SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
or
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[ITEC LOGO]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
15175 INNOVATION DRIVE
SAN DIEGO, CALIFORNIA 92128
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (858) 613-1300
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
The number of shares outstanding of the registrant's common stock as of May 14,
2001, was 160,132,065.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 2001 (unaudited) and June 30, 2000 (audited)................................3
Consolidated Statements of Operations - 3 months ended March 31, 2001 and 2000 (unaudited).........................4
Consolidated Statements of Operations - 9 months ended March 31, 2001 and 2000 (unaudited).........................5
Consolidated Statements of Cash Flows - 9 months ended March 31, 2001 and 2000 (unaudited)..........................6
Notes to Consolidated Financial Statements..........................................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..............................................................................................17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................17
ITEM 5. OTHER INFORMATION..............................................................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................................17
SIGNATURES .............................................................................................................18
2
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MARCH 31, JUNE 30,
2000 2000
Current assets
Cash $ 275 $ 291
Accounts receivable, net 196 175
Inventories 156 203
Prepaid expenses and other 376 333
------------- -------------
Total current assets 1,003 1,002
Property and equipment, net 623 531
Goodwill 674 -
Other - 150
------------- -------------
$ 2,300 $ 1,683
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank note payable $ 4,265 $ 5,765
Short-term debt 2,563 2,563
Accounts payable 6,539 5,378
Current portion, long-term debt 175 -
Accrued expenses 1,863 1,828
------------- -------------
Total current liabilities 15,405 15,534
Long-term debt - -
------------- -------------
Stockholders' equity (deficit)
Series A preferred stock, $1,000 par value, 7,500 shares
authorized, 420.5 shares issued and outstanding 420 420
Common stock, $0.005 par value, 200,000,000 shares
Authorized, 155,578,560 shares issued and outstanding 773 507
Paid-in capital 65,149 58,641
Shareholder loans (105) (105)
Accumulated deficit (79,342) (73,314)
------------- -------------
Total shareholders' equity (deficit) (13,105) (13,851)
------------- -------------
$ 2,300 $ 1,683
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2001 2000
---- ----
Revenues
Sales of products $ 1,165 $ 260
Engineering fees - 240
Licenses and royalties 30 221
----------- -----------
1,195 721
----------- -----------
Costs and expenses
Costs of products sold 1,050 225
Selling, general, and administrative 1,559 822
Cost of engineering fees 223 508
----------- -----------
2,832 1,555
----------- -----------
(1,637) (834)
Income (loss) from operations
Other expense
Interest, net (65) (150)
Restructuring - (1,362)
----------- -----------
(65) (1,512)
----------- -----------
Income (loss) before income taxes (1,702) (2,346)
Income tax expense - -
----------- -----------
Net income (loss) $ (1,702) $ (2,346)
=========== ===========
Earnings (loss) per common share
Basic $ (.01) $ (.03)
=========== ===========
Diluted $ (.01) $ (.03)
=========== ===========
Weighted avg. common shares - basic 141,148 90,807
Weighted avg. common shares - diluted 141,148 90,807
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2001 2000
---- ----
Revenues
Sales of products $ 2,381 $ 1,261
Engineering fees - 265
Licenses and royalties 662 557
------------ ------------
3,043 2,083
------------ ------------
Costs and expenses
Costs of products sold 1,974 1,822
Selling, general, and administrative 5,631 5,749
Cost of engineering fees 679 2,136
------------ ------------
8,284 9,707
------------ ------------
(5,241) (7,624)
Income (loss) from operations
Other expense
Interest, net (787) (329)
Restructuring - (1,380)
------------ ------------
(787) (1,709)
------------ ------------
Income (loss) before income taxes (6,028) (9,333)
Income tax expense - -
------------ ------------
Net income (loss) $ (6,028) $ (9,333)
============ ============
Earnings (loss) per common share
Basic $ (.05) $ (.10)
============ ============
Diluted $ (.05) $ (.10)
============ ============
Weighted avg. common shares - basic 119,045 90,807
Weighted avg. common shares - diluted 119,045 90,807
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2001 2000
Cash flows from operating activities
Net income (loss) $ (6,028) $ (9,333)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 252 579
Stock issued for services 871 -
Non-cash interest 364 -
Changes in operating assets and liabilities
Accounts receivable 58 1,704
Inventories 47 502
Prepaid expenses and other (43) 896
Accounts payable and accrued expenses 701 (3,713)
----------- -----------
Net cash from operating activities (3,778) (6,722)
Cash flows from investing activities
Capital expenditures (104) -
Other 150 -
----------- -----------
Net cash from investing activities 46 -
----------- -----------
Cash flows from financing activities
Net borrowings under bank lines of credit (1,500) 377
Net borrowings under long-term notes payable 850 -
Net proceeds from issuance of common stock 4,366 6,971
----------- -----------
Net cash from financing activities 3,716 7,348
----------- -----------
Net increase (decrease) in cash (16) 626
Cash, beginning of period 291 75
----------- -----------
Cash, end of period $ 275 $ 701
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Imaging Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have
been prepared pursuant to the rules of the Securities and Exchange Commission
(the "SEC") for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These financial statements and notes herein are unaudited, but in
the opinion of management, include all the adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the years ended
June 30, 2000, 1999, and 1998 included in the Company's annual report on Form
10-K filed with the SEC. Interim operating results are not necessarily
indicative of operating results for any future interim period or for the full
year.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At March 31, 2001, and for the three
months then ended, the Company had a net loss, negative working capital, and a
decline in net worth which raise substantial doubt about its ability to continue
as a going concern. The Company's losses have resulted primarily from an
inability to achieve product sales and contract revenue targets due to
insufficient working capital. ITEC's ability to continue operations will depend
on positive cash flow, if any, from future operations and on the Company's
ability to raise additional funds through equity or debt financing.
On August 20, 1999, at the request of Imperial Bank, the Company's primary
lender, the Superior Court of San Diego appointed an operational receiver who
took control of the Company's day-to-day operations on August 23, 1999. On June
21, 2000, in connection with a settlement agreement reached with Imperial Bank,
the Superior Court of San Diego issued an order dismissing the operational
receiver.
The Company has reestablished management control of its operations. In order to
succeed with its strategic plan, the Company must obtain additional funds to
provide adequate working capital and finance operations. The Company has engaged
a financial advisor, i Capital Corporation of Irvine, California, to assist with
additional fund raising efforts and to help identify merger and acquisition
candidates. There can be no assurance, however, that the Company will be able to
comply with the Imperial Bank settlement agreement, meet the conditions under
the financing facility, or complete any additional debt or equity financings on
favorable terms or at all, or that any such financings, if completed, will be
adequate to meet the Company's capital requirements. Any additional equity or
convertible debt financings could result in substantial dilution to the
Company's stockholders. If adequate funds are not available, the Company may be
required to delay, reduce or eliminate some or all of its planned activities,
including any potential mergers or acquisitions. The Company's inability to fund
its capital requirements would have a material adverse effect on the Company.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) available to common shareholders (the
"numerator") by the weighted average number of common shares outstanding (the
"denominator") during the period. Diluted earnings (loss) per common share
("Diluted EPS") is similar to the computation of Basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back the after-tax amount of interest
recognized in the period associated with any convertible debt. The computation
of Diluted EPS does not assume exercise or conversion of securities that would
have an anti-dilutive effect on net earnings (loss) per share.
7
NOTE 4. INVENTORIES
MARCH 31, 2001 JUNE 30, 2000
--------------- -------------
Inventories $ 65 $ 87
Finished goods 91 116
---------------- ----------------
$ 156 $ 203
================ ================
NOTE 5. CONVERTIBLE NOTES PAYABLE
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the registrant sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850,000
bearing interest at the rate of eight percent (8%) per annum, due December 12,
2003, each convertible into shares of the registrant's common stock. Interest
shall be payable, at the option of the purchasers, in cash or shares of common
stock. At any time after the issuance of the notes, each note is convertible
into such number of shares of common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note as of the date of
conversion by (b) the lesser of (x) an amount equal to seventy percent (70%) of
the average closing bid prices for the three (3) trading days prior to December
12, 2000 and (y) an amount equal to seventy percent (70%) of the average closing
bid prices for the three (3) trading days having the lowest closing bid prices
during the thirty (30) trading days prior to the conversion date.
Additionally, the registrant issued a warrant to each of the purchasers to
purchase a number of shares of the registrant's common stock at an exercise
price equal to $.0887 per share. The purchasers may exercise the warrants
through December 12, 2005.
The beneficial conversion feature of the Notes Payable results in a non-cash
interest expense of $364 thousand.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Quarterly Report on Form 10-Q. The discussion of the Company's business
contained in this Quarterly Report on Form 10-Q may contain certain projections,
estimates and other forward-looking statements that involve a number of risks
and uncertainties, including those discussed below at "Risks and Uncertainties."
While this outlook represents management's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested below. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
OVERVIEW
Imaging Technologies Corporation develops, manufactures, and
distributes high-quality digital imaging solutions. The Company produces printer
and imaging products for use in graphics and publishing, digital photography and
other niche business and technical markets. Beginning with a core technology in
the design and development of controllers for non-impact printers and
multifunction peripherals, the Company has expanded its product offerings to
include monochrome and color printers, external print servers, digital image
storage devices, and software to improve the accuracy of color reproduction.
The Company's business continues to experience short-term operational
and liquidity challenges. Management continues to modify its strategic business
plan in an effort to stabilize its operations and return to positive cash flow
in the short-term, and profitability in the future. Accordingly,
quarter-to-quarter financial comparisons may be of limited usefulness now and
for the next several quarters due to ongoing changes in the Company's business.
Historically, a portion of the Company's income was derived from
non-recurring engineering fees and royalty income from a relatively small number
of original equipment manufacturing ("OEM") customers. Over the past several
years, the Company has experienced shortfalls in income as a result of
engineering contracts with OEM manufacturers for products that were never
completed by the OEM, were never introduced into the market and shipped, or were
cancelled by the customer before ITEC completed the deliverables portion of the
contract. Failure of these OEMs to achieve significant sales of products
incorporating the Company's technology and fluctuations in the timing and volume
of such sales had a materially adverse effect on the Company.
The Company's current strategy is to turn away from the uncertainties
of providing engineering services to OEM customers, which rely on a future
revenue stream, to that of selling products. The Company intends to continue to
develop its target markets and to pursue clearly defined commercial market
opportunities in order to leverage its core technologies.
Additionally, the Company has been pursuing certain strategic
acquisitions in order to grow its revenues and to pursue new opportunities for
revenues and profits.
In December 2000, the Company acquired Eduadvantage.com, which is
primarily engaged in sales of educational software to institutions, businesses,
and end-users via the Internet. As part of acquisition, the Company also
acquired the rights to certain proprietary software to process transactions on
the Internet. The Eduadvantage acquisition is expected to advance the Company's
objective to develop and support e-commerce strategies, including the future
launch of Dealseekers.com. Eduadvantage also provides the Company a vehicle to
distribute certain ITEC products, along with EduAdvantage.com's current software
products for accounting, desktop publishing, tax software, and virus detection.
In November 2000, ITEC entered into an agreement to acquire a majority
interest in Quality Photographic Imaging (formerly known as Quick Pix, Inc.)
("QPI") (OTC: QPIX). QPI was established in 1982 and is a leading visual
marketing support firm, located in Southern California. The company provides a
spectrum of services to produce final color visuals, both digital and
photographic. QPI is a total visual marketing support company servicing a wide
range of varied clientele. Under the terms of the acquisition agreement, ITEC
will assume certain debts of QPI in the approximate amount of $1.3 million. The
acquisition requires QPI shareholder approval, which is pending.
9
In December 2000, ITEC signed a definitive agreement to purchase a
majority interest in Pen Interconnect, Inc., Irvine, Calif. However, the
acquisition was terminated in February 2000.
To successfully execute its current strategy, the Company will need to
improve its working capital position. The report of the Company's independent
auditors accompanying the Company's June 30, 2000 financial statements includes
an explanatory paragraph indicating there is a substantial doubt about the
Company's ability to continue as a going concern, due primarily to the decreases
in the Company's working capital and net worth. At March 31, 2001, and for the
three months then ended, the Company had a net loss, negative working capital,
and a decline in net worth, which continue to raise substantial doubt about its
ability to continue as a going concern.
The Company needs to raise additional funds to operate its business and
has been actively pursuing solutions to its liquidity difficulties. To help
address these needs, on December 12, 2000, ITEC entered into a Convertible Note
Purchase Agreement with several investors for $850,000. Additionally, the
Company issued a warrant to each of the purchasers to purchase an aggregate of
150,443 shares of the registrant's common stock at an exercise price equal to
$.0887 per share. (Also see Note 5 to the Consolidated Financial Statements.)
The Company has also engaged a financial advisor to assist with
additional fund raising efforts and to help identify merger and acquisition
candidates. There can be no assurance, however, that the Company will be able to
obtain additional debt or equity financing on favorable terms or at all, or that
any such financings, if completed, will be adequate to meet the Company's
capital requirements. Any additional equity or convertible debt financings could
result in substantial dilution to the Company's stockholders. If adequate funds
are not available, the Company will be required to delay, reduce or eliminate
some or all of its planned activities. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company. See
"Liquidity and Capital Resources" and "Risks and Uncertainties -- Future Capital
Needs."
RESULTS OF OPERATIONS NET REVENUES
Revenues were $1.2 million and $721 thousand for the three-month period
ended March 31, 2001 and 2000, respectively, as increase of 65%. Sales of
products were $1.2 million and $260 thousand for the three month period ended
March 31, 2001 and 2000, respectively, an increase of 248%.
For the nine-month period ended March 31, 2001 and 2000, respectively,
revenues were $3.04 million and $2.08 million, an increase of 46%. Sales of
products were $2.4 million and $1.3 million for the nine-month period ended
March 31, 2001 and 2000, respectively, and increase of 89%. The increase in
product sales from the reported periods of 2000 to 2001 was due to an overall
increase in the sales activities of the Company since the court-appointed
operational receiver was relieved in July 2000. However, the Company's lack of
sufficient working capital has had, and may continue to have, a negative adverse
effect on printer product sales in particular, and overall revenues in general.
Licensing fees and royalties were $30 thousand and $221 thousand for
the three-month period ended March 31, 2001 and 2000 respectively, a decrease of
86%. For the nine-month period ended March 31, 2001 and 2000, respectively,
licensing fees and royalties were $662 thousand and $557 thousand, respectively,
an increase of 19%. Royalties and licensing fees vary from quarter to quarter
and are dependent on the sales of products sold by OEM customers using ITEC
technologies. These revenues, however, are expected to decline in the future due
to the Company's focus on product sales and the operations of the Company's
e-commerce businesses as opposed to technology licensing activities.
COST OF PRODUCTS SOLD
Cost of products sold were $1.05 million (90% of product sales) and
$225 thousand (87% of product sales) for the three-month period ended March 31,
2001 and 2000, respectively. The decrease in margins is primarily due to the
sale of some end-of-life products at substantial discounts. While the Company
expects to improve its margins moving forward, there remain certain challenges
related to profitability of its printer products, for which the Company
typically out-sources its manufacturing. Management hopes to increase margins
through more efficient outsourcing for parts and manufacturing, and improving
the Company's product mix in favor of higher margin software products.
For the nine-month period ended March 31, 2001 and 2000, cost of
products sold were $1.97 million (83% of product sales) and $1.82 million (144%
of product sales), respectively. The increase in overall margins in the
nine-month comparative periods relate to the departure, in June 2000, of the
court-appointed operational receiver
10
who, in order to recover the maximum amount of money from the Company, sold some
of the Company's products at or below cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses have consisted primarily
of salaries and commissions of sales and marketing personnel, salaries and
related costs for general corporate functions, including finance, accounting,
facilities and legal, advertising and other marketing related expenses, and fees
for professional services.
Selling, general and administrative expenses for the three-month period
ended March 31, 2001 and 2000, respectively, were $1.6 million and $822
thousand. In the current three-month period, selling, general, and
administrative expenses increased $737 thousand (90%) from the year-earlier
quarter. The increase was due primarily to settlements of legal matters.
Selling, general and administrative expenses for the nine-month period
ended March 31, 2001 and 2000, respectively, were $5.6 million and $5.7 million.
In the current nine-month period, the Company reduced selling, general, and
administrative expenses $118 thousand (2%) due primarily to staff reductions,
which were offset, in part, by the settlement of certain legal matters.
COSTS OF RESEARCH AND DEVELOPMENT
Costs of research and development were $223 thousand and $508 thousand
for the quarters ended March 31, 2001 and 2000, respectively; a decrease of $285
thousand (56%). For the nine-month period ended March 31, 2001 and 2000,
respectively, research and development costs were $679 thousand and $2.1
million, a decrease of $1.5 million (68%). Over the past year, the Company had
been reducing its engineering and licensing activities and has re-directed
research and development costs toward the development and support of the
Company's branded products, including printers and associated digital imaging
products.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
cash generated from operations, debt financing, and from the sale of equity
securities.
As a result of some of the Company's financing activities, there has
been a significant increase in the number of issued and outstanding shares.
During the three-month period ended March 31, 2001, the Company issued an
additional 37 million shares. During the nine-month period ended March 31, 2001,
the Company issued an additional 53 million shares. These shares of common stock
were issued for raising capital due to private placements and for corporate
expenses in lieu of cash.
As of March 31, 2001, the Company had negative working capital of
$14.4, an increase of approximately $130 thousand (1%) in working capital as
compared to June 30, 2000.
Net cash used in operating activities decreased 44% to $3.8 million
during the nine-month period ended March 31, 2001, from $6.7 million during the
year-earlier period, due primarily to a $3.3 million (35%) decrease in the
Company's net loss during the period.
Net cash from investing activities was $46 thousand during the
nine-month period ended March 31, 2001. There was no such activity in the
corresponding nine-month period in the prior year. The difference was due
primarily to increased capital expenditures in the period.
Net cash from financing activities was $3.7 million for the nine-month
period ended March 31, 2001, a decrease of $3.6 million or 49%. The decrease is
due primarily to a reduction in proceeds from the sale of common stock, because
the trading price of the Company's common stock fell substantially during the
period.
The Company has no material commitments for capital expenditures. The
Company's 5% convertible preferred stock (which ranks prior to the Company's
common stock), carries cumulative dividends, when and as declared, at an annual
rate of $50.00 per share. The aggregate amount of such dividends in arrears at
March 31, 2001, was approximately $646 thousand.
The Company's capital requirements depend on numerous factors,
including market acceptance of the Company's products, the scope and success of
the Company's product development efforts, the resources the Company devotes to
marketing and selling its products, and other factors. The report of the
Company's independent auditors accompanying the Company's June 30, 2000
financial statements includes an explanatory paragraph
11
indicating there is a substantial doubt about the Company's ability to continue
as a going concern, due primarily to the decreases in the Company's working
capital and net worth. (Also see Note 2 to the Consolidated Financial
Statements.)
RISKS AND UNCERTAINTIES
THE COMPANY NEEDS ADDITIONAL CAPITAL
ITEC's business has not been profitable in the recent past and it may
not be profitable in the future. The Company may incur losses on a quarterly or
annual basis for a number of reasons, some within and others outside its
control. See "Potential Fluctuation in ITEC's Quarterly Performance." The growth
of the Company's business will require the commitment of substantial capital
resources. If funds are not available from operations, the Company will need
additional funds. ITEC may seek such additional funding through public and
private financing, including debt or equity financing. Adequate funds for these
purposes, whether through financial markets or from other sources, may not be
available when needed. Even if funds are available, the terms under which the
funds are available may not be acceptable to the Company. Insufficient funds may
require the delay, reduction, or elimination of some or all of the Company's
planned activities. Also see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
POTENTIAL FLUCTUATION IN ITEC'S QUARTERLY PERFORMANCE
Quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a material adverse effect on the
Company's results of operations. The factors include: the timing of product
announcements and subsequent introductions of new or enhanced products by the
Company and by our competitors, the availability and cost of components, the
timing and mix of shipments of the Company's products, the market acceptance of
new products, seasonality, currency fluctuations, changes in the Company's
prices and in the Company's competitors' prices, price protection offered to
distributors and OEMs for product price reductions, the timing of expenditures
for staffing and related support costs, the extent and success of advertising,
research and development expenditures, and changes in general economic
conditions.
The Company may experience significant quarterly fluctuations in
revenues and operating expenses as it introduces new products. In addition,
component purchases, production and spending levels are based upon management's
forecast of future demand for the Company's products. Accordingly, any
inaccuracy in the Company's forecasts could adversely affect its financial
condition and results of operations. Demand for the Company's products could be
adversely affected by a slowdown in the overall demand for computer systems,
printer products or digitally printed images. The Company's failure to complete
shipments during a quarter could have a material adverse effect on its results
of operations for that quarter. Quarterly results are not necessarily indicative
of future performance for any particular period.
ITEC IS IN A HIGHLY COMPETITIVE INDUSTRY
The markets for ITEC products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than ITEC. The Company's ability to compete in its markets depends on
a number of factors, some within and others outside its control. These factors
include: the frequency and success of product introductions by the Company and
by its competitors, the selling prices of ITEC products and of its competitors'
products, the performance of ITEC products and of its competitors' products,
product distribution by ITEC and by its competitors, ITEC's marketing ability
and the marketing ability of its competitors, and the quality of customer
support offered by ITEC and by its competitors.
A key element of ITEC's strategy is to provide competitively priced,
quality products. The Company cannot be certain that its products will continue
to be competitively priced. The Company has reduced prices on certain products
in the past and will likely continue to do so in the future. Price reductions,
if not offset by similar reductions in product costs, will reduce gross margins
and may adversely affect the Company's financial condition and results of
operations.
OUR MARKET IS CHARACTERIZED BY SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE
The markets for ITEC's products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in product
selling prices due to competitive pressures over the life of a product are
common. The future success of the
12
Company will depend on its ability to continue to develop and manufacture
competitive products and achieve cost reductions for existing products. In
addition, the Company monitors new technology developments and coordinates with
suppliers, distributors and dealers to enhance its existing products and to
lower costs. Advances in technology will require increased investment in product
development to maintain the Company's market position. If the Company is unable
to develop and manufacture new, competitive products in a timely manner, its
financial condition and results of operations will be adversely affected.
Furthermore, the markets for ITEC products are relatively new and are
still developing. Management believes that there has been growing market
acceptance for color printers, color management software and supplies. The
Company cannot be certain, however, that these markets will continue to grow.
Other technologies are constantly evolving and improving. The Company cannot be
certain that products based on these other technologies will not have a material
adverse effect on the demand for its products.
WE ARE HIGHLY DEPENDENT UPON OUTSIDE SUPPLIERS
At present, many of ITEC's products use technology licensed from
outside suppliers. The Company relies heavily on these suppliers for upgrades
and support. In the case of ITEC font products, the Company licenses the fonts
from outside suppliers, who also own the intellectual property rights to the
fonts. The Company's reliance on third-party suppliers involves many risks,
including limited control over potential hardware and software incompatibilities
with ITEC products. Furthermore, the Company cannot be certain that all of the
suppliers of products it markets will continue to license their products to
ITEC, or that these suppliers will not license their products to other companies
simultaneously.
RISKS RELATED TO ACQUISITIONS
In order to grow our business, the Company has been active in acquiring
businesses that management believes are complementary. We continue to pursue
other strategic acquisitions. To successfully implement this strategy, the
Company must identify suitable acquisition candidates, acquire these candidates
on acceptable terms, integrate their operations and technology successfully with
the Company, retain existing customers and maintain the goodwill of the acquired
business. The Company may fail in its efforts to implement one or more of these
tasks. Moreover, in pursuing acquisition opportunities, the Company may compete
for acquisition targets with other companies with similar growth strategies.
Some of these competitors may be larger and have greater financial and other
resources than those of the Company. Competition for these acquisition targets
likely could also result in increased prices of acquisition targets and a
diminished pool of companies available for acquisition. Overall financial
performance will be materially and adversely affected if the Company is unable
to manage internal or acquisition-based growth effectively.
Acquisitions involve a number of risks, including: integrating acquired
products and technologies in a timely manner; integrating businesses and
employees with the Company's business; managing geographically-dispersed
operations; reductions in the Company's reported operating results from
acquisition-related charges and amortization of goodwill; potential increases in
stock compensation expense and increased compensation expense resulting from
newly-hired employees; the diversion of management attention; the assumption of
unknown liabilities; potential disputes with the sellers of one or more acquired
entities; the Company's inability to maintain customers or goodwill of an
acquired business; the need to divest unwanted assets or products; and the
possible failure to retain key acquired personnel.
Client satisfaction or performance problems with an acquired business
could also have a material adverse effect on the Company's reputation, and any
acquired business could significantly under perform relative to expectations.
The Company is currently facing all of these challenges and its ability to meet
them over the long term has not been established. As a result, the Company
cannot be certain that it will be able to integrate acquired businesses,
products or technologies successfully or in a timely manner in accordance with
its strategic objectives, which could have a material adverse effect on overall
financial performance.
In addition, if the Company issues equity securities as consideration
for any future acquisitions, existing stockholders will experience ownership
dilution and these equity securities may have rights, preferences or privileges
superior to those of ITEC common stock. See "Future Capital Needs."
THE COMPANY IS DEPENDENT ON KEY PERSONNEL
The success of the Company is dependent, in part, upon its ability to
attract and retain qualified
13
management and technical personnel. Competition for these personnel is intense,
and the Company will be adversely affected if it is unable to attract additional
key employees or if it loses one or more key employees. The Company may not be
able to retain its key personnel.
COMPONENTS AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES
The Company presently out-sources the production of some of its
manufactured products through a number of vendors located in California. These
vendors assemble products, using components purchased by the Company from other
sources or from their own inventory. The terms of supply contracts are
negotiated separately in each instance. Although the Company has not experienced
any difficulty over the past several years in engaging contractors or in
purchasing components, present vendors may not have sufficient capacity to meet
projected market demand for ITEC products and alternative production sources may
not be available without undue disruption.
Contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. The Company, in turn, includes
appropriate software, performs additional tests on the products, then packages
and ships products into the distribution channels. In addition to buying such
items as printed circuit boards and other components from outside vendors, the
Company purchases and/or licenses software programs, including operating systems
and intellectual property modules (pre-written software code to execute a
specifically defined operation). The Company purchases these products from
vendors who have licenses to sell the software to the Company from the
originators of the software, and have, from time to time, directly licensed
system software that is either embedded or otherwise incorporated in certain
ITEC products.
While most components are available locally from multiple vendors,
certain components used in ITEC products are only available from single sources.
Although alternative suppliers are readily available for many components, for
some components the process of qualifying replacement suppliers, replacing
tooling or ordering and receiving replacement components could take several
months and cause substantial disruption to operations. Any significant increase
in component prices or decrease in component availability could have a material
adverse effect on the Company's business and overall financial performance.
POSSIBILITY OF CHALLENGE TO ITEC PRODUCTS OR OUR INTELLECTUAL PROPERTY RIGHTS
The Company currently holds no patents. The Company's software
products, hardware designs, and circuit layouts are copyrighted. However,
copyright protection does not prevent other companies from emulating the
features and benefits provided by its software, hardware designs or the
integration of the two. The Company protects its software source code as trade
secrets and makes its proprietary source code available to OEM customers only
under limited circumstances and specific security and confidentiality
constraints. In some product hardware designs, the Company has developed
application-specific integrated circuits (ASICs), which encapsulate proprietary
technology and are installed on the circuit board. This can serve to
significantly reduce the risk of duplication by competitors, but in no way
ensures that a competitor will be unable to replicate a feature or the benefit
in a similar product.
Competitors may assert that the Company infringes their patent rights.
If the Company fails to establish that it has not violated the asserted rights,
it could be prohibited from marketing the products that incorporate the
technology and it could be liable for damages. The Company could also incur
substantial costs to redesign its products or to defend any legal action taken
against it. The Company has obtained U.S. registration for several of its trade
names or trademarks, including: PCPI, NewGen, ColorBlind, LaserImage,
ColorImage, ImageScript and ImageFont. These trade names are used to distinguish
the Company's products in the marketplace.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts business globally. Accordingly, future results
could be adversely affected by a variety of uncontrollable and changing factors
including: foreign currency exchange fluctuations; regulatory, political or
economic conditions in a specific country or region; the imposition of
governmental controls; export license requirements; restrictions on the export
of critical technology; trade restrictions; changes in tariffs; government
spending patterns; natural disasters; difficulties in staffing and managing
international operations; and difficulties in collecting accounts receivable.
In addition, the laws of certain countries do not protect ITEC products
and intellectual property rights to the same extent as the laws of the United
States.
14
ITEC IS HIGHLY DEPENDENT ON EXPORT SALES
The Company intends to pursue international markets as key avenues for
growth and to increase the percentage of sales generated in international
markets. In the Company's past few fiscal years, sales outside the United States
represented a significant amount of its net sales. The Company expects sales
outside the United States to continue to represent a significant portion of its
sales. As the Company continues to expand its international sales and
operations, the business and overall financial performance may be adversely
affected by factors such as those described under "Risks Associated with
International Operations."
ITEC RELIES HEAVILY ON INDIRECT DISTRIBUTION
ITEC products are marketed and sold through an established distribution
channel of value added resellers, manufacturers' representatives, retail
vendors, and systems integrators. The Company has a network of dealers and
distributors in the United States and Canada, in the European Community and on
the European Continent, as well as a growing number of resellers in Africa,
Asia, the Middle East, Latin America, and Australia. The Company supports its
worldwide distribution network and end-user customers through centralized
manufacturing, distribution, and repair operations headquartered in San Diego.
As of March 31, 2001, the Company directly employed fifteen individuals involved
in marketing and sales activities.
Sales are principally made through distributors, which may carry
competing product lines. These distributors could reduce or discontinue sales of
ITEC products, which could materially and adversely affect the Company. These
independent distributors may not devote the resources necessary to provide
effective sales and marketing support of ITEC products. In addition, the Company
is dependent upon the continued viability and financial stability of these
distributors, many of which are small organizations with limited capital. These
distributors, in turn, are substantially dependent on general economic
conditions and other unique factors affecting the Company's markets. Management
believes that the future growth and success of the Company will continue to
depend in large part upon its distribution channels. The business could be
materially and adversely affected if the Company's distributors fail to pay
amounts to the Company that exceed reserves it has established. To expand its
distribution channels, the Company has entered into select private-label
arrangements that allow it to address specific market segments or geographic
areas. To prevent inventory write-downs in the event that these customers do not
purchase products as anticipated, the Company may need to convert such products
to make them salable to other customers.
ITEC'S STOCK PRICE IS VOLATILE
The market price of ITEC's common stock historically has fluctuated
significantly. The Company's stock price could fluctuate significantly in the
future based upon any number of factors such as: general stock market trends;
announcements of developments related to ITEC's business; fluctuations in the
Company's operating results; a shortfall in revenues or earnings compared to the
estimates of securities analysts; announcements of technological innovations,
new products or enhancements by the Company or its competitors, general
conditions in the computer peripheral market and the imaging markets served by
the Company; general conditions in the worldwide economy; developments in
patents or other intellectual property rights; and developments in the Company's
relationships with its customers and suppliers.
In addition, in recent years the stock market in general, and the
market for shares of technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. Similarly, the market price of ITEC common stock may
fluctuate significantly based upon factors unrelated to the Company's operating
performance.
ITEC HAS NOT PAID ANY DIVIDENDS
The Company has not paid any cash dividends on its common stock to date
and it does not anticipate paying cash dividends in the foreseeable future.
APPOINTMENT AND REMOVAL OF OPERATIONAL RECEIVER
On August 20, 1999, at the request of Imperial Bank, the Company's
primary lender, the Superior Court, San Diego appointed an operational receiver.
On August 23, 1999, the operational receiver took control of ITEC's day-to-day
operations. Through further equity infusion, primarily in the form of the
exercise of warrants to purchase ITEC common stock, operations have continued,
and on June 21, 2000, the Superior Court, San Diego issued an order dismissing
the operational receiver. However, in the future, without additional funding
sufficient to satisfy
15
Imperial Bank and other creditors, as well as providing for working capital,
there can be no assurances that such operations can continue. In addition, the
Company may not be able to satisfy all conditions required to sell shares under
the Private Equity Line of Credit Agreement. In that case, the Company would
likely need to raise money from other sources in order to continue to fund
operations. Such alternative funding may not be available. If such funding is
not obtained, the Company will need to reduce or suspend operations.
NASDAQ LISTING AND LIQUIDITY OF COMMON STOCK
The Nasdaq(R) SmallCap(R) Market and Nasdaq Marketplace Rules require
an issuer to evidence a minimum of $2,000,000 in net tangible assets, a
$35,000,000 market capitalization or $500,000 in net income in the latest fiscal
year or in two of the last three fiscal years, and a $1.00 per share bid price,
respectively. On October 21, 1999, Nasdaq notified the Company that it no longer
complied with the bid price and net tangible assets/market capitalization/net
income requirements for continued listing on The Nasdaq SmallCap Market. At a
hearing on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised
public interest concerns relating to the Company's financial viability. While
the Panel acknowledged that ITEC was in technical compliance with the bid price
and market capitalization requirements, the Panel was of the opinion that the
continued listing of ITEC common stock on The Nasdaq Stock Market was no longer
appropriate. This conclusion was based on the Panel's concerns regarding the
future viability of the Company. ITEC common stock was delisted from The Nasdaq
Stock Market effective with the close of business on March 1, 2000. As a result
of being delisted from The Nasdaq SmallCap Market, stockholders may find it more
difficult to sell ITEC common stock. This lack of liquidity also may make it
more difficult for the Company to raise capital in the future.
Trading of ITEC common stock is now being conducted over-the-counter
through the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock does constitute a penny stock
because our common stock has a market price less than $5.00 per share, our
common stock is no longer quoted on Nasdaq, and our net tangible assets do not
exceed $2,000,000. As ITEC common stock falls within the definition of penny
stock, these regulations require the delivery, prior to any transaction
involving ITEC common stock, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Furthermore, the ability of
broker/dealers to sell ITEC common stock and the ability of shareholders to sell
ITEC common stock in the secondary market would be limited. As a result, the
market liquidity for ITEC common stock would be severely and adversely affected.
The Company can provide no assurance that trading in ITEC common stock will not
be subject to these or other regulations in the future, which would negatively
affect the market for ITEC common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about October 7, 1999, the law firms of Weiss & Yourman and
Stull, Stull & Brody made a public announcement that they had filed a lawsuit
against us and certain current and past officers and/or directors, alleging
violation of federal securities laws during the period of April 21, 1998 through
October 9, 1998. On or about November 17, 1999, the lawsuit, filed in the name
of Nahid Nazarian Behfarin, on her own behalf and others purported to be
similarly situated, was served on us. A motion to dismiss the lawsuit was
granted on February 16, 2001 on our behalf and those individual defendants that
have been served. However, on or about March 19, 2001, an amended complaint was
filed on behalf of Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and
Michael S. Taylor, on behalf of themselves and others similarly situated. On or
about March 20, 2001, we once again filed a motion to dismiss the case along
with certain other individual defendants. The motion is pending. We believe
these claims are without merit and we intend to vigorously defend against them
on our behalf as well as on behalf of the other defendants. The defense of this
action has been tendered to our insurance carriers.
Throughout fiscal 1999, 2000 and 2001, and through the date of this
filing, approximately 50 trade creditors have made claims and/or filed actions
alleging the failure of us to pay our obligations to them in a total amount
exceeding $3 million. These actions are in various stages of litigation, with
many resulting in judgments being entered against us. Several of those who have
obtained judgments have filed judgment liens on our assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars. Should we be
required to pay the full amount demanded in each of these claims and lawsuits,
we may have to cease our operations. However, to date, the superior security
interest held by Imperial Bank has prevented nearly all of these trade creditors
from collecting on their judgments.
Furthermore, from time to time, the Company may be involved in
litigation relating to claims arising out of its operations in the normal course
of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
On January 19, 2001, the Company filed a report on Form 8-K related to
a Convertible Note Purchase Agreement with Amro International, et.al. (Also see
Note 5 to the Consolidated Financial Statements in this report on Form 10-Q.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2001
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/ BRIAN BONAR
--------------------------
Brian Bonar
Chief Executive Officer
By: /S/ CHRISTOPHER W. MCKEE
-----------------------------------
Acting Principal Accounting Officer