53. Defendants announced the private placement of these preferred securities in the following press release in Business Wire, on September 22, 1998, in which they misleadingly stated the deal would "solidify" ITEC's finances. However, at this time defendants failed to disclose the details to the public about the mechanics of the conversion price should the stock price decline below $2.025:
Imaging Products Manufacturer Raises $4.38 Million in Private Placement to Repurchase Shares and Support Product Development
(Nasdaq:ITEC) Imaging Technologies Corporation, pioneer in the development of digital imaging solutions, announced today that it has redeemed all outstanding shares of the Company's Series C Cvertible Preferred Stock (Series C Shares). Owners of the Series C Shares received $2.23 million in cash and subordinated notes. ITEC financed the redemption through a $4.38 million private placement of newly issued shares of common stock and subordinated notes.
"The redemption of the outstanding Series C Shares and the additional capital raised further solidifies the Company's financial position," said Michael K. Clemens, Chief Financial Officer of Imaging Technologies . . .
54. In the same release, defendants explained the mechanics of the deal as follows while leaving out material facts regarding the "poison" adjustments:
The $4.38 million in funding came from several private investors. In exchange, ITEC issued a total of 500,000 shares of common stock at a price of $2.50 per share and subordinated promissory notes in the amount of $3.13 million. All of the promissory notes bear interest at 16% per year. A portion of the notes, $675,000, mature in two years and are convertible, at the option of each investor, at any time into shares of Imaging Technologies' common stock at $2.025 per share (subject to adjustment under certain circumstances). The remaining notes, $2.45 million, mature in one year and are not convertible. The Company also issued warrants to the investors as part of the financing. The warrants authorize the purchase of 490,000 shares of common stock at an exercise price of $2.025 per share. This price is based on the average of the closing bid prices for ITEC's common stock for the five trading days ended September 14, 1998. The Company expects the net proceeds from this financing to be approximately $4 million.
In August 1997, ITEC issued 500 shares of Series C Stock as part of a $5 million financing. The Series C Shares were convertible into the Company's common stock at the option of the investors. In today's transaction, the
Company redeemed all 237 outstanding Series C Shares paying $2.23 million in cash and issuing subordinated promissory notes in the amount of $1 million to the holders of the Series C Shares. The notes bear interest at 16% per year, mature in one year and are not convertible. The Company also issued 128,161 shares of common stock and warrants to purchase 300,000 shares of common stock (200,000 of which have an exercise price of $2.025 per share and 100,000 of which have an exercise price of $4.00 per share) to the holders of the Series C Shares. (Emphasis in original.)
55. While defendants continuously touted the Company's financial condition throughout the Class Period, they purposefully failed to mention that the Company was suffering from severe and ongoing cash flow problems that would be announced only weeks later. On the contrary, defendants went so far as to misleadingly state that the offering "further solidified" the Company's finances.
56. Then, on or about September 24, 1998 over Business Wire, defendants continued to perpetrate their scheme by again omitting to disclose ITEC's cash flow problems when they hired a new Vice President of Finance, though the cash flow problems had to be known or were at least ignored with conscious and/or deliberate recklessness as they were disclosed only 2 weeks later. Defendants' statement was false and misleading because it touted the Company's "expansion efforts," while the Company actually was experiencing cash flow problems that would obviously preclude any such expansion:
