrants which, if issued to the
full extent, could potentially result in the Company issuing 20 percent or more
of the shares of Common Stock outstanding. Stockholders are being asked to
approve only this proposed issuance and are not being asked to approve any other
aspect of the proposed Series D Funding.
-17-
Agreement.
STOCKHOLDER APPROVAL
A vote of the holders of a majority of the voting powershares of theCommon Stock
issued and outstanding, Common Stock, present in person or represented by Proxy at the Meeting
and entitled to vote at the Meeting, is required to approve the issuance of the
Securitiesshares of Common Stock issuable pursuant to the Funding.conversion or exercise of the
Series D Stock and Series D Warrants.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL.
PROPOSAL 5
APPROVAL OF THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
UPON CONVERSION OF SERIES E CONVERTIBLE PREFERRED STOCK
General
As of February 5,2, 1999, the Company entered into a Securities Purchase
Agreement (the "Series E Agreement") with certain investors contemplating a
potential fundingfor an aggregate
purchase price of up to $3,000,000$4.655 million and as of February 18,19, 1999, the Company
contemplates enteringentered into an Exchange Agreement (the "Exchange Agreement") with certain
investors contemplatingfor a potential fundingconversion of $1,150,000 million (thedebt into equity of approximately $1.15 million.
The Series E Agreement and the Exchange Agreement being together the "Series E
Funding"). The Series E Funding providesprovide for the private placement
by the Company of up to 1,250 units (the "Units"), each Unit consistingunits.
Each unit consists of (i)the following securities:
o one share of Series E Convertible Preferred Stock (the "Series E
Stock"); and
(ii)o 5,000 warrants (the "Series E Warrants" and, collectively, with the Series E
Stock, the "Series E Securities") exercisable for shares of
Common Stock.
The Series E Stock is immediately convertible into shares of Common
Stock as more fully described below.
-17-
The Company will not be able, underpursuant to the Series E Funding,Agreement and
Exchange Agreement, to issue at a price below the market price an aggregate
amount of shares of Common Stock equal to 20 percent or more of the outstanding
Common Stock of the Company unless this proposal is approved by the Company's
stockholders. See below "Reason for Stockholder Approval." In the event that
approval is not obtained from stockholders, the Company is only obligated under
the Series E Agreement to convertwill issue, upon proper
notification from the investors, theCommon Stock upon conversion of Series E Stock
into Common Stockand exercise of Series E Warrants at a price below the applicable below market conversion
price inup to the
applicableagreed upon pro rata amounts so that no more thannot to exceed 20 percent of the Company's Common
Stock then outstanding, will be issued. Any outstandingand all additional shares of Common Stock issued upon
conversion of the Series E Stock which if converted would cause the Company to issue in excess
of 20 percentor exercise of the outstanding Common Stock of the CompanySeries E Warrants will be
convertibleissued at the applicable market price of the Common Stock on the applicable conversion or
exercise date.
The Company intends to use the proceeds from the sale of the Series E
SecuritiesStock and Series E Warrants for working capital and general corporate purposes.
-18-
Funding Pursuant to the Series E Agreement and the Exchange Agreement
Series E Agreement
Pursuant to the Series E Agreement, the Company has issued and sold to the
investors the Series E Securities in the following amounts: $1,735,000 in cash
and $1,265,000 in exchange and/or
cancellationconverted for debt $4.405 million of indebtedness, and pursuant to
the Exchange Agreement, the Company contemplates issuing and selling to the
investors the Series E Securities in the following amount: $1,150,000 in
exchange and/or cancellation of indebtedness. All of the investors of the Series
E Agreement funded at the time of execution of the Series E Agreement except
that two of the investors agreed to purchase the Series E Securities in three
tranches (the "Series E Tranche Investors"): the first tranche of a combined
$150,000 funded at the execution of the Series E Agreement; the second tranche
of up to a combined $250,000 to be funded at the filing by the Company of the
Registration Statement; and the third tranche of a combined $350,000 to be
funded on a date after the Company, among other things, (i) provides a written
notice to the investors requiring such investors to purchase up to $350,000 of
the stated value of the Series E Stock and (ii) has,Series E Warrants. The
Company shall issue and has had for 30 days
prior to receiving any funding pursuantsell to the third tranche,investors an additional $0.25 million of
Series E Stock and Series E Warrants within two business days after the SEC has
declared effective the Registration Statement filed with the SEC.
All of the investors ofExchange Agreement
Pursuant to the Exchange Agreement, would fund within five daysif this proposal is passed by the
majority of shares of Common Stock entitled to vote at this Meeting, the Company
obtaining Shareholder
Approval.would issue Series E Stock and Series E Warrants in exchange for $1.15 million
of debt.
Description of Series E Stock
The Series E Stock is immediately convertible into shares of the
Company's Common Stock at a floating conversion rate that is significantly below
market price as of April 23, 1999, which is the lesser of (A) $.50 and (B) an
amount equal to 70 percent of the closing bid price per share of Common Stock on
the Nasdaq SmallCap Market (the
"Series E Closing Price") for the three trading days having the lowest Closing
Priceclosing
bid price during the 30 trading days prior to the date on which the applicable
investor gives to the Company notice of conversion of Series E Stock; except
that allStock. As a
result of this floating conversion rate, the lower the market price for a share
of Common Stock, the more shares of Common Stock will be issued upon conversion
of the Series E Stock. Accordingly, there is theoretically no limit on the
number of shares of Common Stock which may be issued upon conversion of the
Series E Stock. To the extent the Series E stockholders convert their Series E
Stock, converted priorthe market price of the Common Stock may decrease due to February 26, 1999 would be converted
at $.50.the additional
shares of Common Stock coming into the market. A decrease in the market price of
the Common Stock could allow the Series E stockholders to convert their Series E
Stock into even more shares of Common Stock, perhaps further decreasing the
market price of the Common Stock. This downward pressure on the market price
caused by the conversion of Series E Stock could encourage short sales by the
Series E stockholders, which could result in further downward pressure on the
market price of the Common Stock.
-18-
Each investor in Series E Stock shall have the right to vote, except as
otherwise required by Delaware law, on all matters on which holders of Common
Stock have the right to vote on with each such investor having the right to cast
one vote for each whole share of Common Stock into which each share of the
Series E Preferred
Stock held by such investor is convertible immediately prior to the record date
for the determination of stockholders entitled to vote. UponThe holders of Series E
Stock have no rights to receive dividends.
The following table describes the amount of shares of Common Stock into
which the Series E Funding,Stock is convertible at various percentages of the market
price as of April 23, 1999 and the percentages of the total outstanding Common
Stock represented by such conversion of Series E Stock following such conversion
and the exercise of the Series E Warrants:
Percentage of the Outstanding
Common Stock represented by the
Number of Shares of Common Stock issuable
Shares of upon conversion of the Series E
Common Stock Stock following conversion of
issuable upon Series E Stock and exercise of
the conversion the Series E Warrants (assuming
Market Price per share of Conversion of the Series E Warrants are
Common Stock Price Series E Stock exercised at $.875 per share)
------------------- ---------- ------------------ ------------------
At $1.0625 per share, market price
at April 23, 1999 $.50 per share 12,500,000 32.4%
At $.7969 per share (75% of market
price at April 23, 1999) $.50 per share 12,500,000 32.4%
At $.5313 per share (50% of market
price at April 23, 1999) $.50 per share 12,500,000 32.4%
At $.2656 per share (25% of market $.2656 per share 23,531,626 47.4%
price at April 23, 1999)
Description of Series E Warrants
Upon the completion of the issuance of all of the Series E Stock and
Series E Warrants, each of the investors will receivehave received the number of Series
E Warrants that directly corresponds with the dollar amount such investor
invested in the Series E Funding, except that Tranche InvestorsStock and Series E Warrants. The Series E Warrants have
an exercise period of $.875 and an exercise term of five years from the date of
issuance. The exercise price of the Series E Warrants will receivebe adjusted and the
number of shares of Common Stock to be issued upon exercise of the Series E
Warrants that directly corresponds withwill be adjusted upon the dollaroccurrence of, among other things, the merger
or sale of the Company, recapitalization, reorganization or reclassification of
the Company's capital. In the event the Company issues shares of Common Stock at
a price which is below the then market price (excluding shares of Common Stock
issuable upon conversion of Series D Stock and Series E Stock and exercise of
Series D Warrants), the exercise price shall be adjusted downward resulting in
the issuance of additional shares of Common Stock upon exercise of the Series E
Warrants.
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The following table describes the amount of shares of Common Stock for
which the Series E Warrants are exercisable at various percentages of the market
price as of April 23, 1999 and the percentages of the total outstanding Common
Stock represented by such investor invested in each completed tranche.exercise of the Series E Warrants following such
exercise and the conversion of the Series E Stock:
Percentage of the Outstanding
Common Stock represented by the
Shares of Common Stock issuable
upon exercise of the Series E
Warrants following conversion of
Number of Shares of the Series E Stock (assuming the
Common Stock issuable upon Series E Stock is converted at $.50
Exercise price of the exercise of the Series E per share) and exercise of the
Series E Warrants Warrants Series E Warrants
------------------- ---------- ------------------
At the exercise price of $.875 per
share 6,250,000 16.2%
At the exercise price of $.65625 per
share 8,333,333 20.4%
At the exercise price of $.4375 per
share 12,500,000 27.9%
At the exercise price of $.21875 per 25,000,000 43.6%
share
Reason for Stockholder Approval
Under the rules of the National Association of Securities Dealers,
issuers whose securities are listed on the Nasdaq Small Cap Market, the exchange
on which the Common Stock is listed, are required to obtain stockholder
approval, prior to the issuance of securities in connection with a transaction
other than a public offering involving:
(i)o the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock)
at a price less than (A)(i) the greater of book or (B)(ii) market
value of the stock, which together with sales by officers,
directors or substantial stockholders of the company equals 20
percent or more of common stock or 20 percent or more of the
voting power outstanding before the issuance; or
(ii)o the sale or issuance by the Company of common stock (or
securities convertible into or exercisable to purchase common
stock) equal to 20 percent or more of the common stock or 20
percent or more of the voting power outstanding before the
issuance for less than the greater of (x)(i) book value or (y)(ii)
market value of the stock.
Based on the closing bid price per share of Common Stock on the Nasdaq
SmallCap Market on February 11,April 23, 1999, and assuming that the terms and conditionsall of the Exchange Agreement were to be fully carried out and each of the three
tranches relating to the Tranche Investors' Series E FundingStock
and Series E Warrants were to occur,issued, the Common
-19-
Stock issuable pursuant to the
Series E Agreement and the Exchange Agreement would be more than 20 percent of
-20-
the shares of outstanding Common Stock as of February 11,April 23, 1999 (assuming, and after
taking into account, the full conversion of the Series E Stock and the exercise
of all of the Series E Warrants, issued pursuant to the Series E Funding)Agreement and
Exchange Agreement). On a fully diluted basis, the Common Stock issuable
pursuant to the full conversion and exercise of the Series E SecuritiesStock and Series E
Warrants at April 23, 1999 would be approximately 4348.6 percent of the Common
Stock outstanding following such conversion and exercise. Accordingly, full
conversion and exercise of the Series E Stock and Series E Warrants into shares
of Common Stock would result in substantial dilution to the interests of the
holders of Common Stock.
Therefore, the Board seeks stockholder approval of the Company's
issuance of shares of Common Stock pursuant to the conversion or exercise of the
Series E SecuritiesStock and Series E Warrants which, if issued to the full extent, could
potentially result in the Company issuing 20 percent or more of the shares of
Common Stock outstanding. Stockholders are being asked to approve only this
proposed issuance and are not being asked to approve any other aspect of the
proposed Series E Funding.Agreement and Exchange Agreement.
STOCKHOLDER APPROVAL
A vote of the holders of a majority of the voting powershares of theCommon Stock
issued and outstanding, Common Stock, present in person or represented by Proxy at the Meeting
and entitled to vote at the Meeting, is required to approve the issuance of
shares of Common Stock issuable upon conversion and exercise of the Securities pursuant to the Funding.Series E
Stock and Series E Warrants.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL.
PROPOSAL 6
RATIFICATION OF INDEPENDENT AUDITORS
The Board has appointed the firm of Boros & Farrington APC, independent
public auditors for the Company during the 1998 Fiscal Year, to serve in the
same capacity for the year ending June 30, 1999, and is asking the stockholders
to ratify this appointment. The affirmative vote of a majority of the shares
represented and voting at the Meeting is required to ratify the selection of
Boros & Farrington APC.
In the event the stockholders fail to ratify the appointment, the Board
will reconsider its selection. Even if the selection is ratified, the Board in
its discretion may direct the appointment of a different independent auditing
firm at any time during the year if the Board believes that such a change would
be in the best interests of the Company and its stockholders.
A representative of Boros & Farrington APC is expected to be present at
the Meeting, will have the opportunity to make a statement if he or she desires
to do so, and will be available to respond to appropriate questions.
-21-
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF BOROS & FARRINGTON APC TO
SERVE AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL
YEAR ENDING JUNE 30, 1999.
-20-
OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Meeting. If any other matters properly come before the
Meeting, it is the intention of the persons named in the enclosed form of Proxy
to vote the shares they represent as the Board may recommend. Discretionary
authority with respect to such other matters is granted by the execution of the
enclosed Proxy.
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of Common Stock as of February 10,April 20, 1999,
by (i) all persons who are beneficial owners of five percent (5 percent) or more of the
Common Stock, (ii) each director and nominee for director, (iii) the executive
officers named in the Summary Compensation Table of the Executive Compensation
and Other Information section of this Proxy Statement and (iv) all current
directors and executive officers as a group. Unless otherwise indicated, each of
the stockholders has sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws, where applicable. Percentage
Shares Of Shares
Beneficially Beneficially
Beneficial Owner Owned Owned (1)
---------------- ------------ ------------
Harry J. Saal Trust UTA Dated 7/19/72 (2).............. 5,604,333 25.6%
Saal Family Charitable Lead Trust UTA Dated 1,118,767 6.4
2/25/98 (3)............................................
Edward W. Savarese (4)................................. 277,600 2.1
A. L. Dubrow (5)....................................... 245,014 1.8
Brian Bonar (6)........................................ 214,464 1.6
David M. Carver (7).................................... 8,333In
regard to Balmore Funds S.A. and Austost Anstalt Schaan, these investors have
contractually agreed pursuant to the Series D Agreement not to hold at any given
time more than 9.999 percent of the outstanding shares of Common Stock.
Percentage
Shares of Common Of Shares Of Common
Stock Beneficially Stock Beneficially
Beneficial Ownership of Common Stock Owned Owned (1)
------------------------------------ ------- ----------
Harry J. Saal Trust UTA Dated 7/19/72 (2)............... 5,604,333 22.1%
Software Technology, Inc.(3)............................ 3,790,000 17.6
American Industries, Inc.(4)............................ 3,172,099 15.4
Balmore Funds S.A. (5).................................. 3,000,000 13.2
Austost Anstalt Schaan (6).............................. 3,000,000 13.2
Filter International Corp. (7).......................... 2,274,521 7.9
The Cuttyhunk Fund Limited (8).......................... 1,500,000 7.0
Saal Family Charitable Lead Trust UTA Dated
2/25/98 (9)........................................... 1,118,767 5.5
Edward W. Savarese (10)................................. 300,000 1.5
A. L. Dubrow (11)....................................... 224,940 1.1
Brian Bonar (12)........................................ 108,125 *
Christopher McKee (13).................................. 60,833 *
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Percentage
Shares of Common Of Shares Of Common
tock Beneficially Stock Beneficially
Owned Owned (1)
------- ----------
Frank Leonardi (14)..................................... 55,729 *
Joseph Pfeuffer (15).................................... 55,000 *
David M. Carver (16).................................... 30,000 *
Philip Englund (17)..................................... 17,000 *
Warren T. Lazarow (16).................................. 10,000 *
All current directors and executive officers
as a group
(9 persons) (18)....................................... 6,465,960 24.9
* Warren T. Lazarow (7).................................. 8,333 *
All current directors and 6,080,477 27.4
executive officers as a group
(9 persons) (8)......................................
* LessRepresents less than one percent of the outstanding Common StockStock.
(1) Percentage of ownership is based on 16,320,15519,820,915 shares of Common Stock
outstanding on February 10,April 20, 1999. Shares of Common Stock subject to stock
options warrants and convertible securities which are currently
exercisable or convertible or will become exercisable or convertible
within 60 days after February 10,April 20, 1999 are
-21-
deemed outstanding for
computing the percentage of the person or group holding such options,
warrants or convertible securities but are not deemed outstanding for
computing the percentage of any other person or group.
(2) Harry J. Saal is a trustee of the Harry J. Saal Trust UTA Dated
7/19/72, 1955 Bryant Street, Palo Alto, CA 94301. Includes 3,031,073
shares issuable upon exercise of warrants that are currently
exercisable or will become exercisable within 60 days after February 10,April 20,
1999. Includes also 2,470,000 shares issuable upon the conversion of
Series E PreferredStock into shares of Common Stock assuming that the conversion
rate used is $.50 (see "Proposal 5 Approval of the Issuance of
Additional Shares of Common Stock Upon Conversion of Series E
Convertible Preferred Stock"). Includes also 100,000 shares issuable
upon exercise of stock options that are currently exercisable or will
become exercisable within 60 days after February 10,April 20, 1999.
(3) The address of the beneficial owner is Software Technology, Inc., #501
Dongwoo Building, Kangnam Gu, Seoul, South Korea 135-80, Attn: Woo
Young Kim. Includes 1,000,000 shares issuable upon the conversion of
100 outstanding shares of Series E Stock (see "Proposal 5 Approval of
the Issuance of Additional Shares of Common Stock Upon Conversion of
Series E Convertible Stock"). Includes also 70,000 shares issuable upon
exercise of warrants, including 500,000 shares issuable upon exercise
of Series E Warrants, that are currently exercisable or will become
exercisable within 60 days after April 20, 1999.
If Proposals 4 and 5 of this proxy statement are approved by a majority
of the shares of Common Stock entitled to vote at the Meeting, Software
Technology, Inc. could, if it converted all or a significant portion of
its Series E Stock and/or exercised all or a significant portion of its
Series E Warrants exercise significant control over the Company.
(4) The address of the beneficial owner is American Industries, Inc., 1750
N.W. Front Avenue, Suite 106, Portland, Oregon 97209, Attn.: Howard
Hedinger, President. Includes 340,000 shares of common stock issuable
upon exercise of warrants. Includes also 432,099 shares of common stock
-23-
issuable upon conversion of a convertible subordinated promissory note.
The information contained in this footnote is based solely upon
information contained in a Schedule 13D/A dated April 5, 1999 filed
with the SEC and the Company by American Industries, Inc.
(5) The address of the beneficial owner is Trident Chambers, P.O. Box 146,
Roadstown Tortola, British Virgin Islands, Attn.: Francois Morax.
Includes 2,000,000 shares issuable upon the conversion of (i) 375
outstanding shares of Series D Stock and (ii) 125 shares of Series D
Stock to be issued within two business days of the declaration of
effectiveness of the Registration Statement by the SEC, into shares of
Common Stock (see "Proposal 4 Approval of the Issuance of Additional
Shares of Common Stock Upon Conversion of Series D Convertible Stock").
Includes also 1,000,000 shares issuable upon exercise of Series D
Warrants that are currently exercisable or will become exercisable
within 60 days after April 20, 1999.
If Proposals 4 and 5 of this proxy statement are approved by a majority
of the shares of Common Stock entitled to vote at the Meeting, Balmore
Funds S.A. could, if it converted all or a significant portion of its
Series D Stock and/or exercised all or a significant portion of its
Series D Warrants, exercise significant control over the Company.
However, pursuant to the Series D Agreement, Balmore Funds S.A. has
agreed that it can in no event, without providing prior notice to the
Company of at least 75 days, convert Series D Stock into shares of
Common Stock if such conversion would cause its holding of shares of
Common Stock to be greater than 9.999 percent of the outstanding shares
of Common Stock. Furthermore, pursuant to the Series D Agreement,
Balmore S.A. has agreed that it may not vote more than 9.999 percent of
the shares of Common Stock entitled to vote at a stockholders' meeting
on any given matter.
(6) The address of the beneficial owner is 744 Fuerstentum, Landstrasse
163, Lichtenstein, Attn.: Thomas Hackl. Includes 2,000,000 shares
issuable upon the conversion of (i) 375 outstanding shares of Series D
Stock and (ii) 125 shares of Series D Stock to be issued within two
business days of the declaration of effectiveness of the Registration
Statement by the SEC, into shares of Common Stock (see "Proposal 4
Approval of the Issuance of Additional Shares of Common Stock Upon
Conversion of Series D Convertible Stock"). Includes also 1,000,000
shares issuable upon exercise of Series D Warrants that are currently
exercisable or will become exercisable within 60 days after April 20,
1999.
If Proposals 4 and 5 of this proxy statement are approved by a majority
of the shares of Common Stock entitled to vote at the Meeting, Austost
Anstalt Schaan could, if it converted all or a significant portion of
its Series D stock and/or exercised all or a significant portion of its
Series D Warrants, exercise significant control over the Company.
However, pursuant to the Series D Agreement, Austost Anstalt Schaan has
agreed that it can in no event, without providing prior notice to the
Company of at least 75 days, convert Series D Stock into shares of
Common Stock if such conversion would cause its holding of shares of
Common Stock to be greater than 9.999 percent of the outstanding shares
of Common Stock. Furthermore, pursuant to the Series D Agreement,
Austost Anstalt Schaan has agreed that it may not vote more than 9.999
percent of the shares of Common Stock entitled to vote at a
stockholders' meeting on any given matter.
(7) The address of the beneficial owner is Filter International Corp., c/o
DOB 43272, Harnof, Jerusalem, Israel, Attn.: A.C. Davis. Includes
1,000,000 shares issuable upon the conversion of 100 outstanding shares
of Series E Stock (see "Proposal 5 Approval of the Issuance of
Additional Shares of Common Stock Upon Conversion of Series E
Convertible Stock"). Includes also 700,000 shares issuable upon
exercise of warrants, including 500,000 shares issuable upon exercise
of Series E
-24-
Warrants, that are currently exercisable or will become exercisable
within 60 days after April 20, 1999.
If Proposals 4 and 5 of this proxy statement are approved by a majority
of the shares of Common Stock entitled to vote at the Meeting, Filter
International Corp. could, if it converted all or a significant portion
of its Series E Stock and/or exercised all or a significant portion of
its Series E Warrants, exercise significant control over the Company.
The information in this footnote has been furnished to the Company by
Filter International Corp. pursuant to a selling stockholder
questionnaire. The number of shares beneficially owned by Filter
International Corp. disclosed in the beneficial ownership table is as
of March 16, 1999.
(8) The address of the beneficial owner is 73 Front Street, Hamilton, HM12,
Bermuda, Attn.: Geoffrey M. Lewis. Includes 1,000,000 shares issuable
upon the conversion of 100 outstanding shares of Series E Stock (see
"Proposal 5 Approval of the Issuance of Additional Shares of Common
Stock Upon Conversion of Series E Convertible Stock"). Includes also
500,000 shares issuable upon exercise of Series E Warrants that are
currently exercisable or will become exercisable within 60 days after
April 20, 1999.
If Proposals 4 and 5 of this proxy statement are approved by a majority
of the shares of Common Stock entitled to vote at the Meeting, The
Cuttyhunk Fund Limited could, if it converted all or a significant
portion of its Series E stock and/or exercised all or a significant
portion of its Series E Warrants, exercise significant control over the
Company. The information in this footnote has been furnished to the
Company by The Cuttyhunk Fund Limited pursuant to a selling stockholder
questionnaire. The number of shares beneficially owned by The Cuttyhunk
Fund Limited disclosed in the beneficial ownership table is as of March
16, 1999.
(9) Leonard J. Shustek is the trustee of the Saal Family Charitable Lead
Trust UTA Dated 2/25/98, 1955 Bryant Street, Palo Alto, CA 94301.
(Harry J. Saal has no beneficial ownership interest in any of the
shares of this trust). Includes 330,000 shares issuable upon the
conversion of Series E PreferredStock into shares of Common Stock assuming that
the conversion rate used is $.50 (see "Proposal 5 Approval of the
Issuance of Additional Shares of Common Stock Upon Conversion of Series
E Convertible Preferred Stock"). Includes also 165,000 shares issuable
upon exercise of stock options that are currently exercisable or will
become exercisable within 60 days after February 10,April 20, 1999.
(4)(10) Includes 137,500300,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after
February
10,April 20, 1999.
(5)(11) Includes 20,61226,240 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after
February 10,April 20, 1999.
(6)(12) Includes 206,458108,125 shares issuable upon exercise of options and warrants
that are currently exercisable or will become exercisable within 60
days after February 10,April 20, 1999.
(7) Represents 8,333(13) Includes 20,833 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after
February
10,April 20, 1999.
(8)(14) Includes 5,844,80955,729 shares issuable upon exercise of options and warrants that are
currently exercisable or will become exercisable within 60 days after
February 10,April 20, 1999.]
-25-
(15) Includes 15,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after
April 20, 1999.
(16) Includes 10,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after
April 20, 1999.
(17) Includes 5,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after
April 20, 1999.
(18) Includes 6,465,960 shares issuable upon exercise of options and
warrants and conversion of Series E Stock that are currently
exercisable or will become exercisable within 60 days after April 20,
1999.
Shares of Percentage of Shares
Series D Stock of Series D Stock
Beneficial Ownership of Series D Stock Beneficially Owned Beneficially Owned (1)
-------------------------------------- ------------------ ----------------------
Balmore Funds S.A. (2).............................. 375 42.86%
Austost Anstalt Schaan (3).......................... 375 42.86
Nesher, Inc. (4).................................... 75 8.56
Guarantee & Finance Corp. (5)....................... 50 5.71
(1) Percentage of ownership is based on 875 shares of Series D Stock
outstanding on April 20, 1999. Within two business days of the
declaration of effectiveness of the Registration Statement by the SEC,
the Company will issue an additional 325 shares of Series D Stock.
(2) The address of the beneficial owner is Trident Chambers, P.O. Box 146,
Roadstown Tortola, British Virgin Islands, Attn.: Francois Morax.
Balmore Funds S.A. will be issued an additional 125 shares of Series D
Stock within two business days of the declaration of effectiveness of
the Registration Statement by the SEC.
(3) The address of the beneficial owner is 744 Fuerstentum, Landstrasse
163, Lichtenstein, Attn.: Thomas Hackl. Austost Anstalt Schaan will be
issued an additional 125 shares of Series D Stock within two business
days of the declaration of effectiveness of the Registration Statement
by the SEC.
(4) The address of the beneficial owner is Ragnall House, 18 Peel Road,
Douglas, Isle of Man, 1M14L2 United Kingdom, Attn.: John Clarke.
Nesher, Inc. will be issued an additional 25 shares of Series D Stock
within two business days of the declaration of effectiveness of the
Registration Statement by the SEC.
(5) The address of the beneficial owner is Vallarino P.H., Calle 52, Elvimo
Mendez, Panama City, Panama, Attn.: Ricardo Durling. Guarantee &
Finance Corp. will be issued an additional 50 shares of Series D Stock
within two business days of the declaration of effectiveness of the
Registration Statement by the SEC.
-26-
Percentage of Shares of
Shares of Series E Stock Series E Stock
Beneficial Ownership of Series E Stock Beneficially Owned(1) Beneficially Owned(1)
-------------------------------------- ------------------------ ----------------------
Harry J. Saal Trust
UTA Dated 7/19/92................................. 247 28.0%
The Cuttyhunk Fund Limited.......................... 100 11.4
Filter International Corp. ......................... 100 11.4
Software Technology, Inc............................ 100 11.4
Gilston Corporation, Ltd. (2)....................... 50 5.7
Manchester Asset Management (3)..................... 50 5.7
Saal Family Charitable Lead Trust UTA
Dated 2/25/98..................................... 33 3.8
(1) Percentage of ownership is based on 881 shares of Series E Stock
outstanding on April 20, 1999. Within two business days of the
declaration of effectiveness of the Registration Statement by the SEC,
the Company would issue an additional 50 shares of Series E Stock.
(2) The address of the beneficial owner is Charlotte House, Charlotte
Street, P.O. Box N-9204, Nassau, Bahamas, attention Ms. Dawn Davies.
Gilston Corporation, Ltd. will be issued an additional 25 shares of
Series E Stock within two business days of the declaration of
effectiveness of the Registration Statement by the SEC.
(3) The address of the beneficial owner is Charlotte House, Charlotte
Street, P.O. Box N-9204, Nassau, Bahamas, attention Anthony L.M. Inder
Rieden. Manchester Asset Management will be issued an additional 25
shares of Series E Stock within two business days of the declaration of
effectiveness of the Registration Statement by the SEC.
-27-
EXECUTIVE OFFICERS
The executive officers of the Company as of February 12,March 24, 1999, are as
follows:
Name Age Position
- ---- --- --------
Brian Bonar................Bonar.................... 51 President, Chief Executive Officer
and Director
Michael K. Clemens......... 51 Senior Vice President and Chief
Financial Officer
Joseph J. Pfeuffer.........Pfeuffer............. 53 Senior Vice President of Engineering
-22-
Frank Leonardi.............Leonardi................. 53 Senior Vice President of Worldwide
Sales and Marketing
Philip J. Englund.............. 55 Senior Vice President, General
Counsel and Secretary
Christopher W. McKee.......McKee........... 50 Vice President of Finance and
Administration
Brian Bonar has been nominated to serve as a director of the Company.
See "Proposal 1 Election of the Board" for a discussion of Mr. Bonar's business
experience.
Michael K. Clemens has served as Senior Vice President and Chief
Financial Officer of the Company since August 1998. Prior to joining the
Company, Mr. Clemens served in various capacities, including Chief Financial
Officer, Senior Vice President and Treasurer at SyQuest Technology, Inc. from
July 1996 through August 1998. From April 1994 to July 1996, Mr. Clemens served
as the Vice President--Treasurer of MTI Technology, a computer storage company,
and from May 1993 to April 1994, Mr. Clemens served as a consultant to private
businesses in the high-tech industry. Mr. Clemens served as the Chief Financial
Officer of Bluebird Systems, a privately held software and distribution company,
from April 1992 to April 1993.
Joseph J. Pfeuffer has served as Senior Vice President of Engineering
of the Company since February 1998. Prior to joining the Company, Mr. Pfeuffer
was a Director of Engineering with Adobe Systems, Inc. during 1996 and 1997
where he was responsible for Postscript-Registration Mark- controller
development. From 1990 to 1996 Mr. Pfeuffer was a Director of Engineering with
Output Technology responsible for electronic and software engineering. Mr.
Pfeuffer holds a B.S. degree from Stevens Institute of Technology and a Masters
of Business Administration from Washington University.
Frank Leonardi has served as Senior Vice President of Worldwide Sales
and Marketing of the Company since September 1998. Prior to joining the Company,
Mr. Leonardi served as an independent consultant for over five years providing
sales management consulting for various domestic and international markets for
numerous companies. Mr. Leonardi holds a B.S. degree from Iona College.
Philip J. Englund has served as Senior Vice President, General Counsel
and Secretary of the Company since February 1999. Prior to joining the Company,
Mr. Englund served as general counsel to a number of companies on a contract
basis from October 1997 through February 1999, as he had done form April 1995
through November 1996. He served as Senior Vice President, General Counsel and
Secretary to The Titan Corporation from November 1996 through October 1997; and
as Vice President and General Counsel to Optical Radiation Corporation from
November 1986 through April 1995.
Christopher W. McKee has served as Vice President of Finance and
Operations of the Company since August 1998. Prior to joining the Company, Mr.
McKee spent 23 years with Flowserve Corporation and its predecessor company,
BW/IP, Inc., in various financial management positions, including most recently
as its Director of Information Technology and Baan Implementation. Mr. McKee
holds a masters in business administration from Pepperdine University.
-28-
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning the
compensation earned by each of the Company's Chief Executive Officers for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1996, 1997 and 1998. None of the Company's other
executive officers were paid a salary and bonus for the 1998 Fiscal Year in
excess of $100,000. The listed individuals shall be hereinafter referred to as
the "Named Officers."
-23-
SUMMARY COMPENSATION TABLE
Long Term
Compensation
-----------------------------
Annual Compensation Awards
-------------------------------------------------- ----------------- -----------------------------
Other
Other Compen-
Fiscal Annual Options/ Compen-sation
Name and Principal Position Year Salary Bonus Compensation SARS (#) sation (4)(5)
- ------------------------------- --------- ---------- -------------------- ----------------- ----------------------------- -----------
*Brian Bonar................... 1998 $ 235,243 $ -- $ -- 450,000 $ --
Director, President and Chief 1997 173,391 -- -- 150,000 --
Executive Officer 1996 155,648 -- 12,009 (1)(2) 750,000 --
*Edward W. Savarese............ 1998 270,000 85,00085,000(1) 210,973 (2)(3) 300,000 --
Director and Chief Executive 1997 255,000 -- 38,235 150,000 --
Officer 1996 246,792 -- 72,850 (1)(4) 1,675,000 4,710
- ----------------
* Dr. Savarese resigned as the Chief Executive Officer of the Company on
April 1, 1998, and as director of the Company as of June 15, 1998. Mr.
Bonar was appointed as Chief Executive Officer of the Company on April
1, 1998.
(1) This amount includes $40,000 of deferred bonuses from the fiscal year
of 1997 (the "1997 Fiscal Year").
(2) This amount includes $12,009 of accrued but unpaid vacation due to Mr.
Bonar that was converted into unregistered shares of Common Stock.
(2)(3) This amount includes $75,000, which represents the compensation deemed
paid to Dr. Savarese upon exercise of certain warrants to purchase
75,000 shares of Common Stock, and $56,362 for accrued vacation
benefits that were paid to Dr. Savarese.
(3)(4) This amount includes $42,500 for accrued vacation benefits and $30,350
of accrued but unpaid compensation due to Dr. Savarese that was
converted into unregistered shares of Common Stock.
(4)(5) This amount represents the total insurance premiums paid for term life
insurance for the benefit of Dr. Savarese for fiscal 1996. For fiscal
1997, the policy was converted to a whole life policy.
-29-
Option/SAR Grants in Last Fiscal Year
The following table provides information on options/SARs granted in the
1998 Fiscal Year to the Named Officers.
Number of Percentercent of Total Potential Realizable
Securities Options/sarsSARs Exercise Value at Assumed
Underlying Granted to Or Base Annual Rates of Stock
Options/sarsSARs Employees in Price Expiration Price Appreciation for
Name Granted (#) (1) Fiscal Year ($/share) Date Option Term
- ------------------- ------------------------------------- ---------------- --------------- ----------- ----------------- ---------------------------------------------------------
5% ($) 10% ($)
------------ -------------
Brian Bonar 200,000 12.78% $4.00 January 30, 2008 $503,116 $1,274,994
Brian Bonar 200,000 15.98 3.00 April 1, 2008 471,671 1,195,307
Edward W. Savarese* 200,000 19.17 4.00 January 30, 2008 754,674 1,912,491
-24-
* Dr. Savarese resigned as the Chief Executive Officer of the Company on
April 1, 1998, and as a director of the Company as of June 15, 1998.
(1) Warrants become exercisable monthly over 48 months from date of grant.
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-end
Option/SAR Values
The following table provides information on option exercises in the
1998 Fiscal Year by the Named Officers and the value of such Named Officers'
unexercised options at June 30, 1998. Warrants to purchase Common Stock are
included as options. No stock appreciation rights were exercised by the Named
Officers during the 1998 Fiscal Year, and no stock appreciation rights were held
by them at the end of the 1998 Fiscal Year.
Shares Value Number of Securities Value of Unexercised
Acquired on ealizedRealized (#) Underlying Unexercised In-the-money Options/sarsSARs
Name Exercise (#) R Options/sarsSARs at FY-end (#) At Fiscal Year End ($) (1)
- -------------------- --------------- ------------- ---------------------------------- -----------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- ---------------- ------------- -----------------
Brian Bonar 40,000 $216,250 131,458 513,542 $143,047 $205,078
Edward W. Savarese* 75,000 119,550 81,250 368,750 -- --
* Dr. Savarese resigned as the Chief Executive Officer of the Company on
April 1, 1998, and as a director of the Company as of June 15, 1998.
(1) At the 1998 Fiscal Year end, the average of the bid and asked price of
the Common Stock on that date as quoted by the NASD Electronic Bulletin
Board was $3.88.
-30-
Employment Contracts, Termination of Employment and Change-in-control
Arrangements
The Company entered into an employment agreement with Dr. Savarese as
of July 1, 1990, which was amended in 1994, 1997 and 1998, calling for
employment through June 30, 2002. MinimumThe salary under the amended agreement,
commencing July 1, 1998, are $188,750.is $198,750 per year.
The Company also entered into an employment agreement with Mr. Bonar
(with Dr. Savarese, the "Executives"), effective September 1, 1994, and amended
April 1, 1998, calling for employment through June 30, 1999, at an annual base
salary of $250,000 plus incentive bonus.
These employment agreements provide that, in the event of termination
without cause, whether or not occurring in the aftermath of a change in
corporate control, the Company shall pay, within 72 hours after his termination,
his entire salary for the remainder of the entire term, and shall also continue
his fringe benefits for the remainder of the entire term.
In the event of an Executive's death or permanent disability, his
salary shall continue during the entire term, and his stock options shall be
exercisable until two years after his death or permanent disability.
-25-
An Executive shall be entitled to severance pay equal to one-half of
his fiscal 1999 annual salary if his employment terminates upon the scheduled
expiration of the employment agreement, or if he is terminated without cause
within six months before the scheduled expiration of the employment agreement.
The Company entered into an employment letter agreement with Mr.
ClemensLeonardi as of September 1, 1998, callingwhich calls for a base monthly salary of
$16,500.$16,500 and entitles Mr. Leonardi to bonuses based on services provided to the
Company in addition to the services provided to the Company pursuant to his
position as Senior Vice President of Worldwide Sales and Marketing. In addition,
Mr. Leonardi may earn commissions based on sales targets achieved by the
Company. Pursuant to the terms of his letter agreement, Mr. Clemens is eligible for
certain bonuses, including a bonus based on equity financing received, certain
quarterly incentive bonuses and a delayed starting bonus. HeLeonardi also
received
certain stock option grants pursuant to the terms of the Company's employee
stock option plan and presently receives certain other employee benefits, including among others, certain medical benefits and
eligibility to be part of the Company 401(k) plan. Mr. Leonardi's employment
with the Company is "at-will" and may be terminated at any time.
The Company entered into an employment letter agreement with Mr. LeonardiEnglund as of
September 1, 1998, callingFebruary 22, 1999, which calls for a base monthly salary of $33,334.34 with certain additional commission payments based on business
developed.$11,667.67 for a
term of three years. Pursuant to the terms of his letteremployment agreement, Mr. Leonardi also
received certain stock option grants pursuantEnglund is
eligible for the following bonuses:
o $5,000 quarterly bonuses based upon achievement of objectives to be
mutually agreed-upon by Mr. Englund and the termsCompany's chief
executive officer; and
o at the sole discretion of the Company's
warrant guidelines and presentlyCompany, Mr. Englund may receive from
time to time additional compensation or benefits.
In addition, Mr. Englund also receives certain other employee benefits, including among others,
certain medical benefits and eligibility to be part of the Company 401(k) plan.
Mr. Englund's employment agreement provides that, in the event of
termination without cause, termination for good reason or pursuant to change in
corporate control, the Company shall pay, within 72 hours after his termination,
an amount equal to six months of his salary together with any other compensation
or benefits owed to him by the Company. In the event of his death or permanent
disability, his salary shall
-31-
continue during the entire term, and his stock options shall be exercisable
until two years after his death or permanent disability. Mr. Englund shall be
entitled to severance pay equal to one-half of his annual salary if his
employment terminates upon the scheduled expiration of the employment agreement
or if he is terminated without cause within six months before the scheduled
expiration of the employment agreement.
The Company entered into an employment letter agreement with Mr. McKee
as of August 3, 1998, calling for a base monthly salary of $11,750. Pursuant to
the terms of his letter agreement, Mr. McKee is eligible for certain bonuses,
including certainthe following
bonuses:
o quarterly incentive bonuses.bonus based on the Company achieving quarterly sales and
profit objectives; and
o at the sole discretion of the Board, Mr. McKee may receive from time
to time a percentage of the Company's net income.
He also received certain100,000 stock option grants pursuant to the terms of
the Company's employee stock option plan and presently receives certain other employee
benefits, including among others, certain medical benefits and eligibility to be part of the
Company 401(k) plan. Mr. McKee's employment with the Company is "at-will" and
may be terminated at any time.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Dr. Saal and Mr.
Carver. None of these individuals was an officer or employee of the Company at
any time during the 1998 Fiscal Year or at any other time.
No current executive officer of the Company has ever served as a member
of the Board or Compensation Committee of any other entity that has or has had
one or more executive officers serving as a member of the Board or Compensation
Committee.
Compensation Committee Report on Executive Compensation
It is the duty of the Compensation Committee to review and determine
the salaries and bonuses of executive officers of the Company, including the
Chief Executive Officer, and to establish the general compensation policies for
such individuals. The Compensation Committee also has the sole and exclusive
authority to make discretionary option grants to the Company's executive
officers under the Company's stock option plan.
The Compensation Committee believes that the compensation programs for
the Company's executive officers should reflect the Company's performance and
the value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
-26-
General Compensation Policy. The Compensation Committee's policy is to
provide the Company's executive officers with compensation opportunities which
are based upon their personal performance, the
-32-
financial performance of the Company and their contribution to that performance
and which are competitive enough to attract and retain highly skilled
individuals. Each executive officer's compensation package is comprised of three
elements: (i) base salary that is competitive with the market and reflects
individual performance, (ii) annual variable performance awards payable in cash
and tied to the Company's achievement of annual performance goals and (iii)
long-term stock-based incentive awards designed to strengthen the mutuality of
interests between the executive officers and the Company's stockholders. As an
officer's level of responsibility increases, a greater proportion of his or her
total compensation will be dependent upon the Company's financial performance
and stock price appreciation rather than base salary.
Factors. The principal factors that were taken into account in
establishing each executive officer's compensation package for the 1998 Fiscal
Year are described below. However, the Compensation Committee may in its
discretion apply entirely different factors, such as different measures of
financial performance, for future fiscal years.
Base Salary. In setting base salaries, the Compensation Committee
attempted to keep the base salaries of the Company's officers at a level around
the median range of the salaries of officers in comparable companies. The
Compensation Committee also considered each individual's personal performance
and internal alignment considerations. The relative weight given to each factor
varies with each individual in the sole discretion of the Compensation
Committee. Each executive officer's base salary is adjusted each year on the
basis of (i) the Compensation Committee's evaluation of the officer's personal
performance for the year and (ii) the competitive marketplace for persons in
comparable positions. The Company's performance and profitability may also be a
factor in determining the base salaries of executive officers.
Annual Incentives. The annual incentive bonusbonuses for the Company's
executive officers isare granted pursuant to the terms and conditions of an
executive officer's employment agreement and based on a percentage of hisan
executive officer's base pay butwhich is adjusted to reflect the actual financial
performance of each executive officer and the achievement of Company goals
during the year. If an executive officer's employment agreement does not call
for annual incentive bonuses then an executive officer will not receive the
bonuses. Based on these criteria, only Dr. Savarese received a bonusbonuses in the 1998
Fiscal Year. Dr. Savarese's employment agreement provided that a bonus of
$15,000 be paid to him for each fiscal quarter the Company achieved pre-tax
profits. In 1998, the Company had pre-tax profits in the first three quarters of
the year and, accordingly, Dr. Savarese earned bonuses totaling $45,000 in the
Fiscal Year 1998. Subsequent target bonuses pursuant to Dr. Savarese's
employment agreement were not met and therefore no further bonuses were paid to
him for the Fiscal Year 1998. In addition, Dr. Savarese received $40,000 in
annual incentive bonuses which was earned in the Fiscal Year 1997 but not paid
until the Fiscal Year 1998.
Long-term Incentives. Generally, stock option grants or other forms of
stock-based incentive awards are made annually by the Compensation Committee to
each of the Company's executive officers. Each grant is designed to align the
interests of the executive officer with those of the stockholders and provide
each individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the business. Each grant allows
the officer to acquire shares of Common Stock at a fixed price per share (the
market price on the grant date) over a specified period of time (up to ten
years). Each option becomes exercisable in a series of installments over a
four-year period, contingent upon the officer's continued employment with the
Company. Accordingly, the option will provide a return to the executive officer
only if he or she remains employed by the Company during the vesting period, and
then only if the market price of the shares appreciates over the option term.
-33-
The size of the option grant to each executive officer, including the
Chief Executive Officer, is set by the Compensation Committee at a level that is
intended to create a meaningful opportunity for stock ownership based upon the
individual's current position with the Company, the individual's personal
performance in recent periods and his or her potential for future responsibility
and promotion over the option term. The Compensation Committee also takes into
account the number of unvested options held by the executive officer in order to
maintain an appropriate level of equity incentive for that individual. The
relevant weight given to each of these
-27-
factors varies from individual to
individual. The Compensation Committee has established certain guidelines with
respect to the option grants made to the executive officers, but has the
flexibility to make adjustments to those guidelines at its discretion.
CEO Compensation. In setting the total compensation payable to the two
individuals that served as the Company's Chief Executive Officer during the 1998
Fiscal Year, the Compensation Committee sought to make their compensation
competitive with the compensation paid to the chief executive officers of
companies of similar size, in comparable industries, while at the same time
assuring that a significant percentage of compensation was tied to Company
performance and stock price appreciation.
For the 1998 Fiscal Year, the Compensation Committee believes that Dr.
Savarese's and Mr. Bonar's base salaries ($270,000 and $235,243, respectively)
were approximately at the median of the base salary levels of other chief
executive officers at comparable companies. Dr. Savarese's base salary was paid
pursuant to the terms of his employment agreement originally signed in 1990. Mr.
Bonar's base salary was increased on becoming the Company's Chief Executive
Officer in consideration of the additional responsibilities of such position.
The remaining components of Dr. Savarese's and Mr. Bonar's 1998 Fiscal
Year compensation, however, were primarily dependent upon corporate performance.
Dr. Savarese was eligible for a cash bonus for the 1998 Fiscal Year conditioned
on the Company's attainment of business plan objectives. ADr. Savarese earned an
$85,000 bonus was
paid to him for the 1998 Fiscal Year because the Company attained certain of
these objectives.objectives and also had achieved certain business plan objectives in the
1997 Fiscal Year, with such 1997 Fiscal Year bonuses having been deferred for
payment in the 1998 Fiscal Year. Mr. Bonar was not eligible for a cash bonus for
the 1998 Fiscal Year in his role as Chief Executive Officer because he served in
that position for only approximately three months during the 1998 Fiscal Year.
The Compensation Committee granted stock-based incentive awards to Dr. Savarese
and Mr. Bonar in the 1998 Fiscal Year in order to provide them with an equity
incentive to continue contributing to the financial success of the Company. Dr.
Savarese's incentive awards totaled 300,000 shares and Mr. Bonar's incentive
awards totaled 450,000 shares during the 1998 Fiscal Year. These incentive
awards will have value for Dr. Savarese and Mr. Bonar only if the market price
of the underlying shares appreciates over the market price in effect on the date
the grant was made.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Code disallows a tax deduction to publicly held companies for compensation
paid to certain of their executive officers, to the extent that compensation
exceeds $1 million per covered officer in any fiscal year. The limitation
applies only to compensation which is not considered to be performance-based.
Non-performance based compensation paid to the Company's executive officers for
the 1998 Fiscal Year did not exceed the $1 million limit per officer, and the
Compensation Committee does not anticipate that the non-performance based
compensation to be paid to the Company's executive officers for the 1998 Fiscal
Year will exceed that limit. Because it is unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1 million limit, the Compensation Committee has decided at
this time not to take any action to limit or restructure the elements of cash
compensation payable to the Company's
-34-
executive officers. The Compensation Committee will reconsider this decision
should the individual cash compensation of any executive officer ever approach
the $1 million level.
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders through the use of competitive and equitable executive compensation
in a balanced and reasonable manner, for both the short-and long-term.
Submitted by the Compensation Committee.
-28-
Stock Performance Graph
The graph depicted below shows a comparison of cumulative total
stockholder returns for the Company, the Nasdaq Stock Market (U.S.) Index and
the Nasdaq Computer & Data Processing Index.
CUMULATIVE TOTAL RETURN
-----------------------------------------------------------------------------------------------------------------------------------
6/94 6/95 6/96 6/97 6/98
IMAGING TECHNOLOGIES CORPORATION 100.00 33.93 403.57 198.66 138.39
NASDAQ STOCK MARKET (U.S.) 100.00 133.50 171.39 208.36 274.93
NASDAQ COMPUTER & DATA PROCESSING 100.00 163.26 216.84 273.73 414.38
(1) The graph covers the period from July 1, 1993 to June 30, 1998.
(2) The graph assumes that $100 was invested in the Company on July 1,
1993, in the Common Stock and in each index, and that all dividends
were reinvested. No cash dividends have been declared on the Common
Stock.
(3) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings made under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, that might incorporate future
filings made by the Company under those statutes, neither the preceding Stock
Performance Graph nor the Compensation Committee Report is to be incorporated by
reference into any such prior filings, nor shall such graph or report be
incorporated by reference into any future filings made by the Company under
those statutes.
CERTAIN TRANSACTIONS
Irwin Roth, a former director of the Company, receives compensation as
a consultant to the Company on corporate matters under an agreement expiring in
June 2002. These consulting fees amounted to $120,000 in the 1998 Fiscal Year.
Effective July 1, 1998, the annual consulting fee under the agreement was
reduced to $55,583. During the 1998 Fiscal Year, 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 $200,000
of which $100,000 was paid in cash and $100,000 was used to exercise warrants
for 100,000 shares at a price of $1.00 per share.
-35-
During calendar year 1995, Dr. Edward W. Savarese, a former director
and the former Chief Executive Officer of the Company, loaned to the Company an
aggregate of $100,000 under a convertible note with interest at the rate of 7
percent per year. In May 1998, the note was converted into 64,516 shares of
Common Stock. Dr. Savarese was also a director of Color Solutions, Inc., which
was acquired by the Company in November 1997 through the issuance of Common
Stock. In connection with the acquisition, Dr.
Savarese received 40,000 shares of Common Stock.
In January 1996, the Company sold to Dr. Saal for $500,000 five-year
warrants to purchase 2,000,000 shares of its Common Stock at the rate of $5.00
per share. The warrant contained certain anti-dilution provisions should the
Company issue equity instruments at less than 50 percent of the exercise price.
As a result of
-29-
subsequent financings, the exercise price of this warrant has
been reduced as a result of this provision. In June and December 1996, Dr. Saal
exercised warrants to purchase 666,667 and 18,000 shares, respectively.
In May 1998, Dr. Harry Saal, a director of the Company, loaned
$1,000,000 to the Company under a 10 percent note payable on demand at any time
on or after December 31, 1998 (the "Saal 10% Note"). The note is convertible
into Common Stock at anytime at Dr. Saal's option at the lesser of $2.36 per
share or 85 percent of the volume weighted trade price of Common Stock on the
date of conversion.
In September 1998, Dr. Saal and certain other investors (either
individually or as part of a group), all of which were owners of more than 5
percent of the Company's outstanding Common Stock, provided the Company with
funding totaling $4,375,000. In exchange, the Company issued 500,000 shares of
its Common Stock at a price of $2.50 per share and subordinated promissory notes
in the amount of $3,125,000. Of the notes, Dr. Saal purchased $1,500,000 in the
form of non-convertible notes (the "Saal Non-convertible Notes"). The Company
also issued three-year warrants to the investors as part of this financing. The
warrants authorize the purchase of 490,000 shares of Common Stock at an exercise
price of $2.025 per share: Dr. Saal received 300,000 of these warrants. All of
the investors, including Dr. Saal, are parties to a Registration Rights
Agreement that grants certain registrations rights with respect to the shares of
Common Stock purchased in the financing and issuable upon exercise of the
warrants.
In February 1999, pursuant to the Series E Agreement, of which Dr. Saal
was an investor, Dr. Saal exchanged and/or canceled the Saal 10% Note, all
accrued interest and fees associated therewith, certain accrued interest on the
Saal Non-convertible Notes and all accrued director's fees, in the amount of
$1.235 million, for 247 shares of the Company's Series E Preferred.Stock. Also pursuant to
such Series E Agreement became a party to a Registration Rights Agreement that
grants Dr. Saal certain registration rights with respect to the shares of Common
Stock underlying the Series E Securities.Stock and Series E Warrants. See "Proposal 5
Approval of the Issuance of the Company's Securities Pursuant to a Securities
Purchase Agreement Relating to Series E Convertible Preferred Stock."
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The members of the Board, the executive officers of the Company and
persons who hold more than 10 percent of the Company's outstanding Common Stock
are subject to the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934 which require them to file reports with respect to their
ownership of the Common Stock and their transactions in such Common Stock. Based
upon (i) the copies of Section 16(a) reports which the Company received from
such persons for their 1998 Fiscal Year transactions in the Common Stock and
their Common Stock holdings, and (ii) the written representations received from
-36-
one or more of such persons that no annual Form 5 reports were required to be
filed by them for the 1998 Fiscal Year, the Company believes that all reporting
requirements under Section 16(a) for such fiscal year were met in a timely
manner by its directors, executive officers and greater than ten percent
beneficial owners except as set forth below.
Mr. Bonar did not timely file a Form 4 with the SEC with respect to one
transaction. In addition, each of Messrs. Stephen MacDonald (former director of
the Company), Carver, Lazarow and Gerry Berg (former Secretary of the Company)
did not timely file a Form 3 with the SEC. In addition, each of Messrs.
MacDonald, Carver, Lazarow and Berg did not timely file a Form 35 with the SEC.
-30-
ANNUAL REPORT
A copy of the Annual Report of the Company for the 1998 Fiscal Year (the
"Annual Report") has been mailed concurrently with this Proxy Statement to all
stockholders entitled to notice of and to vote at the Meeting. The Annual Report
is not incorporated into this Proxy Statement and is not considered proxy
solicitation material.
FORM 10-K
The Company filed an Annual Report on Form 10-K with the SEC on or about
October 13, 1998. Stockholders may obtain a copy of this report, without charge,
by writing to Michael K. Clemens, Chief Financial OfficerPhilip J. Englund, Senior Vice President and General Counsel of
the Company, at the Company's principal executive offices located at 11031 Via Frontera,15175
Innovation Drive, San Diego, California 92127.
-31-92128-3401.
By Order of the Board of Directors
/s/ Brian Bonar
Brian Bonar
President and Chief Executive Officer
April 28, 1999
-37-
Exhibit A
Form of Proposed Amendment to Article Fourth to the
Company's Certificate of Incorporation
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
IMAGING TECHNOLOGIES CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is Imaging Technologies Corporation.
2. The Certificate of Incorporation of the Corporation (hereinafter
called the "Certificate of Incorporation") is hereby amended by deleting the
number 10,000 in the second sentence of Section (1) of Article Fourth and
inserting the number 100,000 in its place.
3. The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Dated: FebruaryApril __, 1999
---------------------------
Brian Bonar, President
Attest:
- ---------------------------------
Michael Clemens, Chief Financial Officer
-32------------------------------------------
Philip J. Englund, Senior Vice President
A-1
Exhibit B
Proposed Form of the 1998 Stock Option Plan
1998 STOCK OPTION PLAN
Of
IMAGING TECHNOLOGIES CORPORATION
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan")
is designed to provide an incentive to employees (including directors and
officers who are employees) and directors of, and consultants to, IMAGING
TECHNOLOGIES CORPORATION, a Delaware corporation (the "Company"), or any Parent
or Subsidiary (as such terms are defined in Paragraph 19 hereof) of the Company,
and to offer an additional inducement in obtaining the services of such persons.
The Plan provides for the grant of "incentive stock options" ("ISOs") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and nonqualified stock options which do not qualify as ISOs ("NQSOs").
The Company makes no representation or warranty, express or implied, as to the
qualification of any option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Paragraph 12 hereof, the aggregate number of shares of Common Stock, $.01 par
value per share, of the Company ("Common Stock") for which options may be
granted under the Plan shall not exceed 1,500,000. Such shares of Common Stock
may consist either in whole or in part of authorized but unissued shares of
Common Stock or shares of Common Stock held in the treasury of the Company.
Subject to the provisions of Paragraph 13 hereof, any shares of Common Stock
subject to an option which for any reason expires, is canceled or is terminated
unexercised or which ceases for any reason to be exercisable, shall again become
available for the granting of options under the Plan. The Company shall at all
times during the term of the Plan reserve and keep available such number of
shares of Common Stock as will be sufficient to satisfy the requirements of the
Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered
by the Compensation Committee (the "Compensation Committee of the Company's
Board of Directors (the "Committee"), which Committee, to the extent required by
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (as
the same may be in effect and interpreted from time to time, "Rule 16b-3"),
shall consist of not less than two (2) directors, each of whom shall be a
non-employee director within the meaning of Rule 16b-3. Unless otherwise
provided in the By-laws of the Company or by resolution of the Board of
Directors, a majority of the members of the Committee shall constitute a quorum,
and the acts of a majority of the members present at any meeting at which a
quorum is present, and any acts approved in writing by all of the members of the
Committee without a meeting, shall be the acts of the Committee. Those
administering the Plan are referred to herein as the "Administrators".
Subject to the express provisions of the Plan, the
Administrators shall have the authority, in their sole discretion, to determine:
the employees, consultants and directors who shall be granted options; whether
an option to be granted to a employee is to be in ISO or an NQSO (options to be
granted to consultants and directors who are not employees shall be NQSOs); the
times when an option shall be granted; the number of shares of Common Stock to
be subject to each option; the term of each option; the date each option shall
become exercisable; whether an option shall be exercisable in whole, in part or
in installments and, if in installments, the -33-
number of shares of Common Stock to
be subject to each installment, whether the
B-1
installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
exercise of any option or installment; whether shares of Common Stock may be
issued upon the exercise of an option as partly paid and, if so, the dates when
future installments of the exercise price shall become due and the amounts of
such installments; the exercise price of each option; the form of payment of the
exercise price; whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and, if so, whether and
under what conditions to waive any such restriction; whether and under what
conditions to subject all or a portion of the grant, the vesting or the exercise
of an option or the shares acquired pursuant to the exercise of an option to the
fulfillment of certain restrictions or contingencies as specified in the
contract referred to in Paragraph 11 hereof (the "Contract"), including, without
limitation, restrictions or contingencies relating to entering into a covenant
not to compete with the Company, any of its Subsidiaries or a Parent (as such
term is defined in Paragraph 19 hereof), to financial objectives for the
Company, any of its Subsidiaries or a Parent, a division of any of the
foregoing, a product line or other category, and/or to the period of continued
employment of the optionee with the Company, any of its Subsidiaries or a
Parent, and to determine whether such restrictions or contingencies have been
met; whether an optionee is Disabled (as such term is defined in Paragraph 19
hereof); the amount, if any, necessary to satisfy the obligation of the Company,
a Subsidiary or Parent to withhold taxes or other amounts; the fair market value
of a share of Common Stock; to construe the respective Contracts and the Plan;
with the consent of the optionee, to cancel or modify an option, provided that
the modified provision is permitted to be included in an option granted under
the Plan on the date of the modification, and provided, further, that in the
case of a modification (within the meaning of Section 424(h) of the Code) of an
ISO, such option as modified would be permitted to be granted on the date of
such modification under the terms of the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; to approve any provision of the Plan
or any option granted under the Plan, or any amendment to either, which under
Rule 16b-3 requires the approval of the Board of Directors, a committee of
non-employee directors or the stockholders in order to be exempt (unless
otherwise specifically provided herein); and to make all other determinations
necessary or advisable for administering the Plan. Any controversy or claim
arising out of or relating to the Plan, any option granted under the Plan or any
Contract shall be determined unilaterally by the Administrators in their sole
discretion. The determinations of the Administrators on the matters referred to
in this Paragraph 3 shall be conclusive and binding on the parties thereto. No
Administrator or former Administrator shall be liable for any action, failure to
act or determination made in good faith with respect to the Plan or any option
hereunder.
4. ELIGIBILITY. The Administrators may from time to time, in
their sole discretion, consistent with the purposes of the Plan, grant options
to (a) employees (including officers and directors who are employees) of, (b)
directors (who are not employees) of, and (c) consultants to, the Company or any
Parent or Subsidiary of the Company. Such options granted shall cover such
number of shares of Common Stock as the Administrators may determine, in their
sole discretion, as set forth in the applicable Contract; provided, however,
that the maximum number of shares subject to options that may be granted to any
employee during any calendar year under the Plan (the "162(m) Maximum") shall be
250,000 shares; and provided, further, that the aggregate market value
(determined at the time the option is granted in accordance with Paragraph 5
hereof) of the shares of Common Stock for which any eligible employee may be
granted ISOs under the Plan or any other plan of the Company, or of a Parent or
a Subsidiary of the Company, which are exercisable for the first time by such
optionee during any calendar year shall not exceed $100,000. Such ISO limitation
shall be applied by taking ISOs into account in the order in which they were
granted. Any option granted in excess of such ISO limitation amount shall be
treated as a NQSO to the extent of such excess.
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5. EXERCISE PRICE. The exercise price of the shares of Common
Stock under each option shall be determined by the Administrators, in their sole
discretion, as set forth in the applicable Contract; provided, however, that the
exercise price of an ISO shall not be less than the fair market value of the
Common Stock subject to such option on the date of grant; and provided, further,
that if, at the time an ISO is granted, the optionee owns (or is deemed to own
under Section 424(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, of any of its
Subsidiaries or of a Parent, the exercise price of such ISO shall not be less
than 110% of the fair market value of the Common Stock subject to such ISO on
the date of grant.
The fair market value of a share of Common Stock on any day
shall be (a) if actual sales price information is available with respect to the
Common Stock, the average of the highest and lowest sales prices per share of
Common Stock on such day, or (b) if such information is not available, the
average of the highest bid and lowest asked prices per share of Common Stock on
such day as reported by the market upon which the Common Stock is quoted, The
Wall Street Journal, the National Quotation Bureau Incorporated or an
independent dealer in the Common Stock, as determined by the Company; provided,
however, that if clauses (a) and (b) of this Paragraph are all inapplicable, or
if no trades have been made or no quotes are available for such day, the fair
market value of the Common Stock shall be determined by the Board of Directors
by any method consistent with applicable regulations adopted by the Treasury
Department relating to stock options.
6. TERM. The term of each option granted pursuant to the Plan
shall be such term as is established by the Administrators, in their sole
discretion, as set forth in the applicable Contract; provided, however, that the
term of each ISO granted pursuant to the Plan shall be for a period not
exceeding ten (10) years from the date of grant thereof; and provided, further,
that if, at the time an ISO is granted, the optionee owns (or is deemed to own
under Section 424(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, any of its
Subsidiaries or a Parent, the term of the ISO shall be for a period not
exceeding five (5) years from the date of grant. Options shall be subject to
earlier termination as hereinafter provided.
7. EXERCISE. An option (or any part or installment thereof),
to the extent then exercisable, shall be exercised by giving written notice to
the Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the applicable Contract permits
installment payments) (a) in cash or by certified check or (b) if the applicable
Contract permits, with previously acquired shares of Common Stock having an
aggregate fair market value on the date of exercise (determined in accordance
with Paragraph 5 hereof) equal to the aggregate exercise price of all options
being exercised or a combination of cash, certified check or shares of Common
Stock having such value. The Company shall not be required to issue any shares
of Common Stock pursuant to any such option until all required payments,
including payments for any required withholding amounts, have been made.
The Administrators may, in their sole discretion (in the
Contract or otherwise), permit payment of the exercise price of an option by
delivery by the optionee of a properly executed notice, together with a copy of
his irrevocable instructions to a broker acceptable to the Administrators to
deliver promptly to the Company the amount of sale or loan proceeds sufficient
to pay such exercise price. In connection therewith, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
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A person entitled to receive Common Stock upon the exercise of
an option shall not have the rights of a stockholder with respect to such shares
of Common Stock until the date of issuance of a stock certificate for
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such
shares or, in the case of uncertificated shares, until the date an entry is made
on the books of the Company's transfer agent representing such shares; provided,
however, that until such stock certificate is issued or until such book entry is
made, any optionee using previously acquired shares of Common Stock in payment
of an option exercise price shall continue to have the rights of a stockholder
with respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be
purchased or issued under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be
expressly provided in the applicable Contract, any optionee whose relationship
with the Company, its Subsidiaries and Parent as an employee, director or
consultant has terminated for any reason (other than as a result of the death or
Disability (as such term is defined in Paragraph 19 hereof) of the Optionee) may
exercise such option, to the extent exercisable on the date of such termination,
at any time within three months after the date of termination, but not
thereafter and in no event after the date the option would otherwise have
expired; provided, however, that if such relationship is terminated either (a)
for Cause (as such term is defined in Paragraph 19 hereof), or (b) without the
consent of the Company, such option shall terminate immediately.
For the purposes of the Plan, an employment relationship shall
be deemed to exist between an individual and the Company, any of its
Subsidiaries or a Parent if, at the time of the determination, the individual
was an employee of such corporation for purposes of Section 422(a) of the Code.
As a result, an individual on military, sick leave or other bona fide leave of
absence shall continue to be considered an employee for purposes of the Plan
during such leave if the period of the leave does not exceed 90 days or, if
longer, so long as the individual's right to reemployment with the Company, any
of its Subsidiaries or a Parent is guaranteed either by statute or by contract.
If the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed by statute or by contract, the employment
relationship shall be deemed to have terminated on the 91st day of such leave.
Notwithstanding the foregoing, except as may otherwise be
expressly provided in the applicable Contract, options granted under the Plan
shall not be affected by any change in the status of the optionee so long as the
optionee continues to be an employee or director of, or a consultant to, the
Company, any of its Subsidiaries or a Parent (regardless of having changed from
one position to another or having been transferred from one entity to another).
Nothing in the Plan or in any option granted under the Plan
shall confer on any optionee any right to continue in the employ of, as a
director of, or as a consultant to, the Company, any of its Subsidiaries or a
Parent, or interfere in any way with any right of the Company, any of its
Subsidiaries or a Parent to terminate the optionee's relationship at any time
for any reason whatsoever without liability to the Company, any of its
Subsidiaries or a Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise
be expressly provided in the applicable Contract, if an individual optionee dies
(a) while he is an employee or director of, or a consultant to, the Company, any
of its Subsidiaries or a Parent, (b) within three months after the termination
of such relationship (unless such termination was for Cause or without the
consent of the Company or such Subsidiary or Parent) or (c) within one year
following the termination of such relationship by reason of Disability, the
optionee's option may be exercised, to the extent exercisable on the date of the
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optionee's death, by the optionee's Legal Representative (as defined in
Paragraph 19) at any time within one year after death, but not thereafter and in
no event after the date the option would otherwise have expired.
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Except as may otherwise be expressly provided in the
applicable Contract, any optionee whose relationship as an employee or director
of, or a consultant to, the Company, any of its Subsidiaries or a Parent has
terminated by reason of Disability (without continuing in another such capacity)
may exercise the optionee's option, to the extent exercisable upon the effective
date of such termination, at any time within one year after such date, but not
thereafter and in no event after the date the option would otherwise have
expired.
10. COMPLIANCE WITH SECURITIES LAWS. It is a condition to the
exercise of any option that either (a) a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Common Stock to be issued upon such exercise shall be effective and
current at the time of exercise or (b) there is an exemption from registration
under the Securities Act for the issuance of the shares of Common Stock upon
such exercise. Nothing herein shall be construed as requiring the Company to
register shares subject to any option under the Securities Act or to keep any
Registration Statement effective or current.
The Administrators may require, in their sole discretion, as a
condition to the receipt of an option or the exercise of any option that the
optionee execute and deliver to the Company such representations and warranties,
in form, substance and scope satisfactory to the Administrators, as the
Administrators determine are necessary or appropriate to facilitate the
perfection of an exemption from the registration requirements of the Securities
Act, applicable state securities laws or other legal requirement, including,
without limitation, that (a) the shares of Common Stock to be issued upon the
exercise of the option are being acquired by the optionee for the optionee's own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall, prior to any offer of sale or sale of such shares of Common
Stock, provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.
In addition, if at any time the Administrators shall
determine, in their sole discretion, that the listing or qualification of the
shares of Common Stock subject to any option on any securities exchange, Nasdaq
or under any applicable law, or the consent or approval of any governmental
agency or self-regulatory body, is necessary or desirable as a condition to, or
in connection with, the granting of an option or the issuing of shares of Common
Stock upon the exercise thereof, such option may not be granted and such option
may not be exercised in whole or in part unless such listing, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Administrators.
11. CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, which Contract shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Administrators. The terms of
each option and Contract need not be identical.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding
any other provision of the Plan, in the event of a stock dividend, stock split,
combination, reclassification, recapitalization, merger in which the Company is
the surviving corporation, spin-off, split-up or exchange of
B-5
shares or the like which results in a change in the number or kind of shares of
Common Stock which is outstanding immediately prior to such event, the aggregate
number and kind of shares subject to the Plan, the aggregate number and kind of
shares subject to each outstanding option and the exercise price thereof, and
the 162(m) Maximum shall be
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appropriately adjusted by the Board of Directors,
whose determination shall be conclusive and binding on all parties thereto. Such
adjustment may provide for the elimination of fractional shares which might
otherwise be subject to options without payment therefor.
In the event of (a) the liquidation or dissolution of the
Company, or (b) a transaction (or series of related transactions) that is
approved by a majority of the members of the Company's Board of Directors who
were elected by stockholders prior to the first of such transactions (including,
without limitation, a merger, consolidation, sale of stock by the Company or its
stockholders, tender offer or sale of assets) and in which either (i) the voting
power (in the election of directors generally) of the Company's voting
securities outstanding immediately prior to such transaction(s) cease to
represent at least 50% of the combined voting power (in the election of
directors generally) of the Company or such surviving entity outstanding
immediately after such transaction(s) or (ii) the registration of the Common
Stock under the Securities Exchange Act of 1934 is terminated, then all
outstanding options shall terminate upon the earliest of any such event, unless
other provision is made therefor in the transaction.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was
adopted by the Board of Directors on October 26, 1998. No ISO may be granted
under the Plan after October 25, 2008. The Board of Directors, without further
approval of the Company's stockholders, may at any time suspend or terminate the
Plan, in whole or in part, or amend it from time to time in such respects as it
may deem advisable, including, without limitation, in order that ISOs granted
hereunder meet the requirements for "incentive stock options" under the Code, or
to comply with the provisions of Rule 16b-3, Section 162(m) of the Code or any
change in applicable law, regulations, rulings or interpretations of
administrative agencies; provided, however, that no amendment shall be effective
without the requisite prior or subsequent stockholder approval which would (a)
except as contemplated in Paragraph 12 hereof, increase the maximum number of
shares of Common Stock for which options may be granted under the Plan or the
162(m) Maximum, (b) change the eligibility requirements to receive options
hereunder or (c) make any change for which applicable law requires stockholder
approval. No termination, suspension or amendment of the Plan shall, without the
consent of the optionee, adversely affect the optionee's rights under any option
granted under the Plan. The power of the Administrators to construe and
administer any option granted under the Plan prior to the termination or
suspension of the Plan nevertheless shall continue after such termination or
during such suspension.
14. NON-TRANSFERABILITY. No option granted under the Plan
shall be transferable otherwise than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the optionee,
only by the optionee or his Legal Representatives. Except to the extent provided
in the immediately preceding sentence, options may not be assigned, transferred,
pledged, hypothecated or disposed of in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process,
and any such attempted assignment, transfer, pledge, hypothecation or
disposition shall be null and void ab initio and of no force or effect.
15. WITHHOLDING TAXES. The Company, a Subsidiary or Parent may
withhold (a) cash or (b) with the consent of the Administrators (in the Contract
or otherwise), shares of Common Stock to be issued upon exercise of an option
having an aggregate fair market value on the relevant date (determined in
accordance with Paragraph 5 hereof) or a combination of cash and shares, in an
amount equal to the amount which the Administrators determine is necessary to
satisfy the obligation of the Company, a
B-6
Subsidiary or Parent to withhold Federal, state and local income taxes or other
amounts incurred by reason of the grant, vesting, exercise or disposition of an
option, or the disposition of the underlying shares of Common Stock.
Alternatively, the
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Company, a Subsidiary or Parent may require the holder to pay
to it such amount, in cash, promptly upon demand.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such
legend or legends upon the certificates for shares of Common Stock issued upon
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it determines,
in its discretion, to be necessary or appropriate to (a) prevent a violation of,
or to perfect an exemption from, the registration requirements of the Securities
Act and any applicable state securities laws, (b) implement the provisions of
the Plan or any agreement between the Company and the optionee with respect to
such shares of Common Stock or (c) permit the Company to determine the
occurrence of a "disqualifying disposition," as described in Section 421(b) of
the Code, of the shares of Common Stock issued or transferred upon the exercise
of an ISO granted under the Plan.
The Company shall pay all issuance taxes with respect to the
issuance of shares of Common Stock upon the exercise of an option granted under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issuance.
17. USE OF PROCEEDS. The cash proceeds received upon the
exercise of an option under the Plan shall be added to the general funds of the
Company and used for such corporate purposes as the Board of Directors may
determine, in its discretion.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN
CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding,
the Board of Directors may, without further approval by the Company's
stockholders, substitute new options for prior options of a Constituent
Corporation (as such term is defined in Paragraph 19 thereof) or assume the
prior options of such Constituent Corporation.
19. DEFINITIONS. For purposes of the Plan, the following terms
shall be defined as set forth below:
(a) "Cause" shall mean (i) in the case of an
employee or consultant, if there is a written employment or consulting agreement
between the optionee and the Company, any of its Subsidiaries or a Parent which
defines termination of such relationship for cause, cause as defined in such
agreement, and (ii) in all other cases, cause within the meaning of applicable
state law.
(b) "Constituent Corporation" shall mean any
corporation which engages with the Company, any of its Subsidiaries or a Parent
in a transaction to which Section 424(a) of the Code applies (or would apply if
the option assumed or substituted were an ISO), or any Parent or any Subsidiary
of such corporation.
(c) "Disability" shall mean a permanent and
total disability within the meaning of Section 22(e)(3) of the Code.
(d) "Legal Representative" shall mean the
executor, administrator or other person who at the time is entitled by law to
exercise the rights of a deceased or incapacitated optionee with respect to an
option granted under the Plan.
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(e) "Parent" shall have the same definition as
"parent corporation" in Section 424(e) of the Code.
(f) "Subsidiary" shall have the same definition
as "subsidiary corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, the options and
Contracts hereunder and all related matters shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without regard to
conflict of law provisions.
Neither the Plan nor any Contract shall be construed or
interpreted with any presumption against the Company by reason of the Company
causing the Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or
unenforceability of any provision in the Plan, any option or Contract shall not
affect the validity, legality or enforceability of any other provision, all of
which shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
22. STOCKHOLDER APPROVAL. The Plan shall be subject to
approval by a majority of the votes present in person or by proxy and entitled
to vote thereon at the next duly held meeting of the Company's stockholders at
which a quorum is present. No options granted hereunder may be exercised prior
to such approval; provided, however, that the date of grant of any option shall
be determined as if the Plan had not been subject to such approval.
Notwithstanding the foregoing, if the Plan is not approved by a vote of the
stockholders of the Company on or before October 7, 1999, the Plan and any
options granted hereunder shall terminate.
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THE BOARD OF DIRECTORS OF
IMAGING TECHNOLOGIES CORPORATION
Dated: February __,May 27, 1999
IMAGING TECHNOLOGIES CORPORATION PROXY SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS
The undersigned hereby appoints Brian Bonar and Michael K. ClemensPhilip J. Englund
jointly and severally, as proxies, with full power of substitution and
resubstitution, to vote all shares of stock which the undersigned is entitled to
vote at the Annual Meeting of Stockholders (the "Annual Meeting") of Imaging
Technologies Corporation (the "Company") to be held at the Company's principal
executive offices at 15175 Innovation Drive, San Diego, California, on Monday, March 29,Thursday,
May 27, 1999, at 10 a.m., local time, or at any postponements or adjournments
thereof, as specified below, and to vote in his or her discretion on such other
business as may properly come before the Annual Meeting and any adjournments
thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3, 4, 5 AND
6
1. ELECTION OF DIRECTORS:
Nominees: Harry J. Saal, Brian Bonar, A. L. Dubrow, David. M. Carver
and Warren T. Lazarow
/ / VOTE FOR ALL NOMINEES ABOVE / / VOTE WITHHELD FROM ALL
NOMINEES
(EXCEPT AS WITHHELD IN
THE SPACE BELOW)
Instruction: To withhold authority to vote for any individual nominee,
check the box "Vote FOR" and write the nominee's name on the line below.
2. AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION
Amendment of the Company's Certificate of Incorporation to increase the
number of the Company's preferred stock authorized to be issued from 10,000
shares to 100,000 shares.
/ / VOTE FOR / / VOTE AGAINST / / ABSTAIN
3. APPROVAL OF 1998 STOCK OPTION PLAN:
Approval of the 1998 Stock Option/Stock Issuance Plan, pursuant to
which 1,000,0001,500,000 shares of Common Stock will be reserved for issuance over the
term of such plan.
/ / VOTE FOR / / VOTE AGAINST / / ABSTAIN
4. APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF
SERIES D CONVERTIBLE PREFERRED STOCK
Approval of the issuance of all shares of Company Common Stock which
the Company would be entitled to issue upon conversion of the Company's Series D
Convertible Preferred Stock.
/ / VOTE FOR / / VOTE AGAINST / / ABSTAIN
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5. APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF
SERIES E CONVERTIBLE PREFERRED STOCK:
Approval of the issuance of all shares of Company Common Stock which
the Company would be entitled to issue upon conversion of the Company's Series E
Convertible Preferred Stock.
/ / VOTE FOR / / VOTE AGAINST / / ABSTAIN
6. RATIFICATION OF ACCOUNTANTS:
Ratification and approval of the selection of Boros & Farrington APC as
independent auditors for the fiscal year ending June 30, 1999.
/ / VOTE FOR / / VOTE AGAINST / / ABSTAIN
(PLEASE SIGN AND DATE ON REVERSE SIDE)
UNLESS OTHERWISE SPECIFIEDTHE SHARES REPRESENTED BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED IN THE MANNER
DIRECTED. IN THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR EACH
NOMINEE NAMED IN PROPOSAL 1 AND FOR PROPOSALS 1, 2, 3, 4, 5 andAND 6 AND WILL BE VOTED BY THE PROXY HOLDERS AT
THEIR DISCRETION AS TO ANY OTHER MATTERS PROPERLY TRANSACTED AT THE ANNUAL
MEETING OR ANY ADJOURNMENT(S) THEREOF TO VOTE IN ACCORDANCE
WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS JUST SIGN BELOW, NO BOXES NEED BE CHECKED.PROXIES' DISCRETION ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE ANNUAL MEETING.
DATED: __________, 19__
SIGNATURE OF STOCKHOLDER
PRINTED NAME OF STOCKHOLDER
TITLE (IF APPROPRIATE)
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. FOR JOINTLY OWNED SHARES,
EACH OWNER SHOULD SIGN. IF SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH, AND, IF SIGNING FOR A CORPORATION,
GIVE YOUR TITLE.
WHEN SHARES ARE IN THE
NAMES OF MORE THAN ONE PERSON, EACH SHOULD SIGN.
CHECK HERE IF YOU PLAN TO ATTEND THE ANNUAL MEETING. / /
[LOGO] IMAGING TECHNOLOGIES CORPORATION
[LETTERHEAD]
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