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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED] for the transition period from ________ to _________
COMMISSION FILE NO. 0-12641
ITEC
IMAGING TECHNOLOGIES CORPORATION
(Name of small business issuer in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
11031 Via Frontera
San Diego, California 92127
(619) 613-1300
(Address of principal executive offices and issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.005 par value
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
Registrant's total consolidated revenues for the fiscal year ended June 30, 1997
were $30,633,000.
At September 29, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $44,200,000, based on the
last trade price as reported by The Nasdaq SmallCap Market.
At September 29, 1997, there were 10,022,315 shares of common stock, $0.005 par
value, of the registrant issued and outstanding.
Information required by Part III of this Form 10-KSB is incorporated therein by
reference from the Company's definitive Proxy Statement with respect to its 1997
annual meeting of stockholders to be filed pursuant to Regulation 14A within 120
days after June 30, 1997.
Transitional Small Business Disclosure Format
Yes No /X/
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PART I
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ITEM 1.
DESCRIPTION OF BUSINESS
Imaging Technologies Corporation (NASDAQ: ITEC), formerly Personal Computer
Products Inc., was incorporated in March, 1982 under the laws of the State of
California, and reincorporated in May, 1983 under the laws of the State of
Delaware. ITEC is a leader in the development and licensing of controllers.
It also manufactures and distributes high-quality digital imaging solutions
through its three subsidiaries: PCPI Technologies, Inc.; NewGen Imaging
Systems, Inc.; and Prima International, Inc. The Company is engineering and
distributing technology for the next generation of printing and imaging
products.
PCPI Technologies ("PCPI") is an Adobe-Registered Trademark-
PostScript-Registered Trademark- Co-Development Partner. PCPI designs and
manufactures high-performance printer controllers and related products for
original equipment manufacturers ("OEM") of printers and imaging devices. PCPI's
solutions keep pace with rapidly changing printing requirements and improve the
function and performance of OEM customers' products.
Prima International ("Prima") is a worldwide distributor of digital imaging
storage components and peripherals. Focused on the imaging and publishing
markets, Prima sells PC Card data storage, micro-disk drives and provides value-
added imaging storage solutions for notebook and handheld personal computers and
the digital camera market.
NewGen Imaging Systems ("NewGen") produces high-resolution digital color and
monochrome output devices. NewGen imagesetters, color servers, and related
software solutions offer graphics-industry specific features that produce artist
quality output at the desktop. NewGen's technology has wide application in the
rapidly expanding prepress, publishing and graphics industries.
INDUSTRY OVERVIEW
Page printers, especially laser printers, have become an established means of
printing data generated by computers. The market for laser printers has grown
significantly over the past several years.
Laser printers continue to be the dominant technology in use for page printing
and high-end imaging. PostScript printers make up a significant portion of that
market. The PostScript language is a general-purpose computer language developed
by Adobe Systems Incorporated, that describes the appearance of a page,
including elements such as text, graphics and scanned images, to a printer or
other output device. Since its introduction in 1985, the PostScript language has
become the printing and imaging technology of choice for multinational
corporations, the vast majority of professional publishers and government
agencies throughout the world. Because a PostScript file is independent of the
device that created it and the device that prints it, users can print documents
regardless of printing device, computer platform or operating system.
Features that tend to differentiate printers, particularly in the high volume,
high growth page printer technologies such as inkjet and laser, include the
presence of Adobe's proprietary PostScript software, high resolution capability,
network-ready connectivity, and output at rated engine speed.
Color laser printers entered the market in early 1994 and since that time there
has been increasing demand for color as prices decrease. The color market is
maturing and prices are declining significantly. While the overall printer
market is relatively flat, unit volume is increasing and the color segment is
expanding. Color printer unit sales are expected to grow 128% between 1994 to
1999 (International Data Corp.). The general office environment is starting to
demand color printing for reports, presentations and proposals. By 1999, color
printers should be the norm in general office environments and the technology
will drive growth in the market as color laser printers become less expensive,
faster, more compact and easier to use.
Multiple features will also become part of the market for color laser printers
and vendors will eventually add document-finishing features such as sorting and
stapling. Communications features are also expected
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to be added. The key element for vendors is to produce high-quality, high-
performance machines that can be used by computer networks in the office. PCPI
offers the technology and industry relationships to help vendors reach this
goal.
More recently, printer manufacturers are attempting to add value to monochrome
printers by adding new functions such as printing, copying, scanning and faxing.
This new multi-functionality of desktop printing devices provides the end user
with printer, copier, facsimile and scanning all in the same device.
BUSINESS STRATEGY
ITEC's technology strategy is focused on the continued development and
implementation of laser printer, image storage and imaging technologies. The
Company's mission is the development of intelligent embedded software on
board-level devices that add value to personal computers and peripheral
devices and also to develop and distribute printers and image storage
products. The Company's development resources are directed toward the
development of controllers containing Adobe PostScript software and,
potentially, Adobe's Configurable PostScript Interpreter ("CPSI"), host-based
implementations of PostScript software. This technology will be directed
toward the development of controllers that support multifunction devices
(combining printer, facsimile/modem, copier, scanner) on the low-end
(LaserImage-TM-); and development of controllers that support
high-functionality color digital copier/printers on the high-end
(ColorImage-TM-). The Company also intends to target four market segments
which include (1) the monochrome and color printing device market, (2) the
multi-function printing market (monochrome and color), (3) the large format
plotter market (monochrome and color), and (4) the color digital copier
market.
PCPI TECHNOLOGIES
PCPI is focused on the engineering design and development of embedded imaging
controllers for printer OEMs. PCPI controllers manage the layout, form, font
and function of the printed image. The Company's solutions are designed to
provide the OEM with increased performance, combined with lower overall
manufacturing cost.
Since 1983, the Company has been an active licenser and/or OEM provider of its
LaserImage printer controller technology to a number of companies throughout the
world. These include or have included: AEG Olympia (Germany), Apple Computer,
Inc. (United States), Canon USA (United States), Elebra (Brazil), Fujitsu
(Japan), Goldstar (Korea), Hypertec (Korea), Matsushita Electric Company -
Panasonic (Japan), Minolta (Japan), Mita (Japan), Ricoh (Japan), Tandy
Corporation (United States), Tokyo Electric Company (Japan), Xerox (United
States), and others. In order to accommodate the manufacturing requirements of
its licensees, the Company also has established relationships for manufacturing
both in the U.S. and overseas that allow PCPI to provide manufacturing
capabilities so that PCPI will not need to invest and build an extensive
manufacturing infrastructure.
The Company has well-established relationships with major printer manufacturers
around the world and has a contract as a co-development partner with Adobe
Systems, Inc., a leading provider of printing technology. As an authorized Adobe
PostScript Development Partner, PCPI is one of only four third-party Adobe co-
developers. This allows PCPI to produce Adobe-based digital printer controllers
and embedded software. PCPI's products and services include: firmware (embedded
software) circuit boards; application-specific integrated circuits (ASICs); and
software for use in monochrome and color laser printers, plotters, and
multifunction office peripherals. The latest trend in office machinery is the
Multifunction Peripheral (MFP). These devices incorporate printers, scanners,
fax machines and copiers into one compact unit. Industry analyst ARS projects
the sales of MFP units to increase by 255% by 2001. Shipments of multifunction
units are expected to exceed 4.6 million per year, based largely on sales to the
SOHO (small office-home office) market. PCPI's latest generation of controllers
make MFP's faster and more economical to produce.
In 1997, PCPI introduced a new low-cost 64-bit MIPS-TM--based Adobe PostScript 3
printer controller. This controller, the TurboPrint 4000-TM-, is one of several
designs that reflect the Company's strategy of achieving the highest performance
with the lowest cost of manufacture. It provides OEM's with significant
advantages in the extremely competitive printer market. PCPI is incorporating
the NEC VR4300, 100 Mhz MIPS RISC (reduced instruction set circuit)
microprocessor. This gives the controller a flexible architecture to allow OEM's
to customize the product to meet their specific requirements.
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Also in 1997, PCPI introduced a new low-cost multifunction peripheral controller
the LaserImage-Registered Trademark- MFP. The LaserImage MFP simultaneously
manages print, fax, copy and scan operations for monochrome multifunction
devices. It supports Adobe PostScript 3 and features the NEC VR4300
microprocessor to offer enhanced performance and a flexible architecture.
PCPI revenues are primarily derived from fees for non-recurring engineering
(NRE) services for developing controllers for OEM customers. In addition, the
Company receives licensing fees and royalties for PCPI-designed products.
PRIMA INTERNATIONAL
Prima distributes PC Card memory and data storage products for portable
computers through a worldwide network of distributors and resellers. In
addition, Prima provides value-added imaging and storage solutions for the OEM
customers. Prima's product lines serve the rapidly expanding market for digital
cameras, notebook and handheld personal computers (HPCs).
Prima distributes products for three manufacturers in computer imaging storage:
SanDisk Corporation, INTEGRAL Peripherals, Inc. and Adtron Corporation.
SanDisk produces PC Card (PCMCIA-ATA compliant) storage media. Their products
feature high-capacity, solid-state, non-volatile Flash memory. SanDisk products
include PC Cards, compact Flash memory, IDE Flash disks, and Flash chipsets.
Flash is solid-state data storage that uses semiconductor technology instead of
a rotating disk. Flash has no moving parts, requires no battery to maintain
memory, is lighter, more rugged, more reliable and consumes less power than
traditional disk storage. INTEGRAL produces PC Card data storage devices that
are being incorporated into the next generation of notebook, sub-notebook and
handheld personal computers. INTEGRAL's hard drives combine high-capacity data
storage with rugged operation and low battery consumption. Adtron produces PC
Card solid-state read/write drives and software to allow most computers and
operating systems to use PC Card technology.
Prima is headquartered in Northern California and has sales offices on the
European Continent and in the United Kingdom. They have built a reputation for
providing customer service and technical support. Prima distributes products for
the digital consumer retail market, as well as OEMs that use Prima's products in
their designs.
NEWGEN IMAGING SYSTEMS
In February 1997, ITEC and NewGen merged to produce an extensive line of high-
resolution monochrome and color printers. NewGen brings to ITEC an expanded
dimension of end-user-based products and distribution channels.
NewGen serves the monochrome laser and color dye-sublimation market with
printers, imagesetters, color servers, and related software solutions. These
products are high-end, high-quality imaging devices with applications in the
prepress, publishing and graphics markets. NewGen's printers offer graphics
industry specific features that produce artist quality output at the desktop.
NewGen printers are sold through an established distribution channel of value-
added resellers and systems integrators. NewGen has resellers in Asia, Latin
America, Europe, the Middle East and Africa, as well as a strong network in the
United States.
NewGen's entry into the color proofing market introduced a one-step embedded
color technology that produces exceptional image quality. That product's
successor, ChromaxPro-TM- won the prestigious MacUser Editor's Choice Award.
MacUser Magazine called it "the most accurate color we've seen from a desktop
printer." ChromaxPro has set new standards for dye-sublimation proofing systems
by producing full-color, full-bleed prints that mirror final film output.
ChromaxPro uses NewGen's proprietary ChromeMATCH-TM- spectral color proofing
technology to generate accurate, digital color proofs matched to traditional
analog color standards, without the added expense of film, chemicals and
lamination. NewGens' DesignXpress-TM- is one of the fastest, heavy-duty, high-
resolution monochrome printers on the
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market today. At 16 pages per minute, DesignXpress prints a full 11" x 17" page,
including bleeds and registration marks. Output from the DesignXpress, with
resolutions as high as 1200 dpi, can be used for direct-to-plate reproduction.
DesignXP-TM- is NewGen's affordable alternative for high-performance, high-
quality output. Available in resolution of 600 or 1200 dpi, the DesignXP offers
8 page per minute output on paper up to 11" x 17".
Today's rapidly expanding graphic arts and prepress industries depend on
quality, speed and reliability. NewGen printers provide proofs that accurately
reflect the final product, eliminating the need for time-consuming fine-tuning
and adjustments.
PRODUCTION AND SOURCES OF SUPPLY
ITEC, through its subsidiaries, presently contracts for the production of its
manufactured products with a number of suppliers located in the San Diego,
San Jose and Costa Mesa, California areas. The suppliers assemble products,
utilizing components from its inventory or purchased by the Company from
other sources. The terms of supply contracts are negotiated separately in
each instance. The Company is satisfied that its present assembly contractors
have sufficient capacity to meet projected market demand for the Company's
products, or that alternate sources are available without undue disruption.
ITEC has not experienced any significant difficulty over the past several
years in engaging contractors, or in purchasing components.
ITEC contract suppliers generally perform a multi-step quality control test
prior to shipping their products to the Company. ITEC, in turn, performs
additional tests on the products, adds appropriate software, and then packages
and ships the products to customers. In addition to buying such items as printed
circuit boards and other components from outside suppliers, the Company
purchases software programs, in the form of floppy disks, from vendors who have
licenses to sell such software to the Company from the originators of such
software, and has, from time to time, directly licensed system software used in
certain ITEC products.
MARKETING
As of June 30, 1997, marketing and sales activities were conducted by
approximately 32 Company employees. Each of the divisions and subsidiaries
utilizes dedicated sales personnel.
RESEARCH AND DEVELOPMENT
Despite the fact that there can be no assurance that ITEC can successfully
produce new products, nor that such products will be profitable, the Company
will be required to spend resources on research and development in the
foreseeable future in order to enhance existing products, and to develop new
products. New technology developed, or products introduced, by other entities,
including major printer or computer companies, could adversely affect the
marketability of the Company's products. Consequently, the Company is compelled
to continue development and implementation of new technologies in order to
remain competitive.
COMPETITION
The markets for computer hardware and software have been characterized by rapid
and continuing technological change, and by intense competition. The Company
provides differentiation in the laser printer controller/accessories marketplace
through the capability of its controllers, the quality and extent of
accompanying printer emulation software, and the ability of these controllers to
provide added-value through differentiating features, such as speed, cost and
networking. Printer and computer accessories are often commodities that do not
provide significant differentiation. In addition to its developed technologies,
the Company strives to differentiate itself by providing superior customer
service, timely delivery of products to its customers, and competitive pricing.
PROPRIETARY PROTECTION
ITEC's software is copyrighted; however, such protection as the copyright laws
provide does not prevent other companies from emulating the features achieved by
such software. ITEC owns no patents, but has
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obtained registration of several of its trade-names or trademarks, including:
ITEC, PCPI, LaserImage, ColorImage, ImageScript, ImageFont, ImagePress,
ImageNet, PDQ. Pending trademarks include: ChroMATCH, Image Enhancement
Technology (IET), Auto Recognition Technology (ART), ChromaxPro Series,
ChromaxPro, Chromax MT, Chromax CTP, ImagerPro Series, ImagerPro, ImagerPro II
DuoSetter, ImagerPlus Series, ImagerPlus 12XF, ImagerPlus 18XF, DesignXpress
Series, DesignXpress 6, DesignXpress 12, DesignXP Series, DesignXP 6, and
DesignXP 12.
EMPLOYEES
The Company, including its PCPI, Prima and NewGen subsidiaries, employed a total
of 140 persons (which includes 3 part-time employees) at June 30, 1997, of whom
23 were in corporate administration and finance, 57 in engineering and research
and development, 19 in production, 32 in sales and marketing and 9 in technical
support.
OTHER
The costs and effects of compliance with Federal, state, and local environmental
laws and other existing or probable governmental regulations are not, and are
not expected to be, material. In certain cases, government (Federal
Communications Commission) approval is required with respect to ITEC's
controller products.
ITEM 2.
DESCRIPTION OF PROPERTY
ITEC and PCPI Technologies lease approximately 14,000 square feet of space in a
facility located at 11031 Via Frontera, San Diego, California 92127, at a
monthly rental rate of approximately $10,000. The lease expires on January 31,
1999. The Company owns no real property.
Prima International leases approximately 5,000 square feet of space in a
facility located at 3350 Scott Boulevard, Building No. 7, Santa Clara,
California 95054, at a monthly rental rate of $5,800. The lease expires on June
30, 2002.
NewGen Imaging Systems leases approximately 27,000 square feet of space in a
facility located at 3545-A Cadillac Avenue, Costa Mesa, California 92626, at a
monthly rental rate of $13,900. The lease expires on July 31, 1998.
ITEM 3.
LEGAL PROCEEDINGS
The Company, because of the nature of its business, is from time to time
threatened or involved in legal actions. The Company, after discussion with
legal counsel, does not consider any of these legal actions now pending will
result in a material adverse effect on the consolidated financial position or
results of operations of the Company and, further, does not consider that any
such proceedings fall outside ordinary, routine litigation incidental to the
business of the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
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ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market, and quoted
on The Nasdaq Small Cap Market (symbol: ITEC).
The following table sets forth the high and low bid quotations of the Company's
common stock for the periods indicated as reported by The Nasdaq Small Cap
Market or NASD electronic bulletin board. Prices shown in the table represent
inter-dealer quotations, without adjustment for retail markup, markdown, or
commission, and do not necessarily represent actual transactions.
High Low
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YEAR ENDED JUNE 30, 1996
FIRST QUARTER $ 2.50 $ 1.25
SECOND QUARTER 2.65 .90
THIRD QUARTER 4.70 1.90
FOURTH QUARTER 12.80 3.75
YEAR ENDED JUNE 30, 1997
FIRST QUARTER $ 11.88 $ 7.50
SECOND QUARTER 10.00 4.69
THIRD QUARTER 5.94 4.37
FOURTH QUARTER 7.13 3.25
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The number of stockholders of record of common stock, $.005 par value, of the
Company was approximately 3,000 at June 30, 1997.
ITEC has never declared, or paid, any cash dividends on ITEC's Common Stock.
ITEC currently intends to retain earnings, if any, after any payment of
dividends on its 5% Convertible Preferred Stock, for use in its business and
therefore, does not anticipate paying any cash dividends on ITEC's Common Stock.
Holders of the 5% Convertible Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, but only out of amounts legally available
for the payment thereof, cumulative cash dividends at the annual rate of $50.00
per share, payable semi-annually, and commencing on October 15, 1986. ITEC has
never declared, or paid, any cash dividends on ITEC's 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 1997 were $476,000.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Annual Report contains both historical and forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect
the Company's current judgment on those issues. While management is optimistic
about the Company's long-term prospects, the historical financial information
contained herein may not be indicative of future financial performance. In fact,
future financial performance may be materially different from the historical
financial performance. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause the actual results to differ
materially. Important factors that could cause actual results to differ
materially include, but are not limited to: business conditions and growth in
the electronics industry and general economy - both domestic and international;
lower than expected customer orders; competitive factors, including pricing
pressures, technological developments and products offered by competitors;
availability of components; technological difficulties
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and resource constraints encountered in developing new products; and the timely
flow of competitive new products and market acceptance of those products. Actual
results may differ materially from these statements as a result of risk factors
inherent in the Company's business, industry, customer base, or other factors.
Risk factors which are applicable to the Company may be found in the Company's
Form 8K filed on December 20, 1996 with the Securities and Exchange Commission
under the Company's former name, Personal Computer Products, Inc.
Users of this Annual Report are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The Company
undertakes no obligation to publicly release updates or revisions to these
statements.
RESULTS OF OPERATIONS
The Company has been in a transition period, from older technology and products,
to becoming a leading technology-based supplier of state-of-the-art printer
controllers to OEM customers. The implementation of the strategy of the
development of the new Adobe-Registered Trademark- PostScript-Registered
Trademark- Interpreter (APSI) project, which includes the Company's color
ColorImage-TM- Series controller implementation of Adobe PostScript software for
OEM customers, and its monochrome LaserImage-TM- Series controllers which may
also include HP-based (PCL) multi-function technology continues to show
promising results.
The Company has been successful in attracting several major customers, with
substantial resources and marketing capabilities, that desire to utilize the
Company's technologies which have been developed over the past few years.
Several customers have executed contracts over the past few years to adapt Adobe
PostScript software and/or the Company's software products to controllers that
will be integrated with the printer engines of various OEM customers. These
customers include or have included, but are not limited to, Integrated Device
Technology, Inc., Matsushita Electric Company, Ltd. (Panasonic), Minolta
Company, Ltd., NEC Electronics, Inc., Canon USA, Inc., Apple Computer, Mita
Digital Design and Xerox Corporation.
ITEC's strategy has required the Company to alter its focus away from some of
its traditional revenue sources and to make expenditures in support of these
efforts. As a result, the Company's business continues to be in a significant
transitional phase and there are important short-term operational and liquidity
challenges. Accordingly, year-to-year financial comparisons may be of limited
usefulness now and for the next several quarters due to these important changes
in the Company's business.
Effective February 14, 1997, the Company consummated its merger with NewGen
Imaging Systems, formerly NewGen Systems Acquisition Corporation ("NewGen")
which began its operations in July 1996. Accordingly, the consolidated results
of operations for the year ended June 30, 1996 do not include any comparable
amounts. Included in the consolidated results of operations for the year ended
June 30, 1997 are NewGen pre-merger net sales of $7,190,000 and a net loss after
taxes of $1,550,000 from NewGen for the six month period ended December 31,
1996. The net loss included non-recurring charges of $1,157,000 which included
$780,000 of purchased research and development associated with the purchase of
certain product lines from NewGen Systems Corporation (which was established in
1988) by NewGen in July 1996; a $349,000 writedown of certain prepaid licenses
and royalties; and $28,000 of other miscellaneous items.
Total ITEC revenues were $30,633,000 for the year ended June 30, 1997 versus
$11,621,000 for the year ended June 30, 1996, an increase of 164%. The Company,
through its PCPI Technologies subsidiary, recognized non-recurring engineering
fees ("NRE") to adapt the Company's software products to controllers of its OEM
customers of approximately $5,860,000 for the year ended June 30, 1997 compared
to $2,379,000 for the year ended June 30, 1996, an increase of 146%. The Company
had net income of $836,000 for the year ended June 30, 1997 compared to a net
loss of $3,613,000 for the year ended June 30, 1996.
REVENUES
SALES OF PRODUCTS were $24,477,000 for the year ended June 30, 1997 versus
$8,639,000 for the year ended June 30, 1996. The Company's sales of products
were derived primarily from ITEC's wholly-owned subsidiaries Prima and NewGen.
Sales of product through Prima for the years ended June 30, 1997 and 1996 were
$9,501,000 and $8,581,000, respectively. The majority of Prima's sales during
the current fiscal year were from distribution of PCMCIA-based memory storage
products. In prior fiscal years, Prima's sales consisted of product
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distribution and integration, including sales of its PDQ-TM- line of memory
storage devices featuring removable cartridge and magneto optical technologies.
The increase in product sales during the year ended June 30, 1997 is attributed
to an increase in Prima's distribution sales of PCMCIA-based memory products
from SanDisk Corporation and Integral Peripherals, Inc.
Sales of product through NewGen for the year ended June 30, 1997 were
$14,712,000. As noted above, as NewGen began its operations in July 1996 no
prior year comparisons are available. NewGen's sales of products are derived
from high resolution imaging and color digital proofing products, which in some
cases have been designed by NewGen or to NewGen's specifications, to customers
in the printing and graphic arts industry throughout the world.
The Company has been transitioning from older technology and products, to new
technology-based printer controller products over the past few years. It is
anticipated that certain of these new technology-based products being developed
by PCPI can be distributed into NewGen's customer base.
ENGINEERING FEES during fiscal 1997 and 1996 were derived through the Company's
PCPI subsidiary performing work on engineering projects that were funded by OEM
customers under non-recurring engineering contracts. NRE revenue for the years
ended June 30, 1997 and 1996 was $5,860,000 and $2,379,000, respectively, which
was recognized during the course of development based on the percentage of
completion method.
LICENSE FEES AND ROYALTIES through the Company's PCPI subsidiary for the year
ended June 30, 1997 were $296,000 compared to $603,000 for the year ended June
30, 1996. These revenues were derived primarily from "older-technology" based
products. In the past, license fees and royalty revenue have shown significant
period-to-period fluctuations which may continue in future periods. PCPI has
submitted several proposals to prospective customers in order to develop Adobe
PostScript-based controllers and other controllers based upon its ImageBase-TM-
technology. While PCPI has entered into some contracts with OEM customers for
controller development, there can be no assurance that additional contracts will
be obtained for the development of such controllers, or that the existing
contracts will be completed, or that products will be shipped by the customer
which may result in the generation of future royalty and license revenues or
that these products, once generating royalties, will continue to do so.
COST OF PRODUCTS SOLD
Cost of products sold for the years ended June 30, 1997 and 1996 were
$16,402,000 and $7,652,000, respectively, representing gross margins of 33% and
11.4%. The increase in the gross margin is attributed to the addition of NewGen
sales which are presently generating gross margins of approximately 40% and a
change in the product mix at Prima between the periods. During the latter part
of fiscal 1996 and through June 30, 1997, sales of higher margin PCMCIA-based
memory products have been increasing as a percentage of Prima's sales which have
improved the margins. During the year ended June 30, 1996, a majority of the
product sales were older-technology based products and Prima's SyQuest product
lines, both of which have experienced continued decline in the margins.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the year ended June 30, 1997
were $9,375,000 versus $3,206,000 for the year ended June 30, 1996. The increase
is primarily the result of the addition of NewGen. In addition, the Company has
increased its selling expenses in an attempt to stimulate technology and product
sales. These increases are partially offset by a concerted effort to reduce the
administrative overhead throughout the Company.
COST OF ENGINEERING FEES AND RESEARCH AND DEVELOPMENT
Cost of engineering fees and research and development for the year ended June
30, 1997 were $3,463,000 versus $2,135,000 for the year ended June 30, 1996, an
increase of 62.2%. These expenditures consist of engineering expenses associated
with the development of controller technologies and designs for PCPI technology
customers. A significant component of the increased cost of engineering fees and
research and development during fiscal 1997 is attributed to the increase in
engineering personnel from 35 as of June 30, 1996 to 57 as of June 30, 1997 and
the increase in other engineering support costs associated with the additional
personnel.
9
<PAGE>
During the year ended June 30, 1997, the Company capitalized certain qualified
costs in the aggregate amount of $526,000 pursuant to Financial Accounting
Standard No. 86 ("Accounting for Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed").
The consolidated statement of operations for the year ended June 30, 1997,
includes approximately $780,000 of purchased research and development costs
associated with the July 1996 purchase of the rights to certain products lines
under development by NewGen.
Over the past year, PCPI has noticed an increase in the demand for qualified
engineers in the local market. As a result of this increased demand, the cost of
hiring and maintaining engineers could continue to increase and PCPI could
experience difficulty in obtaining these resources in the future. Should the
local market not be able to supply the required engineering talent, the Company
may be required to hire individuals from outside the market or consider
establishing an engineering division in an area of the country that could more
readily support PCPI's engineering requirements.
OTHER INCOME AND LOSS
Net interest expense was $75,000 for the year ended June 30, 1997 versus net
interest expense of $62,000 for the year ended June 30, 1996. The increase in
net interest expense is attributed to the addition of NewGen and the interest
expense associated with its line of credit facility which was partially offset
by reductions in the outstanding debt at PCPI and Prima and increased interest
income associated with the increased cash invested during the year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $5,203,000 compared to
working capital of $3,976,000 as of June 30, 1996. Subsequent to June 30, 1997,
the Company improved its liquidity with the initial closing of $5,000,000 in a
private placement of its newly designated Series C Redeemable Convertible
Preferred Stock ("Series C Shares") and the closing of a $3,000,000 line of
credit facility with a commercial bank to help to finance the sales growth of
PCPI Technologies and Prima. In addition, under the terms of the Series C
private placement, subject to certain additional conditions, the Company has the
right to call for a second round of financing up to an aggregate amount of
$5,000,000 and the holders of the Series C Shares, subject to certain
conditions, are entitled to purchase additional Series C Shares up to
$2,000,000.
PCPI's Adobe co-development projects present continuing liquidity problems for
PCPI because, in the short-term, these activities are net users of working
capital. Although the Company has improved its liquidity, adequate working
capital is necessary to continue the Company's operations, develop its
technology licensing business and to deliver the resulting products to contract
customers in an efficient and timely manner. The increasing sales at Prima and
the addition of NewGen place additional pressures on ITEC's working capital. In
addition, as noted above, while the Company has entered into several contracts
with OEM customers for controller development, there can be no assurance that
additional contracts will be obtained for the development of such controllers,
or that the existing contracts will be completed, or that products will be
shipped by the customer that will generate future royalty and license revenues
or that once these products are being shipped by the Company's customers that
they will continue to generate royalties.
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
June 30, 1997 was approximately $476,000.
As of June 30, 1997, the Company's wholly-owned subsidiary NewGen had $846,000
of available borrowings under its special purpose line of credit.
ITEC has no material commitments for capital expenditures.
10
<PAGE>
ITEM 7.
FINANCIAL STATEMENTS
PAGE
----
Report of independent accountants ................................. 12
Consolidated balance sheet as of June 30, 1997 ................... 13
Consolidated statement of operations for the year ended
June 30, 1997 and 1996 .................................. 14
Consolidated statement of cash flows for the year ended
June 30, 1997 and 1996................................... 15
Consolidated statement of shareholders' equity for the year ended
June 30, 1997 and 1996................................... 16
Notes to consolidated financial statements ........................ 17
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IMAGING TECHNOLOGIES CORPORATION
We have audited the consolidated balance sheet of Imaging Technologies
Corporation and its subsidiaries as of June 30, 1997 and the related
consolidated statements of operations, cash flows, and shareholders' equity for
the two years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Imaging
Technologies Corporation and its subsidiaries as of June 30, 1997, and the
results of their operations and their cash flows for the two years then ended in
conformity with generally accepted accounting principles.
BOROS & FARRINGTON APC
San Diego, California
August 25, 1997
12
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
-----------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------
Current assets:
Cash $ 193,000
Accounts receivable, net 7,436,000
Inventories 2,339,000
Other current assets 545,000
-------
Total current assets 10,513,000
Property and equipment, net 1,639,000
Prepaid licenses, net 697,000
Capitalized software, net 549,000
Other 372,000
-------
Total assets $ 13,770,000
----------
----------
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------
Current liabilities:
Accounts payable $ 2,829,000
Accrued expenses 851,000
Deferred revenues 356,000
Notes payable and capital leases 1,274,000
---------
Total current liabilities 5,310,000
---------
Commitments and contingencies- Note 11
Shareholders' equity:
5% convertible preferred stock
$1,000 PAR VALUE, 7,500 SHARES AUTHORIZED,
420.5 ISSUED AND OUTSTANDING 420,000
Preferred stock
$1,000 PAR VALUE, 2,383 AUTHORIZED, NO SHARES
ISSUED AND OUTSTANDING
Common stock
$.005 PAR VALUE, 100,000,000 SHARES AUTHORIZED,
9,734,612 SHARES ISSUED AND OUTSTANDING 49,000
Paid-in capital 31,278,000
Shareholder loans (140,000)
Accumulated deficit (23,147,000)
------------
Total shareholders' equity 8,460,000
---------
Total liabilities and shareholders' equity $ 13,770,000
----------
----------
-----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales of products $ 24,477,000 $ 8,639,000
Engineering fees 5,860,000 2,379,000
License fees and royalties 296,000 603,000
------- -------
30,633,000 11,621,000
---------- ----------
Costs and expenses:
Cost of products sold 16,402,000 7,652,000
Selling, general and administrative 9,375,000 3,206,000
Cost of engineering fees and research and development 3,463,000 2,135,000
Purchased research and development 780,000
Amortization of capitalized software development costs 233,000
Non-cash restructuring charge 2,058,000
---------- ----------
30,020,000 15,284,000
---------- ----------
Net income (loss) from operations 613,000 (3,663,000)
------- ----------
Other income (expense):
Interest, net (75,000) (62,000)
Other 62,000
------ -------
(13,000) (62,000)
------- -------
Net income (loss) before provision for income taxes 600,000 (3,725,000)
Benefit (provision) for income taxes 236,000 (4,000)
------- ------
Net income (loss) before extraordinary item 836,000 (3,729,000)
Extraordinary gain on the conversion of notes payable into
common stock 116,000
---------- -------
Net income (loss) $ 836,000 $ (3,613,000)
------- ----------
------- ----------
Primary income (loss) per common share before
extraordinary item $ 0.07 $ (0.94)
---------- ----------
---------- ----------
Primary income (loss) per common share $ 0.07 $ (0.91)
---------- ----------
---------- ----------
Weighted average common shares outstanding 9,773,000 4,147,000
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 836,000 $(3,613,000)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH USED BY
OPERATING ACTIVITIES:
Depreciation and amortization of equipment 509,000 126,000
Amortization of capitalized software development costs 233,000
Amortization of prepaid assets 389,000 56,000
Purchased research and development 780,000
Non-cash restructuring charge 2,058,000
Extraordinary gain on conversion of notes payable into
common stock (116,000)
Changes in assets and liabilities:
Accounts receivable (3,868,000) (429,000)
Inventories (193,000) 112,000
Other current assets (712,000) (156,000)
Accounts payable and accrued expenses (1,680,000) 96,000
Deferred revenues (32,000) 361,000
------- -------
NET CASH USED BY OPERATING ACTIVITIES (3,971,000) (1,272,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,009,000) (311,000)
Prepaid licenses (641,000) (169,000)
Capitalized software development costs (526,000)
Purchase of net assets by NewGen (86,000)
Proceeds (purchase) of certificate of deposit 50,000 (50,000)
------ -------
NET CASH USED BY INVESTING ACTIVITIES (2,212,000) (530,000)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions - NewGen 1,002,000
Net proceeds from sale of common stock 500,000 2,567,000
Net increase in line of credit - NewGen 475,000
Net proceeds from exercise of employee options and warrants 207,000 88,000
Repayment of line of credit - Prima (135,000) (151,000)
Principal payments under capital lease obligations (22,000) (19,000)
Repayment of notes payable (41,000) (525,000)
Proceeds from notes payable 125,000
Net proceeds from exercise of warrants 3,272,000
Net proceeds from sale of warrants 513,000
--------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,986,000 5,870,000
--------- ---------
Net (decrease) increase in cash (4,197,000) 4,068,000
Cash at the beginning of the year 4,390,000 322,000
--------- -------
Cash at the end of the year $ 193,000 $ 4,390,000
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
5% CONVERTIBLE
COMMON STOCK PREFERRED STOCK
------------ PAID-IN ---------------
SHARES AMOUNT CAPITAL SHARES AMOUNT
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 3,485,787 $87,000 $18,019,000 2,318 $ 2,318,000
Exercise of employee stock
options 16,340 1,000 95,000
Exercise of warrants 1,226,667 30,000 3,242,000
Common stock issued on
conversion of accounts
payable 176,001 4,000 307,000
Common stock issued on
conversion of notes
payable 58,862 2,000 100,000
Private sales of common
stock 1,801,334 45,000 2,480,000
Sales of warrants 513,000
Net loss
--------- --------- ----------- --------- ---------
BALANCE AT JUNE 30, 1996 6,764,991 169,000 24,756,000 2,318 2,318,000
Exercise of employee stock
options and warrants 162,993 1,000 256,000
Conversion of preferred
stock into common stock 556,601 3,000 3,057,000 (1,897.5) (1,898,000)
Common stock issued for
NewGen Imaging Systems 2,150,000 11,000 2,574,000
Private sales of common
stock 100,000 1,000 499,000
Effect of reverse stock split 27 (136,000) 136,000
Net income
--------- --------- ----------- --------- ---------
BALANCE AT JUNE 30, 1997 9,734,612 $ 49,000 $31,278,000 420.5 $ 420,000
--------- --------- ----------- --------- ---------
--------- --------- ----------- --------- ---------
<CAPTION>
5% SERIES B
CONVERTIBLE
PREFERRED STOCK
--------------- SHAREHOLDER ACUMMULATED
SHARES AMOUNT LOANS DEFICIT TOTAL
------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 116.2 $1,162,000 $ 0 $(20,370,000) $ 1,216,000
Exercise of employee stock
options (8,000) 88,000
Exercise of warrants 3,272,000
Common stock issued on
conversion of accounts
payable 311,000
Common stock issued on
conversion of notes
payable 102,000
Private sales of common
stock 2,525,000
Sales of warrants 513,000
Net loss (3,613,000) (3,613,000)
--------- --------- ---------- ------------ -----------
BALANCE AT JUNE 30, 1996 116.2 1,162,000 (8,000) (23,983,000) 4,414,000
Exercise of employee stock
options and warrants (50,000) 207,000
Conversion of preferred
stock into common stock (116.2) (1,162,000) -
Common stock issued for
NewGen Imaging Systems (82,000) 2,503,000
Private sales of common
stock 500,000
Effect of reverse stock split -
Net income 836,000 836,000
--------- --------- ---------- ------------ -----------
BALANCE AT JUNE 30, 1997 0 $ 0 $ (140,000) $(23,147,000) $ 8,460,000
--------- --------- ---------- ------------ -----------
--------- --------- ---------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Imaging Technologies Corporation, formerly Personal Computer Products,
Inc., a Delaware corporation, and its subsidiaries ("ITEC" or the
"Company") (1) develop and license laser printer technology; (2)
manufacture, market and distribute laser printer controllers and
accessories; (3) market and distribute internationally a variety of
personal computer accessory products; and (4) market and distribute high
resolution imaging and color digital proofing products.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ITEC and its
active subsidiaries, PCPI Technologies, Inc. ("PCPI"), Prima Inc. doing
business as Prima International ("Prima") and NewGen Imaging Systems, Inc.
("NewGen"). All significant inter-company accounts and transactions have
been eliminated.
- - ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those
estimates.
- -INVENTORIES
Inventories are valued at the lower of cost or market; cost being
determined by the first-in, first-out method.
- -PREPAID LICENSES
Up-front payments for licenses of software are recorded as prepaid
licenses. Amortization of prepaid licenses is recorded on a straight-line
basis over estimated useful lives generally ranging from three to five
years, commencing from the date the underlying technology is available for
use by the Company.
- -PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally
computed on a straight-line basis over the estimated useful lives of assets
ranging from three to seven years. Amortization of leasehold improvements
is provided over the initial term of the lease, on a straight-line basis.
Maintenance, repairs and minor renewals and betterments are charged to
expense.
- -OTHER ASSETS
Other assets, which include certain intangible assets, are stated at cost,
less accumulated amortization. Amortization is provided on the
straight-line method over the estimated useful lives of the respective
assets, generally three to ten years.
- -REVENUES
Revenue from the sale of products is recognized as of the date shipments
are made to customers. Revenue from long-term software and technology
license fees is recognized once the collection is made, or is "probable" as
prescribed in AICPA Statement of Position 91-1 "Software Revenue
Recognition," and there are no further contractual obligations under the
license agreement. Royalties are recognized upon the sale of such products
by the licensee.
The Company currently has development contracts with original equipment
manufacturers ("OEMs") to adapt the Company's software products to the
OEMs' hardware products. Revenues under these contracts are recognized
based on the percentage-of-completion method and are invoiced to the OEM
upon milestones
17
<PAGE>
deliveries. Deferred revenue comprises payments received in advance of
revenue to be recognized on such contracts.
- - ADVERTISING COSTS
The Company expenses advertising and promotion costs as incurred. During
fiscal 1997 and 1996, the Company incurred advertising and promotion costs
of approximately $997,000 and $138,000, respectively.
- -RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred and were
immaterial for the tears ended June 30, 1997 and 1996. The cost of
engineering fee revenue is included as a component of research and
development.
The Company has developed software technology and capitalized certain
qualifying costs pursuant to the provisions of Statement of Financial
Accounting Standards No. 86 "Accounting for Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed". The capitalized software
development costs are related to software contained in laser printer
controllers. Capitalized software includes emulations of existing software
printer control languages currently in the marketplace, as well as software
included in laser printer controllers for existing laser printers. The
Company's software emulation products are generally offered in different
combinations that are designed to provide more value than its competitors'
products. Its printer controller products are generally designed to allow
existing laser printers to operate at higher performance levels than
originally configured. While the Company believes its new products will be
accepted in the marketplace and that it will recover its investment in
capitalized software, the ultimate realization of this investment is
dependent on such acceptance and the Company's and/or OEM's ability to
market these new products.
Costs incurred prior to the establishment of technological feasibility, or
subsequent to the release to customers, are expensed as research and
development costs as incurred. Capitalized software costs are amortized on
a product-by-product basis. The annual amortization is the greater of the
amount computed using (a) the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues
for that product, or (b) the straight-line method over the estimated
economic life of the product, generally three years. Amortization begins
when the product is available for general release to customers.
- - REVERSE STOCK SPLIT
Effective February 24, 1997, the Company effected a 1 for 5 reverse stock
split. Accordingly, all historical share and per share data have been
restated to give effect for the reverse stock split.
- -EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is based on the weighted average number of
shares of common stock and dilutive common stock equivalents, if any,
outstanding during the period, and is computed after giving effect to the
dividend requirements of the 5% Convertible Preferred Stock ($68,000 and
$116,000 during fiscal 1997 and fiscal 1996, respectively) and the 5%
Series B Convertible Preferred Stock ($58,000 during fiscal 1997 and 1996).
During fiscal 1996, the effect of the conversion privileges of convertible
preferred stock and convertible notes payable is antidilutive for the
periods presented. Accordingly, such effect is not reflected in the
calculation of primary loss per common share.
In February of 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial accounting standards ("SFAS") No. 128,
"Earnings Per Share" ("EPS"). This statement requires the presentation of
EPS to reflect both "Basic EPS" and "Diluted EPS" on the face of the
statement of operations. In general, Basic EPS excludes dilution created
by common stock equivalents and is a function of the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution created by common stock equivalents and is
calculated in the same manner as fully diluted EPS illustrated in
Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB No.
15).
The Company will be required to adopt the new method of reporting EPS for
the year ending June 30, 1998. The Company's EPS as reflected in this
document includes Primary EPS for fiscal years 1997 and 1996 under the
rules of APB No. 15, and the use of common stock equivalents only when they
are dilutive.
18
<PAGE>
- -STOCK ISSUANCE COSTS
Common stock issuance costs including distribution fees, due diligence
fees, wholesaling costs, legal and accounting fees, and printing are
capitalized before the sale of the related stock and then charged against
gross proceeds when the stock is sold.
- -FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" requires the disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The
carrying value of the financial instruments on the consolidated balance
sheet are considered reasonable estimates of the fair value.
NOTE 2 - CAPITAL RESOURCES AND OPERATING ACTIVITIES
During the past several years, the Company has been operating with limited
financial resources. To alleviate this hardship, the Company has obtained
additional debt and equity financing and has achieved profitability through
the restructuring of its operations and the introduction of new products.
At June 30, 1997, the Company had working capital of $5,203,000 compared to
working capital of $3,976,000 as of June 30, 1996. Subsequent to June 30,
1997, the Company improved its liquidity with the initial closing of
$5,000,000 in a private placement of its newly designated Series C
Redeemable Convertible Preferred Stock ("Series C Shares") and the closing
of a $3,000,000 line of credit facility with a commercial bank to help to
finance the sales growth of PCPI and Prima. While under the terms of the
Series C private placement, subject to certain additional conditions, the
Company has the right to call for a second round of financing up to an
aggregate amount of $5,000,000 and the holders of the Series C Shares,
subject to certain conditions, are entitled to purchase additional Series C
Shares up to $2,000,000, there can be no assurances that additional Series
C Shares will be issued.
NEWGEN SYSTEMS ACQUISITION CORPORATION
Effective February 14, 1997, the Company issued 2,150,000 unregistered
shares of ITEC's common stock in exchange for all of the outstanding shares
of NewGen Systems Acquisition Corporation ("NSAC"). NSAC was then merged
into a newly created, wholly-owned subsidiary of the Company and was
accounted for as a pooling of interests. NSAC commenced operations in July
1996 and, accordingly, no restatement of prior financial statements is
required. Details of the results of operations of the previously separate
companies for the periods prior to combination are as follows:
Year ended Six months ended
June 30, 1996 December 31, 1996
------------- -----------------
Net revenues:
ITEC $ 11,621,000 $ 7,529,000
NewGen _________ 7,190,000
------------- ------------
Combined $ 11,621,000 $ 14,719,000
------------- ------------
------------- ------------
Extraordinary item:
ITEC $ 116,000
NewGen _________
-------------
Combined $ 116,000
-------------
-------------
Net income (loss):
ITEC $ (3,613,000) $ 858,000
NewGen _________ (1,550,000)
------------- ------------
Combined $ (3,613,000 $ (692,000)
------------- ------------
------------- ------------
The net loss of $1,550,000 during the six months ended December 31, 1996
included non-recurring charges of $1,157,000 comprised of $780,000 of
purchased research and development, a $349,000 writedown of certain prepaid
licenses and royalties and $28,000 of other miscellaneous items.
19
<PAGE>
NON-CASH RESTRUCTURING CHARGE
In fiscal 1996, based on a shift in business direction and a desire to
focus its resources, the Company reassessed the future benefit of certain
"older-technology" product lines. As a result, the Company took a one-time,
non-cash write-down of an aggregate of $2,058,000 which was comprised of
capitalized software ($937,000), prepaid licenses and royalties ($583,000),
inventories ($204,000) and certain pre-paid assets ($334,000) to reduce
these assets to their net realizable value.
EXTRAORDINARY GAINS
During fiscal 1996, the Company recognized extraordinary gains on certain
issuances of common stock of approximately $116,000, representing the
difference in the aggregate conversion price and the market value of the
shares on the conversion date.
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
JUNE 30, 1997
-------------
Accounts receivable:
Trade $ 3,289,000
Current NRE, license fees and royalties 4,979,000
------------
8,268,000
Less allowance for doubtful accounts (832,000)
------------
$ 7,436,000
------------
------------
Inventories:
Materials and supplies $ 1,466,000
Finished goods 873,000
------------
$ 2,339,000
------------
------------
Property and equipment, at cost:
Computers and other equipment $ 2,017,000
Office furniture and fixtures 470,000
Leasehold improvements 78,000
------------
2,565,000
Less accumulated depreciation and
amortization (926,000)
------------
$ 1,639,000
------------
------------
Accrued liabilities:
Compensation and vacation $ 613,000
Other 238,000
------------
$ 851,000
------------
------------
NOTE 4 - SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Year ended June 30,
1997 1996
---- ----
NON-CASH FINANCING ACTIVITIES:
Conversion of preferred stock into
common stock $ 3,060,000
-----------
-----------
Options exercised with loans $ 50,000 $ 8,000
----------- ---------
----------- ---------
Common stock issued with notes - NewGen $ 82,000
-----------
-----------
Conversion of convertible notes into
common stock - NewGen $ 1,000,000
-----------
-----------
Conversion of acquisition debt into
common stock - NewGen $ 500,000
-----------
-----------
Conversion of accounts payable into
notes payable $ 227,000
-----------
-----------
Fixed assets acquired under capital leases $ 7,000 $ 28,000
----------- ---------
----------- ---------
Conversion of accrued interest to principal
on notes payable $ 54,000
-----------
-----------
Conversion of accrued interest into
common stock $ 12,000
-----------
-----------
Conversion of notes payable into
common stock $ 198,000
-----------
-----------
Conversion of accounts payable and
accrued expenses into common stock $ 319,000
-----------
-----------
Consulting fees paid with common stock
20
<PAGE>
Year ended June 30,
1997 1996
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 111,000 $ 62,000
----------- ---------
----------- ---------
Cash paid during the year for income taxes $ 5,000 $ 4,000
----------- ---------
----------- ---------
NOTE 5 - NOTES PAYABLE
The following is a summary of the outstanding debt as of June 30, 1997:
ITEC 7% Convertible Note with a director;
payable on demand; convertible at the market
price of $1.55. $ 100,000
Prima 5% Note to a supplier, due in monthly
installments of $10,000 through May 1, 1999;
secured by accounts receivable. 197,000
Prima capital lease 6,000
PCPI capital leases 16,000
NewGen $4,000,000 line of credit; prime rate
of interest plus 2.5 % (11.75% as of June 30,
1997); expiring on April 30, 1998; restricted
to finance certain eligible inventory and
accounts receivable; secured by the assets of
NewGen 955,000
----------
Total notes payable and capital leases $1,274,000
----------
----------
All outstanding debt balances have been classified as current as long-term
amounts are immaterial.
NOTE 6 - PREFERRED STOCK
5% CONVERTIBLE PREFERRED STOCK
Holders of the 5% convertible preferred stock ("Series A") are entitled to
receive, when and as declared by the Board of Directors, but only out of
amounts legally available for the payment thereof, cumulative cash
dividends at the annual rate of $50.00 per share, payable semi-annually.
The 5% convertible preferred stock is convertible, at any time, into shares
of the Company's common stock, at a price of $17.50 per common share. This
conversion price is subject to certain antidilution adjustments, in the
event of certain future stock splits or dividends, mergers, consolidations
or other similar events. In addition, the Company shall reserve, and keep
reserved, out of its authorized but unissued shares of common stock,
sufficient shares to effect the conversion of all shares of the 5%
convertible preferred stock.
In the event of any involuntary or voluntary liquidation, dissolution, or
winding up of the affairs of the Company, the 5% convertible preferred
stockholders shall be entitled to receive $1,000 per share, together with
accrued dividends, to the date of distribution or payment, whether or not
earned or declared.
The 5% convertible preferred stock is callable, at the Company's option, at
call prices ranging from $1,050 to $1,100 per share. No call on the 5%
convertible preferred stock was made during fiscal 1997 or 1996.
5% SERIES B CONVERTIBLE PREFERRED STOCK
In January, 1995, the Company designated 117 shares of previously
undesignated Preferred Stock as 5% Series B Convertible Preferred Stock,
par value $1,000 per share with a face value of $10,000 per share ("Series
B"). Each share may be converted into 1,905 shares of the Company's common
stock at the conversion rate of $5.25. The holders of the Series B have a
liquidation preference of $10,000 per Series B share over the common
shareholders but are junior to the liquidation preference of the existing
5% Convertible Preferred Stock shareholders. Holders of the Series B are
entitled to receive, when and as declared by the Board of Directors, but
only out of amounts legally available for the payment thereof, cumulative
cash dividends at the annual rate of $500 per share, payable annually.
21
<PAGE>
CONVERSION OF PREFERRED STOCK
During the year ended June 30, 1997, the Company extended an offer to
holders of the Company's Series A and Series B to convert the accumulated
dividends of approximately $1,789,000 and $116,000, respectively, into
unregistered shares of the Company's common stock at a conversion rate of
$7.50. Under the terms of the offer, Series A shareholders converted
1,897.5 shares and approximately $1,381,000 of the accumulated dividend and
Series B shareholders converted 116.2 shares and approximately $116,000 of
the accumulated dividend into unregistered shares of the Company's common
stock. As of June 30, 1997, the accumulated dividend in arrears was
approximately $476,000 on the Series A.
NOTE 7 - COMMON STOCK WARRANTS
The Company, from time-to-time, grants warrants to employees, directors,
outside consultants and other key persons, to purchase shares of the
Company's common stock, at an exercise price equal to no less than the fair
market value of such stock on the date of grant. The terms and vesting of
these warrants are determined by the Board of Directors on a case-by-case
basis. The following is a summary of the warrant activity:
SHARES OF COMMON
STOCKS UNDERLYING
WARRANT PROICES WARRANTS
PER SHARE --------
---------
June 30, 1995 $3.00 to $7.50 603,627
Warrants granted $1.00 to $5.00 3,442,437
Warrants exercised $1.50 to $3.10 (1,226,667)
Warrants canceled $3.00 to $3.75 (350,607)
-----------
June 30, 1996 $1.00 to $7.50 2,468,790
Warrants granted $5.00 to $6.25 845,000
Warrants exercised $1.00 to $3.75 (90,520)
-----------
June 30, 1997 $1.00 to $7.50 3,223,270
-----------
-----------
Warrants exercisable
June 30, 1997 $1.00 to $7.50 2,550,651
In July 1995, the Company issued to one of its then officers five-year
warrants to purchase an aggregate of 30,000 shares of common stock at $1.00
per share, the fair market value of the Company's stock on the date the
warrants were granted. During fiscal 1997, the former officer exercised
warrants to purchase 20,000 shares.
In September 1995, two-year warrants to purchase 40,000 shares of the
Company's unregistered common stock at $2.50 per share were issued to an
investor group that provided the Company loan financing in consideration
for $6,000 and a six month extension to their existing loan. Warrants to
purchase 20,000 shares were exercisable immediately and the remaining
20,000 warrants were exercisable after six months.
In September 1995, the Company issued to each of two investors groups that
provided a loan financing, two-year warrants to purchase 6,185 shares (an
aggregate of 12,370 shares) of the Company's unregistered common stock at
$2.50 per share. Warrants to purchase 3,093 were exercisable immediately
and the remaining 3,092 warrants were exercisable after six months for each
investor group. All of these warrants were issued in exchange for cash
consideration of approximately $2,000 which management believes
approximates their fair market value.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the then current market
value. Accordingly, an aggregate of 350,607 warrants were canceled and
reissued at an exercise price $1.00 per share. In addition, the Company
issued to three of its officers and its two outside directors warrants to
purchase an aggregate of 415,460 shares of the Company's common stock.
In October 1995, the Company issued as part of a financing, five-year
warrants to purchase 50,000 unregistered shares of the Company's common
stock at $1.25 per share.
22
<PAGE>
Between January and April 1996, the Company issued to various consultants
warrants to purchase an aggregate of 544,000 shares of the Company's common
stock at prices ranging from $1.50 to $5.00 per share. As of June 30, 1997,
warrants to purchase 20,000 shares, which expire in January 2001, remained
outstanding and are exercisable at the price of $5.00 per share.
In January 1996, the Company sold to its Chairman for $500,000 a five-year
warrant to purchase 2,000,000 unregistered shares of its common stock at
the rate of $5.00 per share. The warrant contains certain anti-dilution
provisions should the Company issue equity instruments at less than 50% of
the exercise price. Subsequently, in connection with a private placement
with various private investors of approximately $2.5 million, the exercise
price of this warrant was reduced to $3.00 per share in accordance with the
warrants anti-dilution provision. During fiscal 1997 and 1996, warrants to
purchase 684,667 shares were exercised and as of June 30, 1997, warrants to
purchase 1,315,333 shares were outstanding.
In June 1997, the Company issued to six of its officers and its two outside
directors warrants to purchase an aggregate of 725,000 shares of the
Company's common stock at an exercise price of $6.25 per share vesting
monthly over 44 months.
NOTE 8 - COMMON STOCK OPTION AND PURCHASE PLANS
COMMON STOCK OPTION PLANS
In July 1984 ("1984 Plan"), November 1987 ("1988 Plan") and September, 1996
("1997 Plan"), the Company adopted stock option plans, under which
incentive stock options and non-qualified stock options may be granted to
employees, directors, and other key persons, to purchase shares of the
Company's common stock, at an exercise price equal to no less than the fair
market value of such stock on the date of grant, with such options
exercisable in installments at dates typically ranging from one to not more
than ten years after the date of grant.
Under the terms of the 1988 and 1997 Plans, loans may be made to option
holders which permit the option holders to pay the option price, upon
exercise, in installments. A total of 212,000 and 1,000,000 shares of
common stock are authorized for issuance under the 1988 and 1997 Plans,
respectively.
No shares are available for future issuance under the 1984 Plan due to the
expiration of the plan during 1994. As of June 30, 1997, 6,740 options
granted under the 1984 Plan were outstanding and options to acquire 948,869
shares remained available for grant under the 1988 and 1997 Plans.
In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans
("Outside Plan"), granted to employees, directors and other key persons of
ITEC or its subsidiaries options to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of
such stock on the date of grant. Options are exercisable in installments at
dates typically ranging from one to not more than ten years after the date
of grant.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the current market value.
Accordingly, the exercise price on an aggregate of 18,220 and 275,000
options under the 1988 and Outside Plans, respectively, were canceled and
reissued at an exercise price of $1.00 per share.
COMMON STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan ("Purchase Plan") was approved by the
Company's shareholders in September 1996. The Purchase Plan permits
employees to purchase the Company's common stock at a 15% discounted price.
The Purchase Plan is designed to encourage and assist a broad spectrum of
employees of the Company to acquire an equity interest in the Company
through the purchase of its common stock. It is also intended to provide
participating employees the tax benefits under Section 421 of the Code. The
Purchase Plan covers an aggregate of 500,000 shares of the Company's common
stock.
All employees, including executive officers and directors who are
employees, customarily employed more than 20 hours per week and more than
five months per year by the Company are eligible to participate in the
Purchase Plan on the first enrollment date following employment. However,
employees who hold, directly or through options, five percent or more of
the stock of the Company are not eligible to participate.
23
<PAGE>
Participants may elect to participate in the Purchase Plan by contributing
up to a maximum of 15 percent of their compensation, or such lesser
percentage as the Board may establish from time to time. Enrollment dates
are the first trading day of January, April, July and October or such other
dates as may be established by the Board from time to time. On the last
trading day of each December, March, June and September, or such other
dates as may be established by the Board from time to time, the Company
will apply the funds then in each participant's account to the purchase of
shares. The cost of each share purchased is 85 percent of the lower of the
fair market value of common stock on (i) the enrollment date or (ii) the
purchase date. The length of the enrollment period may not exceed a maximum
of 24 months. No participant's right to acquire shares may accrue at a rate
exceeding $25,000 of fair market value of common stock (determined as of
the first trading day in an enrollment period) in any calendar year. It is
anticipated that the first enrollment date will be during the second
quarter of fiscal 1998.
STOCK OPTION ACTIVITY:
The following is a summary of the stock option activity:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
UNDERLYING OPTIONS
------------------
OPTION PRICES 1984, 1988 AND OTHER OPTION PRICES
PER SHARE 1997 PLANS OPTIONS PER SHARE
--------- ---------- ------- ---------
<S> <C> <C> <C> <C>
June 30, 1995 $2.50 to $5.10 71,975 265,000 $1.65 to $3.60
Options granted $1.00 to $5.00 32,820 333,600 $1.00
Options exercised $1.00 (8,340) (8,000) $1.00
Options canceled $1.60 to $5.10 (60,402) (278,000) $1.00 to $3.60
-------- ---------
June 30, 1996 $1.00 to $5.10 36,053 312,600 $1.00
Options granted $3.60 to $8.45 104,500
Options exercised $1.00 to $2.10 (5,133) (77,500) $1.00
Options canceled $1.00 to $7.95 (13,200)
-------- ---------
June 30, 1997 $1.00 to $8.45 122,220 235,100 $1.00
-------- ---------
-------- ---------
Options exercisable
June 30, 1997 $1.00 to $5.10 14,100 140,300 $1.00
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. The Company has
opted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") to disclose its
stock-based compensation with no financial effect. The pro forma effects of
applying SFAS 123 in this initial phase-in period are not necessarily
representative of the effects on reported net income or loss for future
years. Had compensation expense for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS 123, the
Company's pro forma net income (loss) and net income (loss) per share would
have been as follows:
1997 1996
---- ----
Net income (loss)
As reported $ 836,000 $(3,613,000)
Pro forma 631,000 (3,678,000
Net income (loss) per share
As reported $ 0.07 $(0.90)
Pro forma $ 0.05 $(0.93)
24
<PAGE>
The weighted average fair value of the options granted during fiscal years
1996 and 1997 is estimated on the date of grant using the Black-Scholes
option pricing model. The weighted average fair values and weighted average
assumptions used in calculating the fair values were as follows:
1997 1996
---- ----
Fair value of options granted $5.45 $0.78
Risk-free interest rate 7% 7%
Expected life (years) 5 5
Expected volatility 95% 95%
Expected dividends $ 0 $ 0
NOTE 9 - SIGNIFICANT CUSTOMERS, REVENUE DATA, AND CONCENTRATION OF CREDIT
RISK
As of and during the year ended June 30, 1997, no customer accounted for
more than 10% of consolidated accounts receivable or total consolidated
revenues.
As of and during the year ended June 30, 1996, Narbon Technologies
accounted for 27% of consolidated accounts receivable and 4% of total
consolidated revenues; Canon USA accounted for 11% of consolidated accounts
receivable and 3% of total consolidated revenues; and Computer 2000
accounted for 8% of consolidated accounts receivable and 17% of total
consolidated revenues.
The majority of the Company's sales in fiscal 1997 and 1996 were to
European distributors (denominated in U.S. dollars) in the computer
peripherals and accessories market, including imaging and data storage
devices and printers, through its wholly-owned subsidiaries.
During the years ended June 30, 1997 and 1996, 59% and 84% of total
consolidated revenues, respectively, were from foreign customers, as
reflected in the following table:
YEAR ENDED JUNE 30,
--------------------
1997 1996
---- ----
Europe $12,084,000 $ 6,605,000
Far East 4,397,000 2,784,000
Others 1,675,000 355,000
----------- ------------
$ 18,156,000 $ 9,744,000
----------- ------------
----------- ------------
The Company typically has not required collateral for its sales. However,
it has required letters of credit or prepayment from time-to-time as deemed
necessary.
NOTE 10 - INCOME TAXES
The Company's provision for income taxes is accounted for in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
the SFAS 109 asset and liability method, deferred tax assets and
liabilities are determined based upon the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax
rates in effect for the year in which the differences are expected to
reverse. A valuation allowance is then provided for deferred tax assets
which are more likely than not to not be realized.
25
<PAGE>
The benefit (provision) for income taxes for the years ended June 30, 1997 and
1996 comprises:
YEAR ENDED JUNE 30,
-------------------
1997 1996
---- ----
Current:
State $ (5,000) $ (4,000)
Deferred federal 241,000
------- ------
$ 236,000 $ (4,000)
---------- ---------
---------- ---------
The components of deferred income taxes at June 30, 1997 are as follows:
Deferred tax assets:
Federal net operating loss carryforwards $ 4,728,000
State net operating loss carryforwards 225,000
Book reserves and accrued liabilities 349,000
Federal general business and other tax credits 517,000
State R&D and other credits 102,000
-------
5,921,000
Valuation allowance (5,680,000)
-----------
Deferred taxes $ 241,000
------------
------------
The Company's federal and state net operating loss carryforwards expire in 1997
through 2011. Additionally, the Company's federal and state research and
development credits expire in 1998 through 2009. During 1991 the Company
sustained a change in ownership as defined in Section 382 of the Internal
Revenue Code; as a result, an annual limitation of approximately $350,000 was
imposed on the utilization of the net operating loss carryforwards generated
prior to the date of change. In addition, Section 383 places a limitation on the
usage of tax credits generated prior to such a change. Subsequent to the date of
the ownership change in 1991, there have been numerous additional equity
issuances; as a result, the Company may have experienced, or could experience in
the future, similar ownership changes, which could result in additional
limitations on the annual utilization of the Company's net operating loss
carryforwards and tax credits generated prior to the new change in ownership.
The provision for income taxes results in an effective rate which differs from
the federal statutory rate. A reconciliation between the actual tax provision
and taxes computed at the statutory rate is as follows:
YEAR ENDED JUNE 30,
-------------------
1997 1996
---- ----
Benefit (provision) at federal statutory
income tax rate $(204,000) $ 1,228,000
utilization of Federal net operating loss
carryforward 445,000
Losses for which no current benefit is available (1,228,000)
State income taxes (5,000) (4,000)
------ ------
$ 236,000 $ (4,000)
--------- ------------
--------- ------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company leases certain equipment under non-cancelable capital leases, which
are included in property and equipment. As of June 30, 1997, the cost and
accumulated amortization of such equipment was $93,000 and $42,000,
respectively.
ITEC and its subsidiaries lease operating facilities under non-cancelable
agreements under the following terms: ITEC and PCPI in San Diego, California,
for 3 years, commencing February 1, 1996; PCPI in Nagoya Japan under a month to
month lease; Prima in Santa Clara, California, for 5 years, commencing July 1,
1997; and NewGen in Costa Mesa, California, for approximately 3 years ending on
July 31, 1998 with an option to extend for two additional three-year periods.
Future minimum rental commitments under non-cancelable leases are reflected in
the following table:
26
<PAGE>
YEAR ENDING JUNE 30, CAPITAL LEASES OPERATING LEASES
-------------------- -------------- ----------------
1998 $ 17,000 $ 386,000
1999 7,000 144,000
2000 1,000 76,000
2001 79,000
2002 81,000
------ ------
Total minimum lease payments 25,000 $ 766,000
----------
----------
Amount representing interest (3,000)
-------
Net present value of minimum lease pmts. $ 22,000
---------
---------
Total rental expense was approximately $459,000 in fiscal 1997 and $217,000 in
fiscal 1996.
LEGAL MATTERS
The Company, because of the nature of its business, is from time to time
threatened or involved in legal actions. The Company, after discussion with
legal counsel, does not consider that any of these legal actions now pending
will result in a material adverse effect on the consolidated financial position
or results of operations of the Company and, further, does not consider that any
such proceedings fall outside ordinary, routine litigation incidental to the
business of the Company.
NOTE 12 - RELATED PARTY TRANSACTIONS
A director receives compensation as a consultant to the Company on corporate
matters and investment banking issues under an agreement expiring in March 1999.
These consulting fees amounted to $120,000 and $108,000 during fiscal 1997 and
1996, respectively. During fiscal 1996, approximately $81,000 of accrued
consulting fees and $27,000 for accrued directors fees owed to the Director were
converted into unregistered shares of the Company's common stock.
As discussed in Note 5, one of the Company's directors loaned to the Company an
aggregate of $100,000 with interest at the rate of 7% per year. As of June 30,
1997, borrowing under this Note Payable aggregated $100,000.
NOTE 13 - EVENTS SUBSEQUENT TO JUNE 30, 1997
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK
On August 21, 1997, the Company closed a private placement of its newly
designated Series C Redeemable Convertible Preferred Stock ("Series C Shares")
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act").
In the initial closing of $5,000,000, ITEC issued 500 Series C Shares and
warrants to purchase up to 200,000 shares of the Company's common stock. After
satisfying certain holding periods, each of the newly issued Series C Shares is
convertible, at the option of its holder, into shares of Common Stock of the
Company based upon a conversion price equal to $9.00 or if lower, the lowest
closing market price of the Company's Common Stock during the 7 trading days
prior to the conversion date. The warrants have an exercise price of $7.50 per
share.
Subject to certain additional conditions, the Company has the right to call for
a second round of financing up to an aggregate amount of $5,000,000, beginning
on and including January 1, 1998 and ending June 30, 1998. This additional round
of financing would involve the issuance of up to an additional 500 Series C
Shares and warrants for the purchase of up to 200,000 shares of Common Stock.
Additionally, purchasers of the Series C Shares are entitled to purchase
additional Series C Shares up to 40% of the number of Series C Shares held by
each investor on December 31, 1997.
LINE OF CREDIT FACILITY
27
<PAGE>
In August 1997, the Company entered into a $3,000,000 line of credit facility
with a commercial bank. The line of credit bears interest at the bank prime rate
of interest plus 1%, and is collateralized by substantially all of the assets of
ITEC, PCPI and Prima. As of August 25, 1997, there were no borrowings under this
line of credit.
28
<PAGE>
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
29
<PAGE>
PART III
- -------------------------------------------------------------------------------
Pursuant to General Instruction E(3) to form 10-KSB, the information required by
items 9, 10, 11, and 12 of Part iii is incorporated by reference from the
Company's definitive Proxy Statement with respect to its 1997 annual meeting of
stockholders, to be filed pursuant to Regulation 14A within 120 days after June
30, 1997.
ITEM 13.
EXHIBITS, LIST, AND REPORTS ON FORM 8-K
(a) The following exhibit list states, in the case of certain exhibits, a prior
SEC filing which contains the exhibit and from which it is incorporated by
reference.
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also Item 4(a). (Incorporated by reference to
Exhibit 3(a) to 1988 Form 10-K.)
3(b) Certificate of Amendment of Certificate of Incorporation of the
Company, filed February 8, 1995, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1995 Form 10-K.)
3(c) Certificate of Amendment of Certificate of Incorporation of the
Company, filed May 23, 1997, as amended, and currently in effect.
3(d) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K)
4(a) Amended Certificate of Designation of Imaging Technologies
Corporation with respect to the 5% Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4(d) to 1987 Form 10-K.)
4(b) Amended Certificate of Designation of Imaging Technologies
Corporation with respect to the 5% Series B Convertible Preferred
Stock. (Incorporated by reference to Exhibit 4(b) to 1988 Form 10-K.)
10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by
reference to Form S-8 Filed October 26, 1984, File No. 2-93993.)
10(a.2) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1984 Stock Option Plan. (Incorporated by reference to
Form S-8 filed October 26, 1984, File No. 2-93993.)
10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by
reference to Exhibit 10(g) in 1989 Form 10-K.)
10(b.2) Amendment and Restatement of 1988 Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K.)
10(b.3) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1988 Stock Option Plan. (Incorporated by reference to
Exhibit 10(e) to 1991 Form 10-K)
10(c) Standard Industrial Lease Multi-Tenant - Modified Net dated
January 24, 1996 between the Company and Bernardo View, Ltd.; addendum
I to lease; addendum II to lease; Addendum III to Lease. (Incorporated
by reference to Exhibit 10(c) to 1996 Form 10-KSB)
30
<PAGE>
10(d) Reference is made to the various stock options and warrants
granted in 1996 to directors and executive officers as described in
Notes 6 and 7 to the 1996 financial statements. (Incorporated by
reference to Forms S-8 dated February 12, 1996, File Nos. 333-00871,
333-00873 and 333-00879).
10(e.1) Executive Employment Agreement, as amended, between the
Company and Edward W. Savarese, dated July 1, 1990 and amended as of
February 25, 1994. (Incorporated by reference to Exhibit 10(k) to 1994
Form 10-KSB).
10(e.2) Compensation Agreement between the Company and Edward W.
Savarese, dated November 16, 1992. (Incorporated by reference to
Exhibit 10(af) to 1993 Form 10-KSB.)
10(f) Compensation Agreement between the Company and Harry J. Saal,
dated November 16, 1992. (Incorporated by reference to Exhibit 10(ad)
to 1993 Form 10-KSB.)
10(g.1) Compensation Agreement between the Company and Irwin Roth,
dated November 16, 1992. (Incorporated by reference to Exhibit 10(ag)
to 1993 Form 10-KSB.)
10(g.2) Consulting Agreement, dated April 1, 1994, between the Company
and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to 1994
Form 10-KSB.)
10(h) Acquisition Agreement for acquisition of Prima International
subsidiary on October 1, 1993. (Incorporated by reference to Exhibit
2.1 to Amendment No. 1 to Form 8K/A dated October 14, 1993.)
10(i.1) Third Party Development Partner License Agreement, effective
October 22, 1993, between the Company and Adobe Systems Incorporated.
(Incorporated by reference to Exhibit 10(ai) to 1994 Form 10-KSB)
10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the
Postscript Support Source and Object Code Distribution License
Agreement between Adobe Systems Incorporated and the Company.
(Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB)
10(j) ITEC/APS License Agreement, dated March 28, 1994, between the
Company and Integrated Device Technology, Inc. (Incorporated by
reference to Exhibit 10(ak) to 1994 Form 10-KSB)
10(k) International Sales Representative Agreement, dated October 15,
1993, between the Company and Nippo Ltd. (Incorporated by reference to
Exhibit 10(ao) to 1994 Form 10-KSB).
10(l) Consulting Agreement dated September 17, 1993 between the
Company and Marius A. Robinson. (Incorporated by reference to Exhibit
10(aq) to 1994 Form 10-KSB)
10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between
the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(ar) to 1994 Form 10-KSB).
10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.50 per share, dated September 17,
31
<PAGE>
1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(as) to 1994 Form 10-KSB)
10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.00 per share, dated September 17,
1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(at) to 1994 Form 10-KSB)
10(n) ITEC/MEI License Agreement, dated September 30, 1994 between
the Company and Matsushita Electric Industrial Co., Ltd. (Incorporated
by reference to Exhibit 10(aac) to 1994 Form 10-KSB)
10(o) Form of standard Warrant Agreement dated January 3, 1996 issued
to Harry J. Saal as described in Note 6 to the 1996 financial
statements. (Incorporated by reference to Exhibit 10(o) to 1996 Form
10-KSB)
10(p) Form of standard Warrant and Consulting Agreement issued to
consultants as described in Note 6 to the 1996 financial statements.
(Incorporated by reference to Form S-8 dated May 9, 1996, File Number
333-03375)
10(q) Compensation Agreement between the Company and Brian Bonar,
dated September 1, 1994. (Incorporated by reference to Exhibit 10(q)
to 1996 Form 10-KSB)
11 EPS calculation
21 List of Subsidiaries of the Company
23 Consent of Independent Accountants
Exhibits 10(a.1), (a.2), (b.1), (b.2), (b.3), (d), (e.1), (e.2), (f), (g.1),
(g.2), and (q) are management contracts or compensatory plans or arrangements.
The Company will furnish a copy of any exhibit to a requesting stockholder upon
payment of the Company's reasonable expenses in furnishing such exhibit.
(b) No reports on Form 8-K were filed during the last quarter of fiscal 1997
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERSONAL COMPUTER PRODUCTS, INC.
By: EDWARD W. SAVARESE
------------------
Edward W. Savarese
Vice Chairman, President, and
Chief Executive Officer
September 29, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
HARRY J. SAAL Chairman of the Board of Directors September 29, 1997
- -------------
Harry J. Saal
EDWARD W. SAVARESE Vice Chairman of the Board of Directors September 29, 1997
- ------------------ and Chief Executive Officer
Edward W. Savarese
BRIAN BONAR President and Chief Operating Officer September 29, 1997
- -----------
Brian Bonar
RALPH R. BARRY Vice President, Chief Financial Officer, September 29, 1997
- -------------- Secretary and Treasurer
Ralph R. Barry (PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
IRWIN ROTH Director September 29, 1997
- ----------
Irwin Roth
A.L. DUBROW Vice President and Director September 29, 1997
- -----------
A.L. DuBrow
FRANK KAVANAUGH Vice President and Director September 29, 1997
- ---------------
Frank Kavanaugh
33
<PAGE>
INDEX TO EXHIBITS
- -------------------------------------------------------------------------------
NUMBER DESCRIPTION OF EXHIBIT PAGE
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also Item 4(a). (Incorporated by
reference to Exhibit 3(a) to 1988 Form 10-K.) ................ *
3(b) Certificate of Amendment of Certificate of Incorporation of
the Company, filed February 8, 1995. (Incorporated by
reference to Exhibit 3(b) to 1995 Form 10-K.) ......... *
3(c) Certificate of Amendment of Certificate of Incorporation of the
Company, filed May 23, 1997, as amended, and currently in effect. 37
3(d) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K) *
4(a) Amended Certificate of Designation of Imaging Technologies
Corporation with respect to the 5% Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4(d) to 1987 Form 10-K.) *
4(b) Amended Certificate of Designation of Imaging Technologies
Corporation with respect to the 5% Series B Convertible
Preferred Stock (Incorporated by reference to Exhibit 4(b)
to 1995 Form 10-K.) .................... *
10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by
reference to Form S-8 Filed October 26, 1984, File No. 2-93993.) *
10(a.2) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1984 Stock Option Plan. (Incorporated by reference
to Form S-8 filed October 26, 1984, File No. 2-93993.) ......... *
10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by
reference to Exhibit 10(g) in 1989 Form 10-K.) ............. *
10(b.2) Amendment and Restatement of 1988 Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to 1991 Form 10-K.) *
10(b.3) Forms of standard Non-Qualified and Incentive Stock Option
Agreement for 1988 Stock Option Plan. (Incorporated by reference
to Exhibit 10(e) to 1991 Form 10-K) ........................... *
10(c) Standard Industrial Lease Multi-Tenant - Modified Net dated
January 24, 1996 between the Company and Bernardo View, Ltd.;
addendum I to lease; addendum II to lease; Addendum III to Lease.
(Incorporated by reference to Exhibit 10(c) to 1996 Form 10-KSB) *
10(d) Reference is made to the various stock options and warrants
granted in 1996 to directors and executive officers as described
in Notes 6 and 7 to the 1996 financial statements. (Incorporated
by reference to Forms S-8 dated February 12, 1996, File Nos.
333-00871, 333-00873 and 333-00879). ............ *
10(e.1) Executive Employment Agreement, as amended, between the Company
and Edward W. Savarese, dated July 1, 1990 and amended as of
February 25, 1994. (Incorporated by reference to Exhibit 10(k)
to 1994 Form 10-KSB.)........................ *
10(e.2) Compensation Agreement between the Company and Edward W.
Savarese, dated November 16, 1992. (Incorporated by reference to
Exhibit 10(af) to 1993 Form 10-KSB.) .......................... *
*EXHIBIT IS INCORPORATED BY REFERENCE ONLY AND A COPY IS NOT INCLUDED IN THIS
FILING.
34
<PAGE>
NUMBER DESCRIPTION OF EXHIBIT PAGE
10(f) Compensation Agreement between the Company and Harry J. Saal,
dated November 16, 1992. (Incorporated by reference to Exhibit
10(ad) to 1993 Form 10-KSB.) ........................... *
10(g.1) Compensation Agreement between the Company and Irwin Roth, dated
ovember 16, 1992. (Incorporated by reference to Exhibit 10(ag)
to 1993 Form 10-KSB) ............................ *
10(g.2) Consulting Agreement, dated April 1, 1994, between the Company
and Irwin Roth. (Incorporated by reference to Exhibit 10(az) to
1994 Form 10-KSB.)............................................. *
10(h) Acquisition Agreement for acquisition of Prima International
subsidiary on October 1, 1993. (Incorporated by reference to
Exhibit 2.1 to Amendment No. 1 to Form 8K/A dated October 14,
1993.) ............................................ *
10(i.1) Third Party Development Partner License Agreement, effective
October 22, 1993, between the Company and Adobe Systems
Incorporated. (Incorporated by reference to Exhibit 10(ai) to
1994 Form 10-KSB.) .............................................. *
10(i.2) Reference Port Appendix No. 1, dated October 22, 1993, to the
Postscript Support Source and Object Code Distribution License
Agreement between Adobe Systems Incorporated and the Company.
(Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB.) *
10(j) ITEC/APS License Agreement, dated March 28, 1994, between the
Company and Integrated Device Technology, Inc. (Incorporated by
reference to Exhibit 10(ak) to 1994 Form 10-KSB.)............. *
10(k) International Sales Representative Agreement, dated October 15,
1993, between the Company and Nippo Ltd. (Incorporated by
reference to Exhibit 10(ao) to 1994 Form 10-KSB.)....... *
10(l) Consulting Agreement dated September 17, 1993 between the Company
and Marius A. Robinson. (Incorporated by reference to Exhibit
10(aq) to 1994 Form 10-KSB.) ................................. *
10(m.1) Warrant Purchase Agreement, dated September 17, 1993, between
the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(ar) to 1994 Form 10-KSB.) ........... *
10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.50 per share, dated September
17, 1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(as) to 1994 Form 10-KSB.) *
10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of
Common Stock of the Company at $1.00 per share, dated September
17, 1993, between the Company and Robinson International, Ltd.
(Incorporated by reference to Exhibit 10(at) to 1994 Form 10-KSB.) *
* EXHIBIT IS INCORPORATED BY REFERENCE ONLY AND A COPY IS NOT INCLUDED IN THIS
FILING.
35
<PAGE>
NUMBER DESCRIPTION OF EXHIBIT PAGE
10(n) ITEC/MEI License Agreement, dated September 30, 1994 between
the Company and Matsushita Electric Industrial Co., Ltd.
(Incorporated by reference to Exhibit 10(aac) to 1994 Form
10-KSB.) .................................................... *
10(o) Form of standard Warrant Agreement dated January 3, 1996 issued
to Harry J. Saal as described in Note 6 to the 1996 financial
statements. (Incorporated by reference to Exhibit 10(c) to 1996
Form 10-KSB)................................................. *
10(p) Form of standard Warrant and Consulting Agreement issued to
consultants as described in Note 6 to the 1996 financial
statements. (Incorporated by reference to Form S-8 dated May 9,
1996, File Number 333-03375). ............................... *
10(q) Compensation Agreement between the Company and Brian Bonar
dated September 1 , 1994. (Incorporated by reference to Exhibit
10(r) to 1995 Form 10-KSB). ............................. *
11 EPS calculation ............................................. 38
21 List of Subsidiaries of the Company.......................... 39
23 Consent of Independent Accountants .......................... 40
* EXHIBIT IS INCORPORATED BY REFERENCE ONLY AND A COPY IS NOT INCLUDED IN THIS
FILING.
36
<PAGE>
EXHIBIT 3(c)
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 05/23/1997
971170721 - 2008678
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PERSONAL COMPUTER PRODUCTS, INC.
The undersigned corporation, in order to amend its Certificate of
Incorporation, hereby certifies as follows:
FIRST: The name of the corporation is:
PERSONAL COMPUTER PRODUCTS, INC.
SECOND: The corporation hereby amends its Certificate of Incorporation
as follows:
Paragraph FIRST of the Certificate of Incorporation, relating to the
corporate title of the corporation, is hereby amended to read as follows:
"FIRST: The name of the corporation is:
IMAGING TECHNOLOGIES CORPORATION"
THIRD: The amendment effected herein was authorized by the consent in
writing, setting forth the action so taken, unanimously signed by the holders of
all the outstanding shares entitled to vote thereon pursuant to Sections 228 and
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I hereunto sign my name and affirm that the statements
made herein are true under the penalties of perjury, this 23rd date of May,
1997.
PERSONAL COMPUTER PRODUCTS, INC
/s/EDWARD SAVERESE
-------------------
Edward Saverese, President
37
<PAGE>
EXHIBIT 11 - COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
YEAR ENDED JUNE 30,
--------------------------
1997 1996
---- ----
PRIMARY INCOME (LOSS) PER COMMON SHARE:
Net income (loss) before extraordinary item $ 836,000 $(3,729,000)
Preferred dividend requirement (126,000) (174,000)
------------ -----------
Net income (loss) before extraordinary item
applicable to common shareholders $ 710,000 $(3,903,000)
------------ -----------
------------ -----------
Net income (loss) $ 836,000 $(3,613,000)
Preferred dividend requirement (126,000) (174,000)
------------ -----------
Net income (loss) applicable to common
shareholders $ 710,000 $(3,787,000)
------------ -----------
------------ -----------
Weighted average number of shares outstanding
Common stock 7,848,000 4,147,000
5% convertible preferred stock 24,000
Convertible notes payable 64,000
Common stock purchase options and warrants 3,588,000
Assumed repurchase of common stock (1,751,000)
------------ -----------
Weighted average number of shares outstanding 9,773,000 4,147,000
------------ -----------
------------ -----------
Primary income (loss) per common share before
extraordinary item $ 0.07 $ (0.94)
------------ -----------
------------ -----------
Primary income (loss) per common share $ 0.07 $ (0.91)
------------ -----------
------------ -----------
38
<PAGE>
EXHIBIT 21 - LIST OF SUBSIDIARIES OF THE COMPANY
1. Prima Inc., a California corporation and a wholly-owned subsidiary of ITEC
2. Laser Printer Accessories Corporation, a Delaware corporation and a wholly-
owned subsidiary of ITEC (Inactive)
3. Personal Computer Products, Inc., doing business as PCPI Technologies, a
California corporation and a wholly-owned subsidiary of ITEC
4. Co-Processors, Inc., a California corporation and a wholly-owned subsidiary
of ITEC (Inactive)
5. NewGen Imaging Systems, Inc., a California corporation and a wholly-owned
subsidiary of ITEC.
39
<PAGE>
EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the Registration
Statements on Form S-8 (No.'s 2-93993, 33-25980, 33-41396, 33-57372, 33-86262,
33-86376 333-00871, 333-00873 and 333-00879) of Personal Computer Products, Inc.
of our report dated August 25, 1997 appearing on page 13 of this Form 10-KSB.
BOROS & FARRINGTON APC
San Diego, California
August 25, 1997
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