Behfarin, et al. v. Imaging Technologies, et al. 99-CV-02163-First...

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Kevin J . Yourman ( 147159)Vahn Alexander (167373)Jennifer R. Williams (207487)WEISS & YOURMAN10940 Wilshire Blvd., 24th Floo rLos Angeles, CA 90024 • .. 'Telephone : (310) 208-2800

c~rurrMichael D . Braun (167416)STULL, STULL & BRODY10940 Wilshire Blvd ., Suite 2300Los Angeles, CA 90024Telephone : (310) 209-2468

Attorneys for Plaintiffs

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

NAHID NAZARIAN BEHFARIN, PETERCOOK, STEPHEN DOMAGALA andMICHAEL S . TAYLOR, on Behalf ofThemselves and All Others Similarly Situated,

Plaintiffs,

CASE NO: 99 CV 21 SP)

CLASS ACTION3K BY F-W

FIRST AMENDED COMPLAINT FORVIOLATION OF FEDERAL SECURITIESLAWS

vs.

IMAGING TECHNOLOGIESCORPORATION, BRIAN BONAR,MICHAEL K. CLEMENS, GERRY BERGand CHRISTOPHER W . McKEE ,

Defendants .

JILI~

JURY TRIAL DEMANDED

FIRST AMENDED COMPL A INT FOR VIOLATION OFFEDERAL SECURITIES LAWS • 99 CV 2163K LSP

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Plaintiffs as and for their complaint, allege the following upon personal knowledge as t o

themselves and their own acts, and upon information and belief as to all other matters . Plaintiffs'

information and belief is based, inter alia, on the investigation conducted by plaintiffs' attorneys,

including a review of the press releases and public filings of defendant Imaging Technologies,

Corp . ("ITEC" or the "Company") and articles pertaining to the Company. Plaintiffs believe that

substantial evidentiary support will exist for the allegations set forth after a reasonable opportunity

for discovery .

NATURE OF THE CASE

1 . This is a class action on behalf of all purchasers of the securities of ITEC (including

those individuals who acquired their ITEC securities in exchange for shares, ADRs, or options in

other companies which were acquired by the Company)(the "Class") between April 21, 1998 and

October 9, 1998, inclusive (the "Class Period"), seeking to pursue remedies under the Securities

Exchange Act of 1934 (the "Exchange Act") . Defendants include: ITEC, Brian Sonar, Michael K .

Clemens, Gerry Berg and Christopher W . McKee .

2 . As is more fully alleged throughout the Complaint, this action arises fro m

damages incurred by the Class as a result of a scheme and common course of conduct by

defendants which operated as a fraud and deceit on the Class during the Class Period . Defendants'

scheme included rendering false and misleading statements and/or omissions concerning the

financial condition and business p rospects of the Company in order to artificially inflate the value

of the Company's securities .

3 . For example, throughout the Class Period, defendants made numerous positiv e

representations concerning the strength, competitive advantages, growth and profitability of the

Company . However, defendants made these numerous misrepresentations regarding the financial

and business prospects of the Company while knowing, or with conscious or deliberate

recklessness disregarding, the following facts : (a) the "restructuring" of ITEC announced in April

of 1998 would be far more costly than defendants had led the investing community believe . In

fact, the costs were significant and material by any standards, totaling approximately $3,800,000,

which far outweighed any benefits that ITEC may have received; (b) the Company's cash flow

FIRST AMENDED COMPLAINT FOR VIOLATION OFFEDERAL SECUR1TIM LAWS - 99 CV 2163K LSP

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1 problems were not only severe but irreversible . By the end of fiscal year 1998 (June 30, 1998),

2 ITEC's working capital had drastically declined from $4,818,000 for fiscal 1997 to $315,000 ,

3 while net cash used in operating activities increased to $7,100,000 during fiscal 1998 as compared

4 to $4,000,000 for the prior year ; (c) as a result of ITEC's cash flow problems, the Company wa s

5 not growing as defendants represented . On the contrary, the decline in working capital couple d

6 with high operating costs was resulting in an inability to achieve product sales targets in relation to

7 current sales levels ; and (d) defendants' representations to the investing community concerning the

8 Company's growth and profitability were also false and misleading because throughout the Class

9 Period, the Company was overstating earnings, revenue, and the prospects for the Company by : (i)

10 concealing and failing to reveal the extent of ITEC's non-performing receivables, which they were

11 aware of as early as April of 1998 ; (ii) concealing that the Company's expenses had dramatically

12 increased in the fourth quarter of fiscal 1998 . ITEC's fourth quarter "selling, general, and

13 administrative" expenses were 76% higher than the average for each of the previous three fiscal

14 quarters and ITEC's fourth quarter "engineering costs" were 28% higher than the average for each

15 of the previous three fiscal quarters ; and (iii) misrepresenting the "engineering revenues" that the

16 Company had earned in fiscal year 1998 . Specifically, the Company reported engineering revenues

17 of $4,500,000 through the third quarter of 1998, however, the Company's annual 10-K report filed

18 in October 1998 adjusted the figure downward by reporting a total of $3,700,000 for the entir e

19 fiscal year of 1998.

20 4. Since the disclosure of these and other adverse facts would cause a sever e

21 collapse in the price of the Company's securities, defendants set out on a scheme to artificiall y

22 inflate ITEC's stock price so that: (a) they could continue to obtain financing to fund the Company ;

23 (b) the Company could continue as a going concern and therefore defendants would be able t o

24 maintain their positions with ITEC ; and (c) defendants could continue to acquire other companies

25 for less than market value with stock that was artificially inflated .

26 5. As a result of defendants' false statements, misrepresentations, and omissions, the

27 price of IT'EC's securities were artificially inflated during the Class Period, On the first day of the

28 Class Period, April 21, 1998, the Company's securities traded as low as $2 3/4 per share .

FIRST AMENDED COMPLAINT FOR VIOLATION OFFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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However, based on defendants' misrepresentations concerning the true state of affairs of the

I Company, the stock of ITEC traded as high as $4 3/4 per share on or about June 29, 1998 .

Defendants were able to maintain such an artificial trading value for the Company's securities unti l

the actual condition of the Company was disclosed on or about October 9, 1998 . Once ITEC's

dismal state was finally revealed to the investing community on that day , the stock price of ITEC

plummeted from a trading high of $13/4 to a trading low of $15116 per share, on volume of

1458,000 shares . This represented a drop of over 80% from the stock's high of 54 3/4 on June 29 ,

1 1998 .

6. Due to defendants' deceptive and illegal conduct, plaintiffs and the other Class

I members purchased their ITEC securities at grossly inflated prices . Had plaintiffs and the othe r

Class members been aware of the truthful condition of the Company and the adverse impact tha t

defendants ' omissions were having on the Company, they would not have purchased their shares,

or at least not at the artificially in flated prices at which they purchased those shares .

JURISDICTION AND VENUE

7 . The claims herein arise under §§ 10(b) and 20 (a) (15 U . S.C . §§78j(b) and

78t(a)) of the Securities and Exchange Act of 1934 (15 U.S.C. §78) (the "Exchange Act") and Rul e

I lOb-5 promulgated thereunder (17 C.F.R. §240.1Ob-5) .

8. This Court has subject matter jurisdiction of this action pursuant to 15 U.S.C.

§78-u .

9. Venue is proper in this District pursuant to 28 U.S.C. §1391(b) because defendant

ITEC maintains its corporate offices in this district and the violations of law complained of herein

occurred primarily in this district, including the dissemination of materially false and misleading

statements and the omission of material information complained of herein .

10. In connection with the conduct complained of herein, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including the mails an d

interstate telephone communications, and the facilities of a national securities exchange .

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PARTIES

11 . Plaintiff Nahid Nazarian Behfarin purchased shares ofITEC securities during the

I Class Period and was damaged thereby.

12. Plaintiff Peter Cook purchased shares of ITEC securities during the Class Perio d

and was damaged thereby .

13 . Plaintiff Stephen Domagala purchased shares of ITEC securities during the Clas s

Period and was damaged thereby .

14. Plaintiff Michael S . Taylor purchased shares of ITEC secu rities during the Class

Period and was damaged thereby .

15. Defendant ITEC develops, manufactures and distributes high quality printer

products for use in graphics and publishing, digital photography and other technical markets .

Defendant ITEC maintains its principal executive offices at 11031 Via Frontera, San Diego ,

California 92127 .

16. Defendant Brian Bonar (`Sonar") at all relevant times was Chief Executive

Officer and a Director of the Company . During the Class Period, Bonar directly owned 214,464

shares of Company stock, had 19,500 options to purchase the common stock of ITEC with a strike

price of $1 .00, and also had 630,000 warrants to purchase the common stock of ITEC with strike

prices ranging from $1 .00 to $6 .25 per warrant . For the fiscal year ended June 30, 1998, Bonar

also received remuneration of $476,299 which included $250,250 of taxable compensation related

to the exercise of stock options and warrants during the fiscal year.

17. Defendant Michael K. Clemens ("Clemens") at all relevant times was Senior Vic e

President and Chief Financial Officer of the Company .

18 . Defendant Gerry Berg (`Berg") at all relevant times was Senior Vice President of

Worldwide Business Development of the Company, was appointed Vice President of Operations in

January 1998 and for a period of time acted as Chief Financial Officer beginning in February of

1998. During the Class Period, Berg had 90,000 options to purchase the common stock of ITEC

with strike prices ranging from $3 .00 to $4 .00. Berg also had 125,000 warrants to purchase th e

FLRST AMENDED COMPLAINT FOR VIOLATION OFFEDERAL S ECURITIES LAWS - 99 CV 2163K LSP

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11 common stock of ITEC with strike prices ranging from $3.00 to $3 .75 per warrant . For the fiscal

I year ended June 30, 1998, Berg also received remuneration of $66,091 .

19. Defendant Christopher W . McKee ("McKee") at all relevant times was Vice

11 President of Finance and Administration at the Company .

20. Defendants Bonar, Clemens, Berg, and McKee (collectively the "Individual

Defendants") were at all relevant times during the Class Period controlling persons of ITEC within

the meaning of §20(a) of the Exchange Act . By reason of their stock ownership , management

positions , and/or membership on ITEC's Board , the Individual Defendants were controlling

persons of ITEC and had the power and influence, and exercised the same , to cause it to engage in

the illegal conduct complained of herein . The Individual Defendants are liable for the false

statements pleaded herein , as those statements were each "group published" information , the result

of the collective action of the Individual Defendants .

21 . As officers, directors and/or controlling persons of a Company registered with the

Securities Exchange Commission ("SEC") under the federal securities laws, whose securities are

traded on the NASDAQ, and governed by the provisions of the federal securities laws, the

Individual Defendants each had a duty to disseminate truthful information promptly and accurately

with respect to the Company's operations, products, markets, management, earnings and business

prospects, to correct any previously issued statements that had become materially misleading or

untrue, and to disclose any trends that would materially affect earnings and the financial results of

ITEC, so that the market price of the Company's publicly traded securities would be based upon

truthful and accurate information.

22. Under rules and regulations promulgated by the SEC under the Exchange Act, th e

Individual Defendants also had a duty to report all trends, demands or uncertainties that were likely

to influence : (a) ITEC's liquidity; (b) ITEC' s net sales , revenues and/or income; and (c) previously

reported financial information such that it would not be indicative of operating results . The

Individual Defendants ' representations during the Class Period violated these specific requirements

and obligations .

23. The Individual Defendants , because of their positions with the Company,


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1 controlled and/or possessed the power and autho rity to control the contents of ITEC' s quarterly and

2 annual repo rts , press releases and presentations to securities analysts, which information was

3 conveyed through the analysts to the investing public . Each defendant was provided with copies of

4 the Company 's reports and press releases alleged herein to be misleading p rior to or short ly after

5 their issuance and had the ability and oppo rtunity to prevent their issuance or cause them to be

6 corrected .

7 24. Because of their positions and access to mate rial non-public information available

8 to them but not to the public, each of these defendants knew, or with conscious or deliberat e

9 recklessness disregarded , that the adverse facts specified herein had not been disclosed to and were

10 being concealed from the public and that the positive representations which were being made were

11 then materially false and misleading .

12 25. Defendants are also each liable as individual participants in a fraudulent scheme

13 and course of conduct that operated as a fraud and/or deceit upon the Class. Because of thei r

14 executive, managerial and/or directo rial positions with the Company, each of the defendants had

15 access to the adverse , non-public information about the business , finances and business prospects

16 of ITEC as particularized herein and acted to misrepresent , misstate or conceal such information

17 from plaintiffs and the investing public .

18 26 . It is also appropriate to treat the defend ants as a group for pleading purposes under

19 the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false

20 and misleading information complained of herein was disseminated through the collective actions

21 of the defend ants. Defendants were involved in the dra fting, producing, reviewing, and/or

22 disseminating of the false and misleading information detailed herein, and knew , or with conscious

23 or deliberate recklessness disregarded , that such materially misleading statements were being

24 issued by the Company, and/or approved or ratified these statements in violation of the federal

25 securities laws . Defendants ' false and misleading statements and omissions of fact consequently

26 had the effect of, both on their own and in the aggregate , artificially inflating the price of the

27 securities of ITEC at all times during the Class Period .

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1 PLAINTIFFS ' CLASS ACTION ALLEGATIONS

2 27. Plaintiffs b ring this action as a class action pursuant to Rude 23(a) and (b)(3) of the

3 Federal Rules of Civil Procedure on behalf of a Class consisting of all persons and entities who

4 purchased or otherwise acquired ITEC securities from Ap ri l 21, 1998, through October 9, 1998,

5 inclusive (the "Class Period"), and who were damaged thereby . Excluded from the Class are

6 defendants, officers and directors of the Company , members of their immediate families, and their

7 legal representatives , heirs , successors or assigns and any entity in which defendants have or had a

8 controlling interest .

9 28. During the Class Period , millions of shares of ITEC securities were traded o n

10 NASDAQ , an efficient and developed securities market . Thousands of brokers nationwide have

11 access to trading information about ITEC through the system . Within minutes of any transaction

12 taking place , this system displays the most recent trades and prices .

13 29. The members of the Class are so numerous that joinder of all members i s

14 impracticable. While the exact number of Class members is unknown to plaintiffs at this time and

15 can only be ascertained through appropriate discovery , plaintiffs believe that there are thousands of

16 members of the Class . During the Class Period , ITEC had over 19,000 , 000 million shares o f

17 common stock outstanding and actively traded on the NASDAQ, an efficient market , under the

18 ticker symbol "ITEC . "

19 30 . Plaintiffs ' claims are typical of the claims of the members of the Class as al l

20 members of the Class are similarly affected by defendants ' wrongful conduct in violation of federal

21 law that is complained of herein .

22 31 . Plaintiffs will fairly and adequately protect the interests of the members of the

23 Class and have retained counsel competent and experienced in Class and securities litigation .

24 Plaintiffs have no interests that are adverse or antagonistic to those of the Class .

25 32 . A Class action is superior to other available methods for the fair and efficient

26 adjudication of this controversy . Because the damages suffered by many individual Class members

27 may be relatively small, the expense and burden of individual litigation make it virtuall y

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FIRST AMENDED COMPLAINT FOR VIOLATION OF

FEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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1 impossible for the Class members to individually seek redress for the wrongful conduct alleged

2 herein.

3 33. Common questions of law and fact exist as to all members of the Class and

4 predominate over any questions affecting solely individual members of the Class . Among the

5 questions of law and fact common to the Class are :

6 (i) whether the federal securities laws were violated by defendants' acts as

7 alleged herein;

8 (ii) whether defendants participated in and pursued the common course of

9 conduct complained of herein;

10 (iii) whether documents, press releases and other statements disseminated to the

1 I investing public and the Company's shareholders during the Class Period misrepresented th e

12 business condition of ITEC ;

13 (iv) whether defendants failed to correct prior statements when subsequent

14 events rendered those prior statements untrue or inaccurate ;

15 (v) whether defendants acted willfully or with conscious or deliberate

16 recklessness in misrepresenting and/or omitting to state material facts ;

17 (vi) whether the market price of ITEC's securities during the Class Period were

18 artificially inflated due to the misrepresentations and/or non-disclosures complained of herein ; and

19 (vii) whether the members of the Class have sustained damages, and, if so, what

20 is the proper measure thereof.

21 34. Plaintiffs will rely, in part, upon the presumption of reliance established by the

22 fraud-on-the-market doctrine in that :

23 (i) defendants made public misrepresentations or omitted material facts during

24 the Class Period, as alleged herein;

25 (ii) the misrepresentations and/or omissions were material ;

26 (iii) ITEC's securities were traded on NASDAQ, an efficient market ;

27 (iv) the misrepresentations and/or omissions alleged tended to induce reasonable

28 investors to misjudge the value of ITEC shares ; and

FIRST AMENDED COMPLAINT FOR VIOLA'T'ION OFFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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1 (v) plaintiffs and members of the Class acquired their shares between the time

2 defendants made the misrepresentations and/or omissions and the time the truth was revealed ,

3 without knowledge of the falsity of the misrepresentations .

4 BACKGR2 N

5 35. Founded in 1982, ITEC develops , manufactures and distributes high quality printer

6 products for use in graphics and publishing , digital photography and other technical markets .

7 Beginning with a core technology in the design and development of controllers for non -impac t

8 printers and multifunction peripherals , the Company has expanded its product offerings to include

9 monochrome and color p rinters, external print servers, digital image storage devices, and software

10 to improve the accuracy of color rep roduction.

11 36. Since January of 1997, the Company' s "growth" has been fueled in great part

12 through acquisitions . Moreover, prior to and during the Class Period , the Company sustained itself

13 and its acquisition strategies with infusions of capital through private placements , securities

14 offe rings , and lines of credit from banking facilities. ITEC financed many of its acquisitions with

15 cash and Company securities , which in September of 1997 traded as high as $7 per share . One

16 acquisition was that of Color Solutions, Inc,, which the Company announced on January 5, 1998

17 over Business Wire:

18 Imaging Technologies Corp . (NASDAQ:ITEC) Monday announced completion ofthe acquisition of Color Solutions Inc ., a 3-year-old color management software

19 development firm located in Cardiff by the Sea , Calif. Color Solutions ' productsprovide accurate and repeatable color rendering, across a wide range of pe ripheral

20 devices and software applications . The Company' s ColorBlind software allowsusers to precisely calibrate peripherals such as seamen, monitors , digital cameras,

21 printers and other specialized color digital devices , all based on ICC color standardsImaging Technologies Corp. purchased the stock of privately held Colo r

22 Solutions Inc. with ITEC common stock '

23 37. Consequently, it was imperative that the value of ITEC's securities remained high,

24 prior to and throughout the Class Period, so that defendants could continue to pursue their growth

25 through acquisition strategies and be able to sustain the Company .

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28 Emphasis added unless otherwise noted .



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38, The Company 's strategy appeared to be successful as it reported, through Business

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Wire on or about January 29, 1998, record sales and profits :

Imaging Technologies Corporation (NASDAQ :ITEC) today repo rted financialresults for the second qua rter of fiscal 1998, ended December 31, 1997. ITECreported net income of $1,080 ,000, or $0.08 per share , compared to $293,000 or$0.03 per share for the second quarter of fiscal 1997, ended December 31, 1996,which represents an increase of 269% . Gross revenues for the second quarter offiscal 1998 were $9,750 , 000, compared to $7,514,000 for the second quarter offiscal 1997, which represents an increase of 30% . For the six months endedDecember 31, 1997, ITEC repo rted net income of $1,848 ,000, or $0.14 per share,compared to a loss of $809 ,000 or $0. 10 per share for the first six months of fiscal1997 . Gross revenues for the first six months of fiscal 1998 were $ 17,544,000,compared to $15,395 ,000 for the corresponding Period in fiscal 1997, an increase of14% .

"For the past three years, we have concentrated our talent and resources on creatinga stronger, more diversified Company to serve the growing digital imagingmarketplace," said Dr. Harry J. Saal , Chairman of Imaging Technologies . "Today,ITEC is showing the positive results emerging from that strategy." "ImagingTechnologies continues to show strongfnancial growth in all areas of thecompany, " said Dr. Edward W. Savarese, ChiefExecutive Officer of ITEC."With our recent acquisitions , we will capitalize utilizing our key technologies inhigh -resolution graphic printing, color management software , printer controllers,digital imaging and storage technology."

39. However, despite defendants' aggressive acquisition strategies and thei r

representations to the investing community concerning the "strong financial growth" that ITEC

was allegedly exhibiting in all areas, the Company began to suffer from a dramatic decline in the

value of its stock . In September of 1997, the Company's stock traded as high as $7 per share, But,

by March 1998, the stock had declined significantly and traded as low as $2 7/8 per share which

represented more than a 50% drop in the value of ITEC's securities . This meant that the

Company's viability as a going concern was in jeopardy because the currency of ITEC's mergers,

its stock, was plummeting in value-

40. During this time period, the Company also began to experience serious difficultie s

because ITEC was having trouble generating sufficient cash flow to meet its operating demands .

As a result, the Company was being forced to turn to the capital markets for assistance once again

in order to survive. However, the Company's ability to raise financing and obtain lines of credi t

with its banking facilities necessarily depended on the value and future prospects of the Company' s

securities . Thus, it became crucial for defendants to artificially inflate the value of ITEC' s


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securities at any cost so that (a) the Company could continue as a going concern by raising

desperately needed capital through a p rivate placement offering which was scheduled for later in

the year; (b) defendants could maintain their positions within the Company ; and (c) ITEC could

continue to grow through its acquisition strategies .

41 . Defendants' plan commenced in April of 1998, with the appointment of a new Chie f

Executive Officer ("CEO"), Brian Bonar, who announced that ITEC would undergo a

"reorganization." The plan was to convince the investing community that by consolidating ITEC's

independent operating subsidiaries into a single organization, the Company would save money by

eliminating workers and redundant operations, and consequently be a strong and profitable

business with a competitive advantage within the market . Of course, the costs associated with such

a strategy were monumental, especially in light of the dramatic decrease in ITEC's cash flow,

coupled with an increase in operating expenses .

42. Nevertheless, defendants engaged their scheme to defraud the investors of ITEC by

disseminating false, incomplete and misleading information about the Company's management,

operations and business conditions in order to inflate the value of the Company's stock.

Defendants set out to create such an unrealistically favorable image of the Company's business

prospects, operations, and asset values, even though they knew, or with conscious or deliberate

recklessness disregarded, that the Company would be taking a write-off of approximately

$9,000,000 for fiscal 1998 which would ultimately devastate ITEC's investors .

SUBSTANTIVE ALLEGATIONS

43 . Beginning on Apri121, 1998, the first day of the Class Period, defendants

announced that the Company would undergo a "reorganization" which would consolidate all of its

independent operating subsidiaries into a single organization. The purpose of the reorganization

was to allegedly save ITEC money by eliminating workers and redundant operations . In

announcing this "new strategy" for the Company, defendants specifically stated over Business

Wire :

Imaging Technologies Corp. (NASDAQ :ITEC) today announced a plan to realignmanagement and create a divisional structure within the organization .

FIRST AMENDED COMPLAINT FOR VIOLATION OFFEDERAL SECURITIES LAWS - 99 CV 2 I63K LSP

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1 The plan calls for consolidating the independent operating subsidiaries that havebeen acquired under the umbrella of Imaging Technologies Corp . The consolidatio n

2 will take advantage of economies of scale in manufacturing and finance , as well asimprove sales and distribution channels . B rian Bonar, recently appointed chie f

3 executive of ITEC, detailed this plan at the quarterly management meeting held inSan Diego last week .

4"ITEC will no longer be independent subsidiaries, " according to Bonar, chief

5 executive officer. "The New ITEC' will be one organization offering anintegrated family of imaging solutions. By breaking down the barriers between

6 the subsidiaries and organizing the Company around functions, we can achievehigher returns through our established channels and improve cross selling

7 capabilities. This new structure will make ITEC stronger and more competitive. "

8 44. Unfortunately for the shareholders of ITEC, at the time of this announcement and

9 throughout the Class Period, defendants knew that the Company was in no condition to undergo

14 such a dramatic change . The costs of such a restructuring, associated with losing dislocated

I l workers, retraining staff, and losing established relationships, would send the Company into a

12 financial tailspin.

13 45, In fact, by certain defendants own admission in an Oregon state court action for

14 fraud and violation of various state securities laws captioned American Industries, Inc . et at. v.

15 Imaging Technologies Corporation, et all, Case No. 99-02-01129, Circuit Court of the State of

16 Oregon for the County of Multnomah, defendants ITEC and Bonar admitted the following :

17 All of theparties, including the plaintiffs, acknowledge that it was very clear asthe summer of 1998 unfolded that ITEC was short of cash and desperately needed

18 working capital to_fund its transition from an engineering firm to a productmanufacturing and marketing firm. ITEC 's management spoke of these

19 concerns on nearly a daily basis with the plaintiffs. ITEC also made it clear thatit was planning to take a substantial write -down of assets in connection with its

20 year-end financial statementsfor its fiscal year ended 6/30198.

21 *****

22 As the plaintiffs had been repeatedly advised, without a significant infusion ofworking capital, ITEC would be unable to effect its transition . More fundamentally ,

23 without working capital, ITEC likely would fail altogether .

24****

25 ITEC has been in a stressed financial condition since that time.

26 46. The statements of defendants in the Oregon action were not without foundation . As

27 defendants were well aware, ITEC was suffering from a dramatic decline in working capital and an

28 overwhelming increase in expenditures for operating activities . By year end fiscal 1998, working

FIRST AMENDED COMPLAINT FOR VIOLATION OfFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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1 capital had drastically declined from $4,818,000 to $315,000 while net cash used in operating

2 activities increased to $7 .1 million during fiscal 1998 as compared to $4 .0 million for the prior

3 year .

4 47. Impo rtantly, while this information was known to defendants , and only selectively

5 disclosed to certain shareholders (i .e., the plaintiffs in the Oregon action ), these details were never

6 disclosed to the investing community during the Class Pe riod. On the contrary, in the upcoming

7 months, defendants continued to tout the Company 's accolades, financial stability and growth .

8 48. Despite being in such dire s traits , days later, on or about April 29, 1998, defendants

9 announced over Business Wire that in furtherance of their corporate "realignment," ITEC would be

10 expanding and relocating its m anufacturing operations . Defendants stated:

11Imaging Technologies Corporation (Nasdaq : ITEC) today announced plans to

12 relocate manufacturing operations from the firm's NewGen Imaging Systems plant

13in Costa Mesa, California to San Diego .

The company will be opening a new manufacturing facility adjacent to thei r14 corporate headqua rters in the Rancho Bernardo region of San Diego, in the coming

weeks . The new facility will produce advanced digital color and monochrome15 output devices . ITEC's newest line of color printers integrate advanced printer and

imaging controller technologies with color management software for app lications in16 digital photography and the office color market .

17 Closure of the Costa Mesa plant is pa rt of a corporate realignment announced earlierthis week by ITEC' s new Chief Executive Officer, B rian Bonar. "Our plan calls for

18 consolidating the independent subsidiaries under the ITEC -umbrella," said Bonar."The lease on the current NewGen facility is about to expire , providing us with an

19 opportunity to streamline operations by locating all of our corporate manufacturingin one centralized plant . San Diego 's expanding high-technology manufacturing

20 base provides the resources and support we need to economically p roduce the nextgeneration of digital imaging solutions . "

21Opening of ITEC 's new 12 ,000 square foot central manufacturing facility in San

22 Diego , 90 miles south of Costa Mesa, will create approximately 50 newmanufacturing , shipping and technical assembly jobs over the next twelve months .

23

24 49. With these announcements, and defendants ' subsequent statements, they began

25 laying the foundation for their scheme to convince the market that the stock price of ITEC did not

26 deserve further decline and was in fact undervalued because the Comp any was in a position to

27 "capitalize on existing strengths " and that it was poised to "gain a competitive advantage in the

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FIRST AMENDED COMPLAINT FOR VIOLATt0N OFFEDERAL SECURITIES LAWS - 99 CV 2t63K LSP

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1 marketplace." For example , on or about Ap ril 30, 1998, defendants issued the following press

2 release over Business Wire which stated :

3 Imaging Technologies Corp. (ITEC ) (NASDAQ :ITEC), Thursday announced that itwill demonstrate its new Xtinguisher (tm) line of network print servers at the On

4 Demand Digital Printing & Publishing Conference at the Jacob Javits Center in NewYork , May 5-7, 1998 .

5

6"The Xtinguisher Series is part of a new generation of `ITEC-Integrated' product s

7 that take advantage of the Company's key technical strengths in controller expertiseand color management," said Brian Bonar, chief executive officer of Imagin g

8 Technologies . "We now offer the full spectrum of both embedded and externalcontrollers solutions . By working in concert with our development partners, we

9 can capitalize on existing strengths and gain a competitive advantage in a

10marketplace that has long been dominated by a single player. "

"ITEC responded to the market by delivering a complete network imaging solu tion11 that integrates our sophisticated ColorBlind (r) color management software into a

Windows(r) NT-based server with a Web-based GUI," said Richard Stabile ,12 Director of ITEC ' s OEM Partners Division .

13 50. Defendants continued with their plan on or about May 4, 1998, by disseminating an

14 article in Business Wire which accentuated the Company 's ability to "gain a competitive

15 advantage " in the market - The article stated in pertinent part :

16 Imaging Technologies Corporation Announces Results of Successful New ProductLaunch - May 4, 1998 - New Color Laser Printer for the Office Market Receives

17 Strong Reception at European Trade Fair With Initial Orders For Over 1000 NextGeneration Color Laser P rinters .

18Imaging Technologies Corp . (NASDAQ :ITEC) today announced the results of the

19 highly successful launch of its next generation color laser printers at Europe'slargest technology trade show , the CeBIT World Business Fair .

20

21"The Colorlmage(R) Series printers are the first of a new generation that integrate

22 ITEC 's key technical strengths in image enhancement and placement, embeddedcontroller function and color management into a single package," said B rian Bonar,

23 chief executive officer of Imaging Technologies . "Thisprinter, and others thatwill be introduced soon, take advantage of ITB'C's core technologies to add

24 unique features and value . By incorporating technology within various divisionsof the Company, we can gain a competitive advantage and the ability to produce

25 exciting new imagingproducts. The reception the Colorlmage(R) 2400 receivedIn Europe Is evidence ofthat. "

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FIRST AMENDED COMPLAINT FOR VIOLATION O F

FEDERAL SECURITIES LAWS - 99 CV 2163K LS?

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51. Shortly thereafter, on or about May 13, 1998, defendants announced "record" sales

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and profits for ITEC's third quarter of fiscal 1998. Specifically, defendants made the following

statements over Business Wire concerning the Company's "performance" and its prospects :

imaging Technologies Corp . Reports Record Sales and Record Profits for ThirdQuarter of Fiscal 1998 - May 13, 1998 - A 30% Increase in Revenue and 32%Increase in Income - Imaging Technologies Corp. (NASDAQ: ITEC), pioneer inthe development of high-quality digital imaging solutions, today reported recordsales and profits for the third quarter offiscal 1998, which ended March 31, 1998.Net incomefor the third quarter was $1,121,000, a 32% increase over net incomeof $848,000 for the third quarter of fiscal 1997. Earnings per share (diluted)increased to $.08 per share from $. 07 per sharefor the third quarter of fiscal1997. Revenuesfor the quarter were $10, 772,000, a 30% rise over revenues of$8,321, 000 in fiscal 1997.

Nine-month fiscal 1998 net income was $2 ,971,000, compared to 539 ,000 for thefirst nine months of fiscal 1997 . Earnings per share (diluted) increased to $.22 pershare from $0.0 per share for the first three quarters of fiscal 1997 . Revenues for thenine month Period were $28,320,000, compared to $23,717,000, reported in the firstnine months of fiscal 1997.

Brian Bonar, chief executive officer of Imaging Technologies said, "we willcontinue to press forward with our strategy of building a stronger, morefocusedCompany to serve the worldwide needs of digital imaging. The key to our successis the ability to leverage diversified technical resourcesfrom across thecorporation to create new and unique solutions. "

Sonar said the third quarter of fiscal 1998 was an extremely active one for ITEC ."We undertook a number of actions that can accelerate the Company 's growthand competitiveness as we imp lement plans for Fiscal 1999. Among these efforts :

-- Integration of Color Solutions and McMican Corp., two companies acquiredduring the second fiscal quarter .

****

- The management team was strengthened with the addition of severalexperienced, results-oriented individuals who will help the company reach newlevels of performance in the areas of manufacturing, marketing and sales .

-- Establishment of ITEC Europe Ltd . as the new European Headquarters nearLondon . 1T.EC Europe wi ll be a base of operations for sales, technical support andfinancial management in the UK and on the Europe an Continent .

-- A corporate realignment plan that will consolidate and integrate the company'sindependent operating subsidiaries along functional lines . This realignmentincludes relocating manufacturing for the company's Printing Systems DivisionNewGen from Costa Mesa, Calif., to a site adjacent to ITEC's headquarters in SanDiego . Marketing and sales operations will be located at ITEC's existing facilitiesin Santa Clara, Calif.

According to Bonar , "Consolidating operations should reduce operating expensesand p roduce significant savings over time . It should also improve our ability to


16

1 respond more rapidly to changes in an increasingly dynamic market . This strategywild take advantage of economies of scale by centralizing product development,

2 distribution and marketing, as well as consolidating administration, engineeringand manufacturing. It should also improve our ability to respond more rapidly to

3 changes in an increasingly dynamic market . We are investigating strategies t omaximize the financial impact ofthis move, while minimizing the costs involverL"

4 "It has been one year since we changed the name of the company to ImagingTechnologies Corporation and began implementing our plan for the `New ITEC . '

5 Today we are positioned as a pioneer in the development , manufacturing, licensingand distribution of high-quality digital imaging solutions .

6

7"The `New ITEC' can produce more competitive products and more effectively

8 sell the products we have on the drawing table. Through this transition, ITEChas continued to exhibit revenue and earnings growth each quarter. This is a

9 strong testimony that our plan is working. As we look to the future, growthshould continue as we evolve the next generation of technologically advanced

10 imaging products. "

11 52. The foregoing statements concerning ITEC' s "record" sales, profits, and

12 performance were false and misleading for the following reasons . As stated above, ITEC

13 desperately needed cash to even continue as a going concern . Moreover, as early as April of 1998,

14 the Company was being plagued with uncollectible receivables which it was in the process o f

15 "writing off." At the time the foregoing earnings announcement was released , defendants were in

16 negotiations with AMT Accel UK, Ltd . ("AMT") to write-off approximately one million dollars in

17 receivables . These negotiations were finalized in a settlement on or about May 31 , 1998 . AMT

18 was a European sales subsidiary formerly owned by Singapore-based Lam Soon, a printer

19 manufacturer. Prior to May of 1998 , ITEC sold to AMT an exclusive license to distribute in the

20 UK and Europe Company products in return for guaranteed payments of 51 .25 million. A fter

21 AMT and its parent company began experiencing financial difficulties in early 1998, they were

22 unable to meet their obligations which culminated in the settlement described above . Defendants

23 utterly failed to disclose this information to the investing community until approximately si x

24 months after the fact, in October of 1998 .

25 53 . Similarly, defendants failed to disclose that ITEC was experiencing di fficulties

26 collecting on its receivables throughout the Class period from the following sources : (a) Software

27 Technology , Inc . which resulted in a write-off of $954 ,000; (b) Mita Digital Design , Inc . and

28 Nippo Ltd., which refused to honor a co-development agreement to pay $954 ,000 to the Company .

FIRST AMENDED COMPLAINT FOR VIOLATION orFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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In fact, during the Class Period, Mita's parent company in Japan was forced to file for bankruptcy

protection. As a result, defendants ultimately "settled" with Mita for $328,000, resulting in a year

end write-off of $626,000, while Nippo Ltd . refused to contribute any portion of the $954,000

pursuant to the original contract; (c) Minolta terminated a contract with the Company, disputing

contract receivables of $260,000 which were also written-off; (d) Toholcu Ricoh, Ltd ., a Japanese

corporation, which entered into a technology development agreement with the Company that

provided for guaranteed payments of $674,000, canceled its contract with ITEC, disputing the

amount of the guarantee ; and (e) miscellaneous other contracts which resulted in the write-off of

$788,000 of receivables in the fourth quarter of fiscal 1998 .

54. The foregoing statements , and those discussed below concerning ITEC' s financial

condition, were also false and misleading because the Company was improperly recognizing

revenue throughout the Class Period . ITEC was engaging in accounting practices which would

recognize substantial revenue, such as 30% or 50%, upon the signing of a contract or upon the

signing of a letter of intent based upon the fact that a particular contract was merely "similar" to

another contract that the Company was currently performing. Further, the revenue would be

recognized even though no costs had been incurred to actually make the product that was the

subject of the contract. By way of example, these practices were implemented on the Tohoku

Ricoh project which recognized more than half of the revenue contemplated by the project, even

though ITEC had not incurred half of the costs on that project . Ultimately, as noted above, the

Tohoku project was written-off for a loss of $674,000 .

55. Nevertheless, on or about May 21, 1998, defendants' continued to perpetrate thei r

scheme as they announced in Business Wire the acquisition of Cence Limited :

Imaging Technologies Corp. (NASDAQ:ITEC), pioneer in the development ofhigh-quality digital imaging solutions , today announced the acquisition of CenceLimited , a printer and computer maintenance firm headquartered in the UnitedKingdom .

Cence will become an important customer service component in the Company'srecently established European Headqua rters division, ITEC Europe Ltd ., locatednear London.

"ITEC has an ever increasing installed base of p rinters , and imaging solutions on theEurope an Continent," according to Brian Bonar , chief executive of Imaging

FIRST AMENDED COMPLAINT POP, VIOLATION OFFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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I Technologies Corp . "Europe already represents a signi ficant source of revenue forthe Company, and ITEC Europe needs the resources of Cence and the experience

2 ofDavid Travers to effectively serve our growing customer base . "

3 56. As a result of defendants' campai gn to boost the Company's stock price, by June 2,

4 1998 , ITEC began to attract the interest of certain analysts and pub lications such as The Red Chip

5 Review which gave ITEC an "A." rating and classified the Company as "an at tractive investment."

6 Specifically, the Company was featured at the Red Chip Investor Conference as announced in PR

7 Newswire and the following statements , which were based on and repeated information provided

8 by defendan ts, were disseminated to the investment communi ty:

9 The Red Chip Review Investor Conference Showcases Investment Opportunities InHigh-Performance Small-Cap Aren a

10Twenty of the fastest-growing publicly traded companies present their stories to the

11 public on June 19 in New York City at a conference hosted by THE RED C HIPREVIEW-

12"This is a unique opportunity for individua l investors to gain information on quality

13 small-cap stocks directly from Company management," said Marc Robins,editor-in -chief and publisher of THE RED CHIP REVIEW, the event 's sponsor.

14 "Most investor conferences are targeted for retail brokers and institutional moneymanagers . The mission of THE RED CHIP REVIEW is to make available to

I5 individual investors information that is generally available only to the profession ."

16 At the June 19 conference , investors will meet the top executives from 20 of thesepromising companies that have made it through RED CHIP's demanding selection

17 criteria and tough objective analysis . . .

18 Imaging Technologies Corp . (Nasdaq : ITEC) RED CHIP RAT.tNG. A JTEC is anintegrated provider to the digital imaging market with a focus on printe r

19 technologies , color and monochrome printer products and image storage products .The stock 's price has been pressured and, at 1 Ox trailing 1998 EPS, may be an

20 attractive investment. Visit the Company's Web site at www .imagetechcorp .com . .

21 *****

22 . . . Typically, companies followed by THE RED CHIP REPIEW are undervalue dand under followed, yet they show exciting promise. Becaase they're smaller,

23 they're usually more nimble companies, often in their early stages ofdevelopment. They tend to be fast growing, possess a leading technology, or in

24 some way have a unique story.

25 57. Defendants continued to implement their plan on or about June 16, 1998, by

26 issuing the following press release, in pertinent part, over Business Wire :

27 Imaging Technologies Corporation Names Two New Corporate Directors - Adobeand Network General Executives Join ITEC 's Board - (NASDAQ : ITEC) Imaging

28 Technologies Corporation, a worldwide developer of digital imaging solutions ,


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I today announced the appointment of Stephen A, MacDonald and David M . Carverto its Board of Directors . At the same time, the Company announced the resignatio n

2 of two directors, TTEC's founder, Dr . Edward W. Savarese, and Frank Kavanaugh .The new six-member board will now be comprised of four outside and two inside

3 directors led by Dr . Harry J . Saal, Chairman.

4 "MacDonald and Carver have experience that extends to the core of the digitalimaging marketplace," said Harry Saal . "They bring added strength and depth as

5 well as enhanced industry knowledge to the Board . "

6 "Steve and David both bring to ITECpractical experience in taking a concept andbuilding it into a multi-million dollar Industry leader," said Brian Bomar, Chief

7 Executive Officer of Imaging Technologies. "They have impeccable credentialswithin the industry. Their expexperience and insight into the strategic management

8 of technology companies will help us implement ITEC's plass for continuedgrowth within the digital imaging market. I am personally very fortunate to have

9 the support of individuals of this caliber on the ITEC Team . "

10 58. By June of 1998, defendants' scheme to inflate the value of the Company's stock so

11 that they could gain valuable financing, and continue operating ITEC as a going concern, was

12 progressing better then they had hoped . The value of ITEC's securities had almost doubled from

13 earlier in the year as it appeared that the Company had successfully continued its expansion by

14 acquiring other companies and that its financials were sound . As such, defendants had every

15 reason to continue inundating the investing community with unwarranted optimistic statements

16 concerning the Company's operations on or about July 20, 1998, when they announced th e

17 following through Business Wire :

18 Imaging Technologies To Present at San Diego Technology Investment Conference- Imaging Technologies Corporation, (Nasdaq*ITEC) pioneer in the development of

19 high-quality digital imaging solutions, today announced plans to make a financia lpresentation to investment brokers, financial advisors, and money managers at the

20 First Annual San Diego Technology Investment Conference to be held on July 25th.Brian Bomar, Chief Executive Officer of ITEC, will address the forum to discuss

21 the Company's expanding range of digital imaging products, corporate strategies,and opportunities for continued growth.

22More than twenty of the fastest-growing publicly traded technology companies in

23 San Diego County will be showcased at this all day event. Each Company willhave the opportunity to present their story to the public . . .

24ITEC was recently selected as one of the 1998 Orange Coast Technology Fast 50 .

25 The "Fast 50" recognizes achievements of the fastest growing firms in the OrangeCoast Region, which encompasses Orange and San Diego Counties in California . . .

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27 59. Not long thereafter, in a July 23, 1998, press release over Business Wire ,

28 defendants' announced they had retained an investment bank to implement a new financing

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I strategy. Defendants also continued to boast that ETC had a "strong business plan" and that the

2 Company was "growing and profitable :"

3 Imaging Technologies Corporation Retains Black & Company to ProvideInvestment Banking Services

4July 23, 1998-- Imaging Technologies Corp (NASDAQ:ITEC), pioneer in the

5 development of high-quality digital imaging solutions , today announced that it hasengaged Black & Company of Portland, Ore., to provide financial advisory and

6 investment banking services .

7 ITEC has specifically retained Black & Co . to review the Company's strategicfinancing goals and develop a plan to enhance shareholder value .

8"We have a strong business plan and an experienced management team in

9 place," said Brian Bonar, chiefexecutive officer of Imaging Technologies. "TheCompany is growing and profitably We need Black & Company's support to

10 develop and implement an aggressive financing strategy to ensure our continuedsuccess. "

11

12 60. Days later, on or about July 27, 1998, defendants announced the opening of a new

13 manufacturing facility in Rancho Bernardo, California . Through Business Wire, defendants stated :

14 New Facility to Centralize Production, Distribution, and Technical Support o fPrinter and Imaging Products - Imaging Technologies Corp ., (NASDAQ: ITEC) a

15 pioneer in the development of digital imaging solutions, officially opened its newPrinting Systems Division on Friday, July 24, with a ribbon cutting ceremony .

16The new manufacturing, distribution, and technical support facility is adjacent to the

17 corporate headquarters in the Rancho Bernardo region of San Diego . This operationwill produce advanced digital color and monochrome output devices includin g

18 ITEC's newest line of color printers for use in the digital photography, pre-pressproofing, and the office color market . The facility will also be home to th e

19 company's new Xtinguisher line of external print servers that enable printing ofhigh-quality images on digital copiers and wide format printers .

20Previously, 1TEC operated a separate manufacturing and marketing facility in Costa

21 Mesa, Calif, which is being closed at lease-end this month to make way for theconsolidation in San Diego .

22"This newfacility gives us the flexibility to assemble and distribute all of ITEC's

23 products from one central zed Idcation," said Brian Bonar, chief executiveofficer. "Our new streamlined operations will save time and money , giving us the

24 ability to more effectively compete in the Imaging arena. "

25 Relocation of the Costa Mesa facility to San Diego is part of a corporaterealignment designed to integrate all of ITEC's manufacturing operations within a

26 single operating campus.

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FIRST AMENDED COMPLAINT FOR VIOLATION O FFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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1 61. Even as late as August 18, 1998, a point in time when ITEC was continuing to

2 encounter severe cash flow problems and dramatic increases in spending, defendants continued to

3 laud the Company's financial condition in a press release through Business Wire :

4 Imaging Technologies Corporation Names New Chief Financial Officer ; FormerCFO of SyQuest Technology Joins the ITEC Team

5Imaging Technologies Corp . (NASDAQ :ITEC), pioneer in the development o f

6 digital imaging solutions, today announced the appointment of Michael K . Clemensas chief financial officer . . .

7"ITEC's tremendous growth opportunities require a strong financial manager

8 like Michael, " said Brian Bonar, chief executive officer of Imaging Technologies ."He rounds out our management team . Each individual is a seasoned professional

9 who has been carefully chosen to support and implement our strategic plan."

10 "Working for ITECandBrian Bonar is an exciting opportunityfor me, " saidClemens. "They are demonstrating strong market leadership and as a Company,

11 Ilook forward to helping lead the financial growth in the months to come. "

12 62. Not long thereafter, on or about September 14, 1998, defendants issued the

13 following release in which Bonar claimed that the Company was poised to continue growing

14 revenue by over 300% over the next five years :

15 Imaging Technologies Corp, (Nasdaq: ITEC), pioneer in the development of digitalimaging solutions, has been named to Orange Coast "Fast 50," a ranking of the 50

16 fastest-growing technology companies in the Orange County/San Diego region ofCalifornia .

17The Rankings are based on the percentage of growth in revenues in the five-year

18 period from 1993-1997 . Brian Bonar, chief executive officer of ImagingTechnologies, received the award at a formal presentation held on September 10 in

19 Laguna, Calif.

20 "ITEC has grown in revenue by over three hundred percent in the past five years,a pattern we expect will continue over the next fve years,"stated Bonar.

21 "Imaging is a breakthrough industry and the demand for our products andservices is increasing at an acceleratedpace. "

22"The `Fast 50' recognizes and honors the fastest growing regional technology

23 companies whose leaders have the vision and determination to beat the odds, andbuild companies that contribute to the world with long-term solutions, " said Fred

24 Poska, partner, Orange County Technology Group, Deloitte & Touche, sponsorsof the event

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26 63. Of course, ITEC had hardly "beat the odds ." In fact, while Bonar was disseminating

27 such misleading statements to the investing public, days earlier, on or about September 10, 1998,

28 ITEC's lending facilities were terminating their relationship with the Company due to its inability


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to meet its financial obligations . Specifically , Mr. Greg Marks from Imperial Bank , which held

ITEC's largest line of credit , sent a letter to defendants Bonar and Clemens which indicated that the

bank would cease funding ITEC's lines of credit and further notified defendants that it intended to

terminate its banking relationship with the Company . While these issues were somewhat resolved

in the short term in November of 1998, not long thereafter, in 1999, Imperial Bank ultimately sued

the Company for breaching its financial obligations and ITEC was subsequently put into

receivership .

64. As the Company' s restructuring woes and accounts receivables problems draine d

the Company of its assets, and the Company's financial relationships were dissolving, it was more

important than ever for the Company to raise capital so that it could continue as a going concern .

In other words, the Company had to immediately consummate a transaction that had been in

negotiations which involved selling equity in the form of convertible preferred stock .

65. Defendants announced a private placement of preferred securities in the following

I press release in Business Wire, on September 22, 1998, in which they misleadingly stated the dea l

would "solidify" ITEC's finances . Nothing was farther from the truth .

Imaging Products Manufacturer Raises $4 .38 Million in Private Placement toRepurchase Shares and Support Product Developmen t

(Nasdaq :ITEC) Imaging Technologies Corporation , pioneer in the development ofdigital imaging solutions , announced today that it has redeemed a ll outstandingshares of the Company's Se ries C Convertible Preferred Stock (Series C Shares) .Owners of the Series C Shares received $2 . 23 mil lion in cash and subordinatednotes . ITEC financed the redemption through a $4.38 mi llion private placement ofnewly issued shares of common stock and subordinated notes.

"The redemption of the outstanding Series C Shares and the additional capitalralsedlurther solidifies the Company 's financial position," said Michael K .Clemens, Chief Financial Officer of Imaging Technologies . . .

66. In the same release , defendants explained the mechanics of the deal as follows :

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 shareand subordinated promissory notes in the amount of $3 .13 million. All of thepromissory 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 tuneinto shares of Imaging Technologies' common stock at S2.025 per share (subject toadjustment under certain circumstances) . The remaining notes, $2 .45 million,mature in one year and are not convertible. The Company also issued warrants tothe investors as part of the financing. The warrants authorize the purchase o f

FIR$T AMENDED COMPLAINT FOR VIOLATJON OFFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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1 490,000 shares of common stock at an exercise price of $2 .025 per share. This priceis based on the average of the closing bid prices for ITEC's common stock for the

2 five trading days ended September 14, 1998 . The Company expects the netproceeds from this financing to be approximately $4 million.

3In August 1997, ITEC issued 500 shares of Series C Stock as part of a $5 millio n

4 financing. The Series C Shares were convertible into the Company's common stockat the option of the investors . In today's transaction, the Company redeemed all 237

5 outstanding Series C Shares paying $2 .23 million in cash and issuing subordinate dpromissory notes in the amount of $1 million to the holders of the Series C Shares .

6 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

7 purchase 300,000 shares of common stock (200,000 of which have an exercise priceof $2 .025 per share and 100,000 of which have an exercise price of $4 .00 per share)

8 to the holders of the Series C Shares .

9 67. Then, on or about September 24, 1998 over Business Wire, defendants continued to

10 implement their plan by again omitting to disclose ITEC's numerous problems when the y

11 announced the hiring of a new Vice President of Finance:

12 Imaging Technologies Corp . (Nasdaq:ITEC), pioneer in the development of digitalimaging solutions, today announced the appointment of Christopher W. McKee as

13 Vice President of Finance and Operations .

14 "Chris brings to ITEC exceptional technical skills in automating financial andmanufacturing operations," said Michael K . Clemens, Chief Financial Officer of

15 Imaging Technologies . "His a rperience in running multinational, multifacetedfinancial information systems and enterprise resource planning will be critical in

16 ITECs expansion efforts. "

17 68. Unfortunately for the investing community, the myriad of positive statements listed

18 above concerning the Company's financial health and business prospects were both false an d

19 misleading. As stated herein : (a) the "restructuring" of ITEC announced in April of 1998 would be

20 far more costly than defendants had led the investing community believe . In fact, the costs were

21 significant and material by any standards, totaling approximately $3,800,000, which fa r

22 outweighed any benefits that ITEC may have received ; (b) the Company's cash flow problems

23 were not only severe but irreversible . By the end of fiscal year 1998 (June 30, 1998), ITEC's

24 working capital had drastically declined from $4,818,000 for fiscal 1997 to $315,000, while net

25 cash used in operating activities increased to $7,100,000 during fiscal 1998 as compared t o

26 $4,000,000 for the prior year . Further, ITEC's banking relationships were dissolving which

27 inhibited defendants from exercising the Company's credit lines ; (c) as a result of ITEC's cash

28 flow problems, the Company was not growing as defendants represented . The decline in working


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capital coupled with high operating costs was resulting in an inability to achieve product sales

targets in relation to current sales levels ; and (d) defendants' representations to the investing

community concerning the Company's growth, profitability and prospects were also false and

misleading because throughout the Class period, the Company was overstating its earnings,

revenue and financial potential by : (i) concealing and failing to reveal the extent of ITEC's non-

performing receivables, which they were aware of as early as April of 1998 ; (ii) concealing that the

Company's expenses had dramatically increased in the fourth quarter of fiscal 1998 . For example,

ITEC's fourth quarter "selling, general, and administrative' expenses were 76% higher than the

average for each of the previous three fiscal quarters and ITEC's fourth quarter "engineering costs"

were 28% higher than the average for each of the previous three fiscal quarters ; and (iii) engaging

in inappropriate accounting practices, including the misrepresentation of "engineering revenues"

that the Company had earned in fiscal year 1998 . Specifically, the Company reported engineering

revenues of $4,500,000 through the third quarter of 1998, however, the Company's annual 10-K

report filed in October 1998 adjusted the figure downward by reporting a total of $3,700,000 for

the entire fiscal year of 1998.

THE TRUTH REVEALED

69 . On October 9, 1998, the Company stunned the financial community with its surprise

announcement which stated that ITEC would be taking a $9,000,000 write down for fiscal 1998 .

On ten times the normal trading volume, ITEC stock declined more than 40% from $1 3/4 to

S 15116, The announcement was disseminated over Business Wire and noted : .

Imaging Technologies Corporation Reports Fiscal 1998 Financial Results

(NasdagiiTEC), pioneer in the development of digital imaging solutions, todayreported financial results for fiscal 1998, which ended June 30, 1998 .

Sales revenues for the year were $34,417,000, a 7% increase over revenues of$32,237,000 in fiscal 1997 . Operating Income/or fiscal 1998, before specialcharges, fell to a loss of ($863, 000), this compares with operating income of$512,000 for fiscal I997. Earnings per share (diluted) decreased to a loss of(A90) per share for fsscal 1998, from $.06 per shareforfiscal 1997.

The Company announced that in the fourth quarter of fiscal 1998, it took specialcharges of $5,157,000 for contract losses and licensing receivables primarilyrelated to the Asian economic crisis and $3, 784, 000 for restructuring costsassociated with reorganizing and streamlining corporate operations . "While we


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1 do not like to report a loss, the write-offs taken in the fourth quarter were necessaryto realign the business, and give us a stronger posi tion going forward," said Brian

2 Bonar, Chief Executive Officer of Imaging Technologies .

3 70 . In this same release , Bonar continued by finally disclosing certain pertinent facts

4 that had been withheld from the investing public . These included : (a) lower sales ; (b) contrac t

5 cancellations ; (c) an ongoing liquidity crunch ; (d) the Company's inabili ty to collect payments on

6 its receivables; and (e) the accrual of 18 months wo rth of admi ttedly undisclosed costs relating to

7 the mergers :

8 "ITEC experienced a number of significant financial events in the fourth quarter,including lower than expected revenues and incurred losses from contrac t

9 cancellations and nonpayment by customers primarily as a result of the continuedweakening of the Asian economy, " according to Bonar. "As of the end of the first

10 quarter of fiscal 1999, which ended September 30, the Company's busines scontinues to be in a transitional phase and there are Important short-term

11 operational and liquidity challenges. "

12 Sonar described the conditions in Asia that led to the write down of receivables,"ITEC has long-teen, established relationships with some of the larger p rinter

13 manufacturers in Japan and Korea," he said . "As the economic situation in thesecountries continues to deteriorate we are faced with the reality that many of these

14 customers have serious financial problems and are now unable to suppo rt product15 development contracts awarded to ITEC . "

Included in these special charges are restructuring costs related to the relocation16 and realignment of ITEC 's administrative, manufacturing, and distribution

operations as well as the write off of related assets. These additional costs17 include the accrual of costs related to workforce reductions and facilities

relocation, and reserves for excess space and manufacturing capacity . During the18 past 18 months, ITEC has acquired four separate businesses , expanding the

Company's strategic position in the digital imaging market . . .1 920

71 . The financial community was devastated by the Company 's disclosures . Moreover,

the analyst community challenged both the integrity and financial practices of ITEC and21

defendants in upcoming reports . In one report disseminated on or about October 26, 1998, by22

analyst Aalok K. Shah from The Red Chip Review , Mr. Shah stated :23

As we mentioned in our last update on Imaging Technologies Corp . (Nasdaq:TTEC)24 on Oct . 14, ITEC' s 4Q98 ended on June 30, but the Company did not yet release its

quarterly results of file its form 10-K until Oct. 13 . While extensions are granted in25 unusual circumst ances, this is the second year in a row ITEC has been late.

26 *****

27 After briefly reviewing the 1998 form 10-Kfor our update, we lowered our ratingto a "D." Since that time, we have spoken with ITEC management and expressed

28 our concerns regarding the following :

FIRST AMENDED COMPLAINT FOR VIOLATION OFFEDERAL SECURITIES LAWS - 99 CV 2163[c LSP

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1 . The disappointingyear-end results.

2. The limited working capital and going concern clause.

3. The recent financial transactions the Company has initiated toimprove the working cap ital situation .

4. The substantial special charges taken during the fourth quarter,which led to an earnings loss for the year of $0. 90 per share.

5. Thefuture of the Company's products and revenues.

6. The Company's inability to communicate effectively with its shareholders and theinvestment community.

Missed Numbers and a Going Concern Clause :

For the fourth quarter of 1998, the Company recorded revenues of $6 .1 million .This compares with $8 .5 million in 4Q97 , $ 10.8 million in 3Q98 , and the $12 .0million we were axpecting. Gross margins were significantly lower than the 36%we projected . For the quarter, the Company recorded gross margins of 10 .1% .SG&A rose tremendously , thus contributing to the negative operating loss . SG&Awas $3 .5 million , up from $2 . 5 million in 3Q98 . Interest expense rose to $228,000in the fourth quarter, up from $71 ,000 in 3Q98 .

Future Prospects :

In a recent conversation with ITEC management, it was claimed that the Companywill be able to meet the substantial, debt it has accumulated . They told us that ITECis currently working on securing at least two other lines of credit and should expectto have one in the very near future . They also told us that, given the recent chargesthe Company has taken, management is now in a position to run the Companyeffectively. We don't share their view. The cost of ITEC's new financingtransactions are high, and the obligations are large. ITEC will also have to havemore working capital to run the Company, and this may mean a further dilution forshareholders. All told the possible dilution factor may add anywhere from 1 .0million to 1 .7 million shares . To put that into perspective, the Company currentlyhas 11 .3 million outstanding, this would be a 15% increase in shares and an equallylarge dilution on the bottom line.

Forward Disdasure Policy and Lack of Communication :

We are concerned with ITEC's disclosure policies, as severalpieces ofinformation were omitted from recent SECfrlings that we believe were materialThe Company cane in at almost half of our revenue estimates for the fourthquarter, and without any warn ing. When we spoke to the Company in August,management made no mention of any losses, nor did they release anyinformation until nearly three and a halfmonths after the quarter had ended.


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This poor communication casts doubt on the effectiveness of ITEC's staff andhow they relate to their own shareholders.

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Summary:

After taking a very had look at ITEC, we are reiterating the "D " rating weassigned in our news update on Oct. 14 and withholding a target price. Webelieve the Company will have difficulty meeting some of itsfinancial obligations,and it may also have to negotiate another signifIcant transaction to securesufficient working capital. Investors should use extreme caution and avoidmaking an investment in ITEC. We urge investors to exit while there remainssomething still on the table"

72. On or about November 17, 1998 , defendants continued to report dismal results fo r

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the Company by announcing ITEC's financial results for its first quarter of 1999 . The release

stated in pertinent part :

Imaging Technologies Corporation (Nasdaq : ITEC) today reported financial resultsfor the first quarter of fiscal 1999, which ended Sept . 30, 1998. Sales revenues forthe first fiscal quarter were 57,279,000, a slight increase over revenues of$7,184,000 in the first fiscal quarter of 1998 . Operating income for the quarter fellto a loss of ($993,000), compared with operating income of $845,000 for the firstquarter of fiscal 1998. Results per share (diluted) decreased to a loss of ($ .10) pershare, compared to earnings of $ .07 per share for the first quarter of fiscal 1998 .

"We were hampered by a lack ofworking capital in the first quarter, which limitedour product shipments and slowed growth efforts," said Brian Bonar, ChiefExecutive Officer of Imaging Technologies. "However, we successfully introduceda number of new products and we have begun shipping many of our newest lines .We are pleased with the market response . We continue to invest in R&D as welaunch ITEC's next generation of printing and imaging solutions ,

"We are moving forward and getting closer to ful fi lling our vision of being a totalimaging solutions provider," Bonar concluded . "We have a strong managementteam in place , and our products are shipping . This quarter we reported license androyalty revenue for the first time since fiscal 97 . In addition , by year end, we willhave introduced and shipped five new printers, a handful of `dfilm' digital memo rystorage products, along with several new ColorBlind(R) products . "

73. On or about November 23, 1998, analyst Aalok K. Shah from The Red Chip

Review, disseminated another report which directly challenged the integrity of defendants' p rior

representations and lack of disclosures concerning the t rue state of affairs of ITEC to the investing

community. While the repo rt duplicated certain information from the prior October report, it

stated in pertinent part :


FEDERAL SECURITIES LAWS - 99 CV 2163K LSP28

imaging Technologies Corp. (Nasdaq : ITEC), through its divisions, serves as anintegrated provider to the digital imaging market with a focus on printertechnologies, color and monochrome printer products , and image storage products .

ITEC has run into considerable financial difficulty . Indeed, the Companyreported that "At June 300 1998, and for the year then ended, the Companyexperienced a net loss and a significant decline in working capital and net worthwhich raised substantial doubt grout its ability to continue as a going concern . "Its working capital dropped by $4 .5 million during FY98 to $300,000. Since June30, it has been seeking additional funding through private placements .

CURRENT STATUS : A BITTER FAREWEL L

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Disappointing Results : ITEC's 4Q98 ended June 30 . ITEC has been less thanopen with its shareholders and the investment community about its true situation .Our concerns have deepened because of ITEC's disappointing year-end results,its limited working capital, several questionable financial transactions, and thesubstantial special charges it took in 4Q98, which led to an earnings lossfor theyear of $0.90 per share . Excluding special charges of $5 .2 million for inventorywrite-offs and $3 .8 million in restructuring costs, ITEC recorded a loss of $0 .37 pershare for the period compared with our estimate of a $0 .11 per share in earnings .For FY98 as a whole, the Company posted a loss of $0 .15 . When the specialcharges are counted, its fourth quarter loss was $1 .10 per share. For the year, ITEClost $0.90. On Nov. 17, ITEC announced 1Q99 results . The Company announced aloss of $0 .10 per share based on $7 .2 million in revenues .

These losses were due primarily to contract cancellations and the lack of expectedroyalty income because a few OEMs - Panasonic, Apple, and others - failed to bringend products to market . Two in particular, Mita Industrials Co ., a Japanese copiermanufacturer, and AMT ACCEL UK, Ltd ., a European sales subsidiary of aSingapore-based manufacturer of printers, were largely responsible for the $5 .2million in write-offs aid special charges . Mita, with debts of more than 200 billionYen, sought court protection from its creditors in August and is undergoing acorporate restructuring . ITEC settled for $328,000 on what it was owed, and wroteoff some $626,000 of Mita's debt . AMT and its parent company suffered financialdifficulties and were unable to meet their obligations to ITEC . ITEC wrote off$891,000 in this case and settled for an assumption of AMT's net assets, or$359,000 .

A Going Concern : It is evident from ITEC's 10K, which was submitted Oci 13,that the Company may have difficulty fu lly meeting its currentfinancialobligations unless it obtains additional working capital

1TEC redeemed all outstanding shares of its Series C convertible preferred stock inSeptember . Owners received $2 .23 million in cash, $1 million in subordinatednotes, and warrants to purchase 300,000 shares of common stock (100,000 shares atthe exercise price of $4 .00 and 200,000 shares at an exercise price of $2 .025). TheCompany financed the redemption through a $4 .38 million private placement ofnewly issued shares and subordinated notes . It issued a total of 500,000 shares ofcommon stock at $2.50 per share and $3 .13 million in promissory notes at 16%interest . Some of the notes mature in two years and are convertible . The restmature in one year and are noncorwertible ITEC has also issued warrants as part o f


FEDERAL SECURIT IES LAWS - 99 CV 2163K LSP29

the financing. We anticipate that these warrants and convertible notes could addmore than 1 .5 million shares and therefore dilute earnings .

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The Company's management, in a recent conversation with us, contended that theCompany will be able to service the substantial debt it has accumulated . We areless sanguine than management . In addition to the private placements and otherfinancing arrangements, ITEC has negotiated one line of credit and is working onsecuring at least two others. One financial institution terminated ITEC's line ofcredit in July and the Company has negotiated a $7 .5 million credit line withanother bank at prime plus 0 .75. We were told over a month ago, that the Companywould secure additional credit facilities with a bank, within a few days. However,we have not heard any official statements item the Company, and the only publicstatement made on the Company's financial position was that American Industries,Ins ., a Portland, OR. based company, will guarantee 1TEC's letters of credit, forwhat we imagine, additional warrants, and thus leading to further dilution.

Questionable Severance: A letter from ITEC attached to a form submitted by oneof the Company's lenders disclosed that Edward Savarese, ITEC's founder andformer CEO, was entitled as ofApril I to $1.2 million in aggregate compensation,but the Company reduced to $725,000. Another former officer and director,Henry Roth, was entitled to compensation of $555,000, which was reduced by$345,000. Savarese and Roth hold warrants to purchase approximately 600,000shares of ITEC'S stock We find this letter disturbingfor two reasons - the factthat ITEC used a huge payout and warrants to remove Savarese and Roth, whichmay be partly responsiblefor the huge SG&A line in 4Q98, and that managementdid not disclose this significant information in its 10-Kftling.

The End : We have decided to drop coverage on ITEC. We believe the Companywill have difficulty meeting its financial obligations, and it may also have tonegotiate another significant transaction to secure sufficient working capital.Investors should use extreme caution and avoid making an investment in ITEC.We urge investors to exit while there remains something still an the table.

74. Not long thereafter, on or about February 19, 1999, ITEC announced financia l

I results for its second quarter of fiscal 1999 . In its statement , it was evident that a financial

turnaround for the Company was nowhere in sight . Through Business Wire, defendants made the

following announcement :

(Nasdaq : ITEC) Imaging Technologies Corp . today reported financial results forthe second qua rter of fiscal 1999 , which ended Dec . 31, 1998 . Sales revenues forthe second fiscal quarter were $4 . 2 million, a decrease over revenues of $9 .8 millionin the second fiscal quarter of 1998 . Operating income for the quarter fell to a lossof ($3 .0 million) compared with operating income of $ 1 .1 million for the secondquarter of fiscal 1998 . Earnings per share (diluted) decreased to a loss of ($.26) pershare , compared to earnings of $ .08 per share for the second qua rter of fiscal 1998 .

The company posted a six-month fiscal 1999 operating loss of ($4 .6 million)compared with earnings of $1 .8 million for the comparable period in fiscal 1998 .The company reported a loss of ($ .36) per share compared with income of $ .14 pershare for the first two quarters of fiscal 1998_ Revenues for the six-month perio d

FIRST AMENDED COMPLAINT FOR VIOLATION ofFEDERAL SECURITIES LAWS - 99 CV 2163K LSP

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were $11 .5 million compared with $17 .5 million reported in the first six months offiscal 1998 .

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"ITEC failed to achieve the objectives of our business plan in the second fiscalquarter in part due to insufficient working capital limiting our ability to manufactureand deliver products," said Brian Bonar, chief executive officer of ImagingTechnologies ." However, the recently announced infusion of capital and ongoingnegotiations to establish realistic and workable banIdng relationships are designedto put the company back on plan in the coming quarters . "

In addition to posting financial results for the second fiscal quarter, ITEC todayannounced the sale of its Prima International subsidiary, a PC Card and storageproducts distributor, and the consolidation and closure of its McMican memoryproducts manufacturing subsidiary, These moves are part of an ongoingrealignment of the company's operations around its core imaging businesses .

"These efforts are geared toward focusing on markets and products that produce ahigher return on our investment," added Bonar . "The PC Card and data storageaccessories market was not in he with our present market strategy . We areworking to solidify our position in the industry by concentrating on our areas ofgreatest strength ."

75 . ITEC has never recovered from its financial tailspin and today the Company's stock

trades for cents on the share . Unfortunately for the investing community, in ignorance of the

adverse facts concerning ITEC's business condition during the Class Period relating to the

Company's reorganization costs, receivables, improper accounting practices, slowing sales and

cash flow problems, which were concealed by defendants throughout the Class Period, plaintiffs

and the other members of the Class purchased their ITEC securities at artificially high prices,

relying on the statements made and/or the integrity of the market and were damaged thereby .

76. Had plaintiffs and the other members of the Class known of the materially advers e

information not disclosed by the defendants, they would not have purchased their ITEC securities

at the artificially inflated prices that they did .

DEFEND4 T ' SCIENTE$

77. During the Class Period, each of the Individual Defendants who were senio r

executives and/or directors of ITEC were privy to confidential and proprietary information

concerning ITEC, its operations' finances, financial condition, products and business prospects,

including terms of sales, customer returns, price protection promotions, credit allowances,

receivables and customer inventory levels . These defendants also had access to and knew of, o r

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were consciously or deliberately reckless in not knowing of, material adverse non public

21 information concerning ITEC's financial condition .

78 . Each of the Individual Defendants was provided with copies of ITEC's management

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reports, press releases and SEC filings alleged herein to be misleading prior to, or shortly after

their issuance . All of the Individual Defendants had the ability and opportunity to prevent their

issuance or cause them to be corrected . As a result, each of the Individual Defendants i s

responsible for the accuracy of the public reports and releases detailed herein as "group published"

information and are therefore responsible and liable for the representations contained therein .

79 . During the Class Period, defendants directly and indirectly engagod and participate d

in a continuous course of conduct to misrepresent the results of ITEC's operations and to conceal

adverse material information regarding the finances , financial condition, receivables and results of

operations of ITEC as specified herein . Defendants employed devices , schemes , and artifices to

defraud, and engaged in acts, practices, and a course of conduct as herein alleged in an effort to

increase and maintain an ar tificially high market price for the common stock of the Company.

This included the formulation , making, and/or participation in the making of untrue statements of

material facts, and the omission to state material facts necessary in order to make the statements

made , in light of the circumstances under which they were made , not misleading , which operated

as a fraud and deceit upon plaintiffs and the other members of the Class .

80. The defendants are liable, jointly and severally, as direct participants in the wrong s

complained of herein . Defendants had a duty promptly to disseminate accurate and truthful

information with respect to ITEC' s products, operations, financial condition and business

prospects or to cause and direct that such information be disseminated so that the market p rice of

ITEC stock would be based on truthful and accurate information .

81. As officers, directors and/or controlling persons of a publicly held Company whose

securities are registered with the SEC under the Exchange Act, traded on the NASDAQ National

Market System, and governed by the provisions of the Exchange Act, defendants had a duty to

promptly disseminate accurate and truthful information with respect to the Company's operations,

business, products, markets, management, earnings and business prospects, to correct any


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previously issued statements from any source that had become untrue, and to disclose any trends

that would materially affect earnings and financial operating results of ITEC, so that the market

price of the Company's publicly traded securities would be based upon truthful and accurate

information.

82. Since early 1998, at the latest, defendants were aware of the existence of inadequat e

internal controls and/or with conscious or deliberate recklessness disregarded their obligation to

implement adequate controls to ensure that revenues and accounts receivables were properly

recorded in compliance with Generally Accepted Accounting Principles ("GAAP" )_ These

defendants had a responsibility to maintain sufficient accounting controls to accurately report

ITEC's financial results. The representations made by defendants in ITEC's financial statements

and in other financial disclosures to the public were the representations of ITEC's management .

Contrary to the requirements of GAAP and SEC rules, defendants failed to implement and

maintain an adequate internal accounting control system and engaged in improper accounting

practices as described herein .

83 . By virtue of their positions with ITEC and because of the significant reputational

and monetary benefits they stood to gain from a positive public perception of ITEC, and as a result

of artificially inflated stock prices, defendants also had both the opportunity and motive to commit

the acts alleged herein . Defendants were aware of ITEC's true financial condition yet knew, or

with conscious or deliberate recklessness disregarded, the limitations of the Company . The air of

accomplishment and success created as a result of defendants' material misrepresentations made

ITEC more attractive to potential investors, and served to maintain its stock price at artificial

levels .

84. Each defendant had the opportunity to commit and participate in the fraud . The

Individual Defendants were senior officers and/or directors of ITEC and they controlled press

releases , corporate reports, communications with analysts, public filings, and the reporting of the

Company's financials . Thus, these defendants, controlled the public dissemination of ITEC's false

and misleading statements to the investing public as alleged herein which artificially inflated the

price of ITEC's stock.

FIRST AMENDED COMPLAINT FOR VIOLATION OFFEDERAL, SECURITIES LAWS - 99 CV 2163K LSP

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1 85, Each of these defendants also had the motive to commit and participate in the fraud

2 in order to gain pecuniary benefits . The continued receipt of salary and employment in th e

3 Company were significant motives to inflate the Company's stock and avoid bankruptcy .

4 86. As a small Company with limited outside information and news concerning the

5 Company, ITEC's stock price was particularly sensitive to defendants' statements regardin g

6 ITEC's revenues, business and profits .

7 STATUTORY SAFE HARBO R

8 87. The statutory safe harbor providing for forward-looking statements under certain

9 circumstances does not apply to any of the false forward-looking statements pleaded in thi s

10 Complaint. None of the forward-looking statements pleaded herein were sufficiently identified as

11 a "forward-looking statement" when made . Nor did meaningful cautionary statements identifying

12 important factors that could cause actual results to differ materially from that in the

13 forward-looking statements Company those statements . To the extent that the statutory safe harbor

14 does apply to any forward-looking statements pleaded, the defendants are liable for those false

15 forward-looking statements because at the time each of those statements was made, the speaker

16 actually knew the forward-looking statement was false and the forward-looking statement was

17 authorized and/or approved by an executive officer of ITEC who actually knew that thos e

1S statements were false when made.

19 COUNT I

20 (Violations of Section 10(b) of the Exchange Actand Rule 10-5 Promulgated Thereunder)

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22 88. Plaintiffs repeat and reallege the allegations above as though fully set forth herein .

23 89. During the Class Period, defendants, and each of them, carried out a plan, scheme

24 and course of conduct which was intended to and, throughout the Class period, did : (i) deceive the

25 investing public, including plaintiffs and the other Class members, as alleged herein ; (ii) artificially

26 inflate and maintain the market price of ITEC ; and (iii) cause plaintiffs and other members of the

27 Class to purchase ITEC securities at inflated prices . In furtherance of this unlawful scheme, plan

28 and course of conduct, defendants, and each of them, took the actions set forth herein .



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1 90. Defendants : (a) employed devices, schemes, and artifices to defraud ; (b) made

2 untrue statements of material fact and/or omitted to state material facts necessary to make the

3 statements not misleading ; and (c) engaged in acts, practices, and a course of business which

4 operated as a fraud and deceit upon the purchasers of the Company's securities in an effort t o

5 maintain artificially high market prices for ITEC securities in violation of § 10(b) of the Exchange

6 Act and Rule lob-S .

7 91 . The statements made by defendants during the Class Period were materially false

8 and misleading because at the time they were made, the Company and persons acting as corporate

9 officers knew, or with conscious or deliberate recklessness ignored, but failed to disclose, th e

10 matters set forth herein.

11 92. In ignorance of the artificially high market prices of ITEC' publicly trade d

12 securities, and relying directly on defendants or indirectly on the false and misleading statements

13 made by defendants, upon the integrity of the market in which the securities trade, on the integrity

14 of the regulatory process and the truth of representations made to appropriate agencies throughout

15 the Class Period and/or on the absence of material adverse information that was known t o

16 defendants but not disclosed in public statements by defendants during the Class Period, plaintiffs

17 and the other members of the Class acquired ITEC securities during the Class Period at artificially

18 high prices and were damaged thereby .

19 93. Had plaintiffs and the other members of the Class and the marketplace known of the

20 true financial condition, business prospects and character of leadership of ITEC which were no t

21 disclosed by defendants, plaintiffs and other members of the Class would not have purchased or

22 otherwise acquired their ITEC securities during the Class Period, or would have not done so at the

23 artificially inflated prices which they paid . Hence, plaintiffs and the Class were damaged by

24 defendants' violations of § 10(b) and Rule lOb-5 .

25 C II

26 (Violation of Section 20(a) of the Exchange ActAgainst the Individual Defendants)

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28 94. Plaintiffs incorporates by reference the above paragraphs above as if set forth fully


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1 herein . This Count is asserted against the Individual Defendants .

2 95. The Individual Defendants acted as controlling persons of ITEC within the meaning

3 of §20 of the Exchange Act as alleged herein. By reasons of their executive, managerial positions

4 with ITEC, these defendants had the power and authority to cause the Company to engage in th e

5 wrongful conduct complained of herein .

6 96. By reasons of the aforementioned wrongful conduct, the Individual Defendants are

7 liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of their wrongful

8 conduct, plaintiffs and the other members of the Class suffered damages in connection with

9 purchasing the Company's securities during the Class Period.

10 WHEREFORE, plaintiffs pray for relief and judgment, as follows :

11 I . Determining that this action is a proper Class action, certifying plaintiffs as Class

12 Representatives under Rule 23 of the Federal Rules of Civil Procedure and their counsel as Class

13 counsel ;

14 2. Awarding compensatory damages in favor of plaintiffs and the other Class members

15 against all defendants, jointly and severally, for all damages sustained as a result of defendants '

16 wrongdoing, in an amount to be proven at trial, including interest thereon ;

17 II I

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FIRST AMENDED COMPLAINT FOR VIOLATION O FFEDERAL SECURITIES LAWS - 99 CV 21 63K I .SP

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3 . Awarding plaintiffs and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees ; and

4. Such other and further relief as the Court may deem just and proper .

DATED: March 19, 2001 Kevin J . Yourman (147159)Vahn Alexander (167373)Jennifer R. Williams (207487)WEISS & YOTJRMAN

Br4ahn Alexander

10940 Wilshire Blvd ., 24th FloorLos Angeles, CA 90024Telephone : (310) 208-2800

Michael D . Braun (167416)STULL, STULL & BRODY10940 Wilshire Blvd., Suite 2300Los Angeles , CA 90024Telephone : (310) 209-246 8



FEDERAL SECURITIES LAWS - 99 CV 2163K L SP

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NRY DEMAND

Plaintiffs hereby demand a trial by jury .

DATED: March 19, 2001Kevin J . Yourman (147159)Vahn Alexander (167373)Jennifer R. Williams (207487)WEISS & YOURMAN

AA ~

ahn Alexander

10940 Wilshire Blvd ., 24th FloorLos Angeles, CA 90024Telephone : (310) 208-2800

Michael D. Braun (167416)STULL, STULL & BRODY10940 Wilshire Blvd ., Suite 2300Los Angeles, CA 90024Telephone : (310) 209-2468



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PROOF OF SERVICE

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STATE OF CALIFORNIA )) ss. :

COUNTY OF LOS ANGELES )

I am employed in the county of Los Angeles , State of Califomia, I am over the age of18 and not a party to the within action ; my business address is 10940 Wilshire Boulevard, Suite2300, Los Angeles, CA 90024 .

On March 19, 2001, I served the documents described as: FIRST AMENDEDCOMPLAINT FOR VIOLA'T'ION OF FEDERAL SECURITIES LAWS by placing a truecopy(ies) thereof enclosed in a sealed envelope(s) addressed as follows :

Philip J . EnglundITEC TECHNOLOGIES CORPORATION15175 Innovation DriveSan Diego, CA 92128Tel: (858) 613-1300Fax: (858) 207-6505

Barnes H. EllisJeremy D. Sacks,Maria GoreckiSTOEL RIVES LL P900 S . Fifth Avenue , Suite 2600Portland , OR 97204-126 8Tel : (503) 220-248 0

BYMAIL

James G . SandlerRichard ValdezSANDLER, LASRY, LAUBE, BYER &VALDEZ LLP402 West Broadway Suite 1700San Diego , CA 92101-3542Tel : (619) 235-565 5Fax: (619) 235-5648

BYMAIL

BYM,4lL

I served the above document(s) as follows :

X BY MAIL. I am familiar with the firm's practice of collection and processingcorrespondence for mailing. Under that practice it would be deposited with U .S. postalservice on that same day with postage thereon fully prepaid at Los Angeles, Californiain the ordinary course of business . I am aware that on motion of the party served,service is presumed invalid if postal cancellation date or postage meter date is more thanone day after date of deposit for mailing in an affidavit-

I declare that I am employed in the office of a member of the bar of this Court at whosedirection the service was made.

Executed on March 19, 2001, at Los Angeles, California 90024 .

Jannette AstoriaType or Print Name Signature

Case No . 99 CV 2163K LS?

Behfarin, et al. v. Imaging Technologies, et al. 99-CV-02163-First...

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