<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[LOGO]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
11031 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (619) 613-1300
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class: Common Stock, $0.005 par Outstanding at May 12, 1998: 11,923,128 Shares
- ------------------------------- ----------------------------------------------
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IMAGING TECHNOLOGIES CORPORTATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
Part I. Financial Information:
Consolidated Condensed Balance Sheet
March 31, 1998 and June 30, 1997 3
Consolidated Condensed Statement of Operations
Three Months ended March 31, 1998 and 1997 4
Consolidated Condensed Statement of Operations
Nine Months ended March 31, 1998 and 1997 5
Consolidated Condensed Statement of Cash Flows
Nine Months ended March 31, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7
Management's Discussion and Analysis or Plan of Operations 10
Part II. Other Information 16
</TABLE>
2
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IMAGING TECHNOLOGIES CORPORATION, AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30
1998 1997
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,778 $ 255
Accounts receivable trade, net 8,139 2,556
Contract receivables:
Billed 2,490 1,415
Unbilled recoverable costs and accrued profit on
progress completed 4,538 3,208
Inventories 4,040 2,348
Other current assets 2,011 550
-------- --------
Total current assets 22,996 10,332
Property and equipment, net 1,523 1,672
Prepaid Licenses, net 1,020 697
Capitalized software, net 2,417 549
Income tax benefit 600 250
Goodwill 504 73
Other 49 50
-------- --------
$ 29,109 $ 13,623
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,863 $ 2,877
Accrued expenses 878 1,417
Borrowings under bank lines of credit 5,028 955
Notes payable 262 349
-------- --------
Total current liabilities 11,031 5,598
Long-term debt 200 222
-------- --------
11,231 5,820
-------- --------
Shareholders' equity:
5% convertible preferred stock, $1,000 par value,
7,500 shares authorized, 420.5 issued and outstanding 420 420
5% series C convertible preferred stock, $10,000 par value,
1,200 shares authorized, 335 shares issued and outstanding 3,350 -
Common stock, $.005 par value, 100,000,000 shares authorized,
11,804,770 and 10,584,612 shares, respectively, issued and
outstanding 54 49
Paid-in capital 35,043 31,300
Shareholder loans (135) (140)
Accumulated deficit (20,854) (23,826)
-------- --------
Total shareholders' equity 17,878 7,803
-------- --------
$ 29,109 $ 13,623
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
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IMAGING TECHNOLOGIES CORPORTATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
--------- -----------
<S> <C> <C>
Revenues:
Sales of products $ 9,275 $ 6,790
Engineering fees 1,497 1,531
------- -------
10,772 8,321
------- -------
Costs and expenses:
Cost of products sold 6,864 4,441
Selling, general and administrative 2,500 2,006
Cost of engineering fees and research and
development 566 999
------- -------
9,930 7,446
------- -------
Income from operations 842 875
Other income (expense): (71) (22)
------- -------
Income before income tax benefit (expense) 771 853
Income tax benefit (expense) 350 (5)
------- -------
Net income $ 1,121 $ 848
------- -------
------- -------
Income per share data:
Basic income per share $ 0.10 $ 0.09
------- -------
------- -------
Diluted income per share $ 0.08 $ 0.07
------- -------
------- -------
Common shares outstanding 11,447 9,086
------- -------
------- -------
Common shares outstanding assuming dilution 13,685 11,627
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
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IMAGING TECHNOLOGIES CORPORTATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1998 1997
--------- -----------
<S> <C> <C>
Revenues:
Sales of products $23,776 $19,187
Engineering fees 4,544 4,245
License fees and royalties - 285
------- -------
28,320 23,717
------- -------
Costs and expenses:
Cost of products sold 17,053 12,312
Selling, general and administrative 6,807 8,143
Cost of engineering fees and research and
development 1,720 2,452
Purchased research and development - 780
------- -------
25,580 23,687
------- -------
Income from operations 2,740 30
Other income (expense): (115) 25
------- -------
Income before income tax benefit (expense) 2,625 55
Income tax benefit (expense) 346 (16)
------- -------
Net income $ 2,971 $ 39
------- -------
------- -------
Income per share data:
Basic income per share $ 0.27 $ 0.00
------- -------
------- -------
Diluted income per share $ 0.22 $ 0.00
------- -------
------- -------
Common shares outstanding 11,048 8,157
------- -------
------- -------
Common shares outstanding assuming dilution 13,276 11,102
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
IMAGING TECHNOLOGIES CORPORTATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1998 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,971 $ 39
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH USED BY OPERATING ACTIVITIES:
Depreciation and amortization of equipment 499 360
Income tax benefit (350) -
Amortization of prepaid assets - 389
Purchased in-process research and development - 780
Changes in assets and liabilities:
Accounts receivable (7,329) (2,716)
Inventories (1,230) (750)
Other current assets (1,453) (542)
Accounts payable and accrued expenses 897 (1,298)
------- -------
NET CASH USED BY OPERATING ACTIVITIES (5,995) (3,738)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger 38 -
Prepaid licenses and royalties (323) (345)
Capitalized software development costs (1,868) (301)
Proceeds from certificate of deposit - 50
Purchase of net assets by NewGen Systems - (86)
Capital expenditures (285) (853)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (2,438) (1,535)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions - NewGen Systems - 1,002
Net proceeds from exercise of stock options and warrants 1,319 180
Net borrowings under lines of credit 3,741 445
Repayment of notes payable and capital lease obligations (109) (93)
Net proceeds from sale of preferred stock 5,000 -
Collection of shareholder loans 5 -
Proceeds from notes payable - 143
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,956 1,677
------- -------
Net (decrease) increase in cash 1,523 (3,596)
Cash at the beginning of the period 255 4,394
------- -------
Cash at the end of the period $ 1,778 $ 798
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6
<PAGE>
IMAGING TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements of Imaging
Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have not
been audited. These financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements which are included in the Company's annual report on
Form 10-KSB for the year ended June 30, 1997 and the Company's Form 10-QSB
for the quarters ended September 30 and December 31, 1997 filed with the
Securities and Exchange Commission. Interim operating results are not
necessarily indicative of operating results for the full year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Earnings (loss) per share is presented in accordance with Financial
Accounting Standards Board (FASB) 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, after giving effect to
the dividend requirements of preferred stock. Diluted EPS reflects the
potential dilution created by convertible preferred stock, convertible notes
and common stock equivalents using the treasury stock method.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. An enterprise that has no items of other comprehensive
income in any period presented is not required to report comprehensive
income. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Management does not believe that the adoption of SFAS 130 will have a
material impact on the Company's financial statements.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS 131 is effective for fiscal years beginning
after December 15, 1997. Management plans to adopt this accounting standard
in fiscal 1999. Management has not yet assessed the impact that the adoption
of SFAS 131 will have on the Company's financial statements.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE 3- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
-------- -------
<S> <C> <C>
Raw materials and supplies $1,983 $1,475
Work in process 137 -
Finished goods 1,920 873
------- ------
$4,040 $2,348
------- ------
------- ------
</TABLE>
7
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NOTE 4- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1998 1997
----------- ----------
<S> <C> <C>
NON-CASH FINANCING ACTIVITIES:
Conversion of preferred stock into common stock $1,650 $2,166
Options exercised with loans 22
Common stock issued with notes - NewGen 82
Conversion of convertible notes into common stock - NewGen 1,000
Conversion of acquisition debt into common stock - NewGen 500
Conversion of accounts payable into notes payable 248
Acquisition of net assets for common stock (excluding cash):
Accounts receivable 659
Inventories 462
Other current assets 6
Property and equipment 65
Goodwill 431
Accounts payable and accrued liabilities (550)
Borrowings under bank line of credit (332)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 184 $ 111
Cash paid during the period for income taxes $ 8 $ 9
</TABLE>
NOTE 5 - MERGERS AND ACQUISITIONS
ACQUISITION OF MCMICAN CORPORATION
Effective November 24, 1997, the Company purchased the total outstanding
shares of the privately-held McMican Corporation ("McMican"), for 200,000
shares of ITEC common stock. The new operation will be called the Digital
Storage Products Division of Imaging Technologies Corporation, producing
specialized memory modules for handheld personal computers, digital cameras,
and printers.
The transaction was accounted for as a purchase. Accordingly, the results of
McMican's operations have been included in consolidated operations from the
date of acquisition. The following are the unaudited pro forma results of
operations of the Company as though McMican was acquired on July 1, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
----------------------- ------------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $10,772 $8,918 $30,488 $25,674
Net income 1,121 872 3,110 118
Basic income per common share $ .10 $ .09 $ .28 $ .00
</TABLE>
The fair value of the new assets acquired was $1,110 and the liabilities
assumed were $652. In conjunction with the acquisition, the Company recorded
goodwill of approximately $309.
MERGER OF COLOR SOLUTIONS, INC.
Effective November 30, 1997, Color Solutions, Inc. ("CSI") was merged into a
newly created, wholly-owned subsidiary of the Company. Under the terms of the
Merger Agreement, 850,000 unregistered shares of ITEC's common stock were
exchanged for all of the outstanding shares of CSI. On November 30, 1997, CSI
began operating as a wholly-owned subsidiary of the Company.
As a result of the merger, which was accounted for as a pooling of interests,
the consolidated results of operations for the nine months ended March 31,
1998 and 1997 include pre-merger net sales of $610 and $1,094, and net losses
after taxes of $48 and $116, respectively.
8
<PAGE>
NOTE 6- SUBSEQUENT EVENT
The Company's Board of Directors is considering a plan to restructure the
Company's operations to streamline and reduce resources utilized in the
business. During the preceding fourteen months, the Company has acquired
four separate businesses that are engaged in the Company's industry segment.
The Board believes that significant economies can be achieved by focusing and
coordinating product development, distribution, and marketing and by
consolidating certain redundant functions involving administration, selling
and marketing, distribution, engineering, and manufacturing. In this regard,
the Company leased an additional 11,600 square feet of office, manufacturing,
and warehouse space adjacent to its corporate headquarters in San Diego, and
it is in the process of evaluating which subsidiary operations shall be
relocated thereto. These decisions are expected to result in the write-off
of certain related assets, the accrual of costs related to workforce
reductions and relocation, and reserves for excess space and manufacturing
capacity. No final decisions have been made regarding the restructuring
actions; and, accordingly, the financial implications of these actions cannot
be determined at this time. However, the Board expects that the financial
implications will be included in the fourth-quarter 1998 operating results.
9
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS
This Form 10-Q 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 which
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 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 various filing with the
Securities and Exchange Commission. Users of this Form 10-Q 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
10
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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").
Accordingly, the consolidated results of operations for the nine months ended
March 31, 1997 include pre-merger net sales of $7,190 and a net loss after
taxes of $1,551.
Effective November 24, 1997, the Company consummated its acquisition of
McMican Corporation ("McMican"). The acquisition was accounted for as a
purchase. Accordingly, the consolidated results of operations for the nine
months ended March 31, 1998 include McMican's net sales of $1,893 and income
of $237 from the date of acquisition.
Effective November 30, 1997, the Company consummated its merger with Color
Solutions, Inc. ("CSI"). The merger was accounted for as a pooling of
interests. Accordingly, the consolidated results of operations for the nine
months ended March 31, 1998 and 1997 include pre-merger net sales of $610 and
$1,094, and net losses after taxes of $48 and $116, respectively.
Total ITEC revenues were $10,772 for the quarter ended March 31, 1998 versus
$8,321 for the quarter ended March 31, 1997. 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 and
of other related software of approximately $1,497 for the quarter ended March
31, 1998 compared to $1,531 for the quarter ended March 31, 1997, a decrease
of 2%. The Company had net income of $1,121 for the quarter ended March 31,
1998 compared to net income of $848 for the quarter ended March 31, 1997, an
increase of 32%.
Total ITEC revenues were $28,320 for the nine months ended March 31, 1998
versus $23,717 for the nine months ended March 31, 1997. 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 and of other related software of approximately $4,544 for the nine
months ended March 31, 1998 compared to $4,245 for the nine months ended
March 31, 1997, an increase of 7%. The Company had net income of $2,971 for
the nine months ended March 31, 1998 compared to a net income of $39 for the
nine months ended March 31, 1997.
REVENUES
SALES OF PRODUCTS were $9,275 for the quarter ended March 31, 1998 versus
$6,790 for the quarter ended March 31, 1997, an increase of 37%. For the nine
months ended March 31, 1998 sales of products were $23,776 compared to
$19,187 for the nine months ended March 31, 1997, an increase of 24%. The
Company's sales of products were derived primarily from ITEC's wholly-owned
subsidiaries Prima International ("Prima"), NewGen Imaging Systems
("NewGen"), Color Solutions ("CSI") and McMican.
Sales of product through Prima for the quarters ended March 31, 1998 and 1997
were $2,230 and $2,642, respectively. Such sales for the nine months ended
March 31, 1998 and 1997 were $7,476 and $7,172, respectively. The majority of
Prima's sales were from distribution of PCMCIA-based memory storage products.
The increases in product sales during the nine months ended March 31, 1998
are attributed to an increase in Prima's distribution sales of PCMCIA-based
memory products. The decrease in product sales for
11
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the quarter ended March 31, 1998 is attributed to a significant vendor that
was unable to provide product during the quarter.
Sales of product through NewGen for the quarter ended March 31, 1998 were
$4,100 compared to $3,731 for the quarter ended March 31, 1997. Such sales
for the nine months ended March 31, 1998 and 1997 were $11,520 and $10,921,
respectively. The increase in these sales is the result of a product
transition from certain "older technology-based" products which have been
phased out. 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.
Sales of product through CSI for the quarter ended March 31, 1998 were $459
compared to $417 for the quarter ended March 31, 1997. Such sales for the
nine months ended March 31, 1998 and 1997 were $1,847 and $1,094,
respectively. The increase in these sales is the result of the transition of
CSI from the product development stage of their business to a product being
sold in the market place.
ENGINEERING FEES during the quarters ended March 31, 1998 and 1997 were
derived through the Company's PCPI Technologies subsidiary performing work on
engineering projects for OEM customers under non-recurring engineering
contracts. NRE revenue for the quarter ended March 31, 1998 and 1997 was
$1,497 and $1,531, respectively, which was recognized during the course of
development based on the percentage of completion method. Such revenues for
the nine months ended March 31, 1998 and 1997 were $4,544 and $4,245,
respectively.
ROYALTIES through the Company's PCPI Technologies subsidiary for the nine
month period ended March 31, 1997, the Company earned royalty revenues of
$285 which were derived primarily from "older-technology" based products.
During the quarters ended March 31, 1998 and 1997 and nine month period ended
March 31, 1998, no such revenues were recognized. In the past, license fees
and royalty revenue have shown significant period-to-period fluctuations
which may continue in future periods. PCPI Technologies 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 Technologies 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 royalties 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 quarter ended March 31, 1998 and 1997 were
$6,864 and $4,441, respectively, representing gross margins of 26% and 35%.
Cost of products sold for the nine months ended March 31, 1998 and 1997 were
$17,053 and $12,312, respectively, representing gross margins of 28% and 36%.
The decrease in the gross margin percentage is attributed to a change in the
product mix between the periods, and the reduction in prices of end-of-life
products as ITEC begins introducing new products.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the quarter ended March 31,
1998 were $2,500 versus $2,006 for the quarter ended March 31, 1997. The
increase results primarily from increased selling expenses in an attempt to
stimulate technology and product sales, and the associated costs from the
opening of the ITEC Europe facility and the Company's newly acquired
subsidiaries. Selling, general and administrative expenses for the nine
months ended March 31, 1998 were $6,807 versus $8,143 for the nine months
ended March 31, 1997. The decrease is primarily the result of the Company's
concerted effort to reduce the general and administrative expenses of the
Company over the past year through the consolidation of various
administrative functions offset by increased selling expenses.
COST OF ENGINEERING FEES AND RESEARCH AND DEVELOPMENT
Cost of engineering fees and research and development for the quarter ended
March 31, 1998 was $566 versus $999 for the quarter ended March 31, 1997.
Cost of engineering fees and research and development for the nine months
ended March 31, 1998 was $1,720 versus $2,452 for the nine months ended March
31, 1997. These expenditures consist of engineering expenses associated with
the development of controller technologies and designs for PCPI technology
customers. During the quarter and nine month periods ended March 31, 1998,
the Company capitalized certain qualified costs in the aggregate amount of
$789 and $1,868, respectively, 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 nine month period ended
March 31, 1997, includes approximately $780 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 Technologies 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 Technologies 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 Technologies
engineering requirements.
OTHER INCOME AND EXPENSE
Other income and loss consists primarily of net interest expense which was
$58 for the quarter ended March 31, 1998 compared to $19 for the quarter
ended March 31, 1997. Net interest expense for the nine months ended March
31, 1998 and 1997 was $128 and $35, respectively. The increase is associated
with an increase in the usage of the Company's line of credit facilities
which was partially offset by reductions in the outstanding debt at ITEC and
interest income associated with the increased cash invested during the
quarterly and nine month periods.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $11,965 compared to
working capital of $4,734 as of June 30, 1997. The increase is primarily
attributed to the continued
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improvement of the Company's operations and the initial $5,000 closing of the
Series C Redeemable Convertible Preferred Stock ("Series C Shares"). 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 and the holders of the Series C Shares,
subject to certain conditions, are entitled to purchase additional Series C
Shares up to $2,000. In addition, the Company closed a $3,000 line of credit
facility with a commercial bank to help to finance the sales growth of PCPI
Technologies and Prima.
The Company's Adobe co-development projects present continuing liquidity
problems for PCPI Technologies 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 ITEC and its subsidiaries 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 March 31, 1998 was approximately $487. The Series C redeemable
convertible preferred stock does not contain dividend provisions.
As of March 31, 1998, ITEC had $897 of available borrowings under its special
purpose line of credit.
ITEC has no material commitments for capital expenditures.
CERTAIN BUSINESS RISKS
In the past, the Company has reported net losses and has only recently
reported net income. The Company has accumulated aggregated net losses from
inception through March 31, 1998, of approximately $21 million. Although the
Company has reported net income for the past eight quarters ended March 31,
1998, there can be no assurance that the Company will maintain profitability
on a quarterly basis or achieve profitability on an annual basis in the
future. The success of the Company and its business strategy is dependent
upon, among other things, the ability and willingness of the Company's OEM
customers to timely develop and promote products that incorporate the
Company's technology. The Company believes that future revenues may be
similarly concentrated with a limited number of OEM customers. Consequently,
any significant decrease in product sales or reduction in licensing or
engineering services with a large OEM customer would have a material adverse
effect on the Company's operating results.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and needs, frequent new product
introductions and diminishing time frames within which to develop new
products. The failure of the Company and its OEM customers to meet these
needs on a timely basis or to anticipate or respond to rapidly changing
technology could result in a loss of competitiveness or revenues, which would
have a material adverse effect on the Company's operating results.
14
<PAGE>
Also inherent in the Company's business are additional risks, which include:
competition in the market, including internal development by OEMs; the risk
of delays in the development of products, whether such delays are within the
control of the Company or not; risks associated in developing products for
new and rapidly developing markets, in which the Company has directed a
substantial portion of its recent development efforts; dependence on sole
source providers; uncertainties regarding protection of intellectual property
rights, including the potential for trademark and patent infringement
litigation; dependence on key personnel; and risks associated with the
Company's international business activities, which account for a substantial
portion of its revenue.
ABSENCE OF DIVIDENDS - No cash dividends have been paid on the Company's
Common Stock to date and the Company does not anticipate paying cash
dividends in the foreseeable future.
VOLATILITY OF STOCK PRICE - The market price of the Company's Common Stock
has fluctuated significantly since the Company's initial public offering of
Common Stock in December 1983. The Company believes that factors such as
general stock market trends, announcements of developments related to
Company's business, fluctuations in the Company's operating results, general
conditions in the computer peripheral market and the markets served by the
Company or the worldwide economy, a shortfall in revenue or earnings from
securities analysts' expectations, announcements of technological innovations
by the Company or its competitors, developments in patents or other
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause a further significant
fluctuation in the price of the Company's Common Stock. In addition, in
recent years the stock market in general, and the market for shares of
technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. There can be no assurance that the market price of the Company's
Common Stock will not experience significant fluctuations that are unrelated
to the Company's performance.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No reportable matter.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Computation of Earnings (Loss) Per Common Share
(b) Reports on Form 8-K:
None
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
IMAGING TECHNOLOGIES CORPORATION
BY: HARRY J. SAAL
----------------------------------------
DATE: May 14, 1888 Harry J. Saal
CHAIRMAN OF THE BOARD
BY: BRIAN BONAR
----------------------------------------
DATE: May 14, 1888 Brian Bonar
CHIEF EXECUTIVE OFFICER AND PRESIDENT
BY: GERRY B. BERG
----------------------------------------
DATE May 14, 1888 Gerry B. Berg
VICE PRESIDENT AND ACTING CHIEF
FINANCIAL OFFICER
17
<PAGE>
EXHIBIT 11
EXHIBIT 11 - COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(ALL AMOUNTS IN THOUSANDS EXCEPT EPS AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
BASIC INCOME PER COMMON SHARE:
Net Income $ 1,121 $ 848
Preferred dividend requirement (5) (58)
------- -------
Net income applicable to common shareholders $ 1,116 $ 790
------- -------
------- -------
Weighted average number of shares outstanding 11,447 9,086
------- -------
------- -------
Basic income per common share $ .10 $ 0.09
------- -------
------- -------
DILUTED INCOME PER COMMON SHARE:
Net income $ 1,121 $ 848
------- -------
Weighted average number of shares outstanding
Common stock 11,447 9,086
5% convertible preferred stock 24 25
5% Series B convertible preferred stock 170
Series C preferred stock 1,401
Effect of dilutive common stock options
and warrants 749 2,282
Convertible notes 64 64
------- -------
Weighted average number of shares outstanding 13,685 11,627
------- -------
------- -------
Diluted income per common share $ 0.08 $ 0.07
------- -------
------- -------
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
BASIC INCOME PER COMMON SHARE:
Net Income $ 2,971 $ 39
Preferred dividend requirement (16) (58)
------- -------
Net income (loss) applicable to common shareholders $ 2,955 $ (19)
------- -------
------- -------
Weighted average number of shares outstanding 11,048 8,157
Basic income per common share $ .27 $ 0.00
------- -------
------- -------
DILUTED EARNINGS PER COMMON SHARE:
Net income $ 2,971 $ 39
------- -------
------- -------
Weighted average number of shares outstanding
Common stock 11,048 8,157
5% convertible preferred stock 24 25
5% Series B convertible preferred stock 170
Series C preferred stock 1,401
Effect of dilutive common stock options
and warrants 739 2,686
Convertible notes 64 64
------- -------
Weighted average number of shares outstanding 13,276 11,102
------- -------
------- -------
Diluted income per common share $ 0.22 $ 0.00
------- -------
------- -------
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,778
<SECURITIES> 0
<RECEIVABLES> 15,605
<ALLOWANCES> 438
<INVENTORY> 4,040
<CURRENT-ASSETS> 22,996
<PP&E> 2,961
<DEPRECIATION> 1,438
<TOTAL-ASSETS> 29,109
<CURRENT-LIABILITIES> 11,031
<BONDS> 0
0
3,770
<COMMON> 54
<OTHER-SE> 14,054
<TOTAL-LIABILITY-AND-EQUITY> 29,109
<SALES> 23,776
<TOTAL-REVENUES> 28,320
<CGS> 17,053
<TOTAL-COSTS> 18,773
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (314)
<INTEREST-EXPENSE> 184
<INCOME-PRETAX> 2,625
<INCOME-TAX> 346
<INCOME-CONTINUING> 2,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,971
<EPS-PRIMARY> 0.270
<EPS-DILUTED> 0.220
</TABLE>
