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 SEPTEMBER 30, 2000
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[OBJECT OMITTED]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
15175 INNOVATION DRIVE
SAN DIEGO, CALIFORNIA 92128
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (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 |_|
The number of shares outstanding of the registrant's common stock as of October
31, 2000, was 107,673,916.
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2000 (unaudited) and June 30, 2000 (audited) 2
Consolidated Statements of Operations
Three months ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Cash Flows
Three months ended September 30, 2000 and 1999 (unaudited) 4
Notes to Consolidated Financial Statements. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
1
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JUNE 30, 2000
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
9/30/00 6/30/00
Current assets
<S> <C> <C>
Cash $ 345 $ 291
Accounts receivable 372 175
Inventories 65 203
Prepaid expenses and other 281 333
--------- --------
Total current assets 1,063 1,002
Property and Equipment, net 514 531
Other 70 150
--------- --------
$ 1,647 $ 1,683
========= =========
LIABILITIES AND SHAREHOLDERS' NET CAPITAL DEFICIENCY
Current liabilities
Borrowings under bank notes payable $ 5,465 $ 5,765
Short-term debt 2,813 2,563
Accounts payable 5,351 5,378
Accrued expenses 2,584 1,828
--------- --------
Total current liabilities 16,213 15,534
--------- --------
Stockholders' net capital deficiency
Series A preferred stock, $1,000 par value, 7,500 shares
authorized, 420.5 shares issued and outstanding 420 420
Common stock, $0.005 par value, 200,000,000 shares
Authorized; 105,507,937 shares issued and outstanding 528 507
Paid-in capital 60,283 58,641
Shareholder loans (105) (105)
Accumulated deficit (75,692) (73,314)
--------- --------
Total shareholders' net capital deficiency (14,566) (13,851)
--------- --------
$ 1,647 $ 1,683
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999
Revenues
<S> <C> <C>
Sales of products $ 660 $ 940
Engineering fees - 25
Licenses and royalties 177 88
--------- --------
837 1,053
--------- --------
Costs and expenses
Cost of products sold 443 693
Selling, general, and administrative 2,351 3,378
Cost of engineering fees, research, and development 239 649
--------- --------
3,033 4,720
--------- --------
Loss from operations (2,196) (3,667)
--------- --------
Other income (expense):
Interest and finance costs, net (182) (138)
Other - (20)
--------- --------
(182) (158)
--------- --------
Loss before income taxes (2,378) (3,825)
Income tax benefit (expense) - -
--------- --------
Net loss $ (2,378) $ (3,825)
============ ============
Earnings (loss) per common share
Basic $ (0.02) $ (0.12)
============== ==============
Diluted $ (0.02) $ (0.12)
============== ==============
Weighted average common shares 103,160 30,889
======= ======
Weighted average common shares - assuming dilution 103,160 30,889
======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $ (2,378) $ (3,825)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 72 59
Amortization of capitalized software - 356
Stock issued for services 450 326
Changes in operating assets and liabilities
Accounts receivable (197) 546
Inventories 138 140
Prepaid expenses and other 132 211
Accounts payable and accrued expenses 729 543
--------- ----------
Net cash from operating activities (1,054) (1,644)
--------- ----------
Cash flows from investing activities
Capitalized software - (358)
Capital expenditures (55) -
--------- ----------
Net cash from investing activities (55) (358)
--------- ----------
Cash flows from financing activities
Net borrowings under bank notes payable (300) (1,049)
Issuance of other notes payable 250 -
Net proceeds from issuance of common stock 1,213 884
--------- ----------
Net cash from financing activities 1,163 1,933
--------- ----------
Net increase (decrease) in cash 54 (69)
Cash, beginning of period 291 75
--------- ----------
Cash, end of period $ 345 $ 6
========= ==========
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 182 $ 192
Cash paid during the period for income taxes $ - -
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Imaging Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have
been prepared pursuant to the rules of the Securities and Exchange Commission
(the "SEC") for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These financial statements and notes herein are unaudited, but in
the opinion of management, include all the adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows for the periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the years ended
June 30, 2000, 1999, and 1998 included in the Company's annual report on Form
10-K filed with the SEC. Interim operating results are not necessarily
indicative of operating results for any future interim period or for the full
year.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At September 30, 2000, and for the
three months then ended, the Company had a net loss, negative working capital,
and a decline in net worth which raise substantial doubt about its ability to
continue as a going concern. The Company's losses have resulted primarily from
an inability to achieve product sales and contract revenue targets due to
insufficient working capital. ITEC's ability to continue operations will depend
on positive cash flow, if any, from future operations and on the Company's
ability to raise additional funds through equity or debt financing. The Company
has cut back and/or discontinued some of its operations and, if it is unable to
raise or obtain needed funding, the Company may be forced to discontinue
operations generally. On August 20, 1999, at the request of Imperial Bank, the
Company's primary lender, the Superior Court of San Diego appointed an
operational receiver who took control of the Company's day-to-day operations on
August 23, 1999. On June 21, 2000, in connection with a settlement agreement
reached with Imperial Bank, the Superior Court of San Diego issued an order
dismissing the operational receiver.
On October 21, 1999, Nasdaq notified the Company that it no longer complied with
the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The Nasdaq SmallCap Market. At a hearing
on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public
interest concerns relating to the Company's financial viability. The Company's
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, stockholders may find it more difficult to sell common stock.
This lack of liquidity also may make it more difficult to raise capital in the
future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Securities and Exchange Commission adopted regulations that generally define
a "penny stock" as any equity security that has a market price of less than
$5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of shareholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
5
<PAGE>
The Company is in the process of reestablishing management control of its
operations and resuming its strategic plan. In order to succeed, however,
Company must obtain additional funds to provide adequate working capital and
finance operations. To address the Company's working capital needs, on July 12,
2000, it announced an agreement for a financing facility providing commitments,
under specific conditions, to purchase up to $36 million of its common shares
over the two years after September 27, 2000, the effective date of a
registration statement filed with the Securities and Exchange Commission. The
Company has also engaged a financial advisor to assist with additional fund
raising efforts and to help identify merger and acquisition candidates. There
can be no assurance, however, that the Company will be able to comply with the
Imperial Bank settlement agreement, meet the conditions under the financing
facility, or complete any additional debt or equity financings on favorable
terms or at all, or that any such financings, if completed, will be adequate to
meet the Company's capital requirements. Any additional equity or convertible
debt financings could result in substantial dilution to the Company's
stockholders. If adequate funds are not available, the Company may be required
to delay, reduce or eliminate some or all of its planned activities, including
any potential mergers or acquisitions. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) available to common shareholders (the
"numerator") by the weighted average number of common shares outstanding (the
"denominator") during the period. Diluted earnings (loss) per common share
("Diluted EPS") is similar to the computation of Basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back the after-tax amount of interest
recognized in the period associated with any convertible debt. The computation
of Diluted EPS does not assume exercise or conversion of securities that would
have an anti-dilutive effect on net earnings (loss) per share. The following is
a reconciliation of Basic EPS to Diluted EPS:
<TABLE>
<CAPTION>
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
SEPTEMBER 30, 2000
<S> <C>
Net loss $ (2,378)
Preferred dividends (6)
-------------
Basic and diluted EPS $ (2,384) 103,160 $ (0.02)
========== ========== ======
</TABLE>
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
Inventories
<S> <C> <C>
Materials and supplies $ 24 $ 87
Finished goods 40 116
-------- ---------
$ 65 $ 203
======== ========
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Quarterly Report on Form 10-Q. The discussion of the Company's business
contained in this Quarterly Report on Form 10-Q may contain certain projections,
estimates and other forward-looking statements that involve a number of risks
and uncertainties, including those discussed below at "Risks and Uncertainties."
While this outlook represents management's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested below. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
OVERVIEW
Imaging Technologies Corporation develops, manufactures, and
distributes high-quality digital imaging solutions. The Company produces printer
and imaging products for use in graphics and publishing, digital photography and
other niche business and technical markets. Beginning with a core technology in
the design and development of controllers for non-impact printers and
multifunction peripherals, the Company has expanded its product offerings to
include monochrome and color printers, external print servers, digital image
storage devices, and software to improve the accuracy of color reproduction.
The Company's business continues to be in a significant transitional
phase and there are important short-term operational and liquidity challenges.
Accordingly, quarter-to-quarter financial comparisons may be of limited
usefulness now and for the next several quarters due to these important changes
in the Company's business.
Historically, a portion of the Company's income was derived from
non-recurring engineering fees and royalty income from a relatively small number
of original equipment manufacturing ("OEM") customers. Over the past several
years, the Company has experienced shortfalls in income as a result of
engineering contracts with OEM manufacturers for products that were never
completed by the OEM, were never introduced into the market and shipped or were
cancelled by the customer before ITEC completed the deliverables portion of the
contract. Failure of these OEMs to achieve significant sales of products
incorporating the Company's technology and fluctuations in the timing and volume
of such sales had a materially adverse effect on the Company.
The Company's current strategy is to continue to focus on rebuilding
its OEM business and develop, commercialize and distribute its own technology
products, including its software products. The Company intends to continue to
develop its target markets and to pursue clearly defined commercial market
opportunities in order to leverage its core technologies.
To successfully execute its current strategy, the Company will need to
improve its working capital position. The report of the Company's independent
auditors accompanying the Company's June 30, 2000 financial statements includes
an explanatory paragraph indicating there is a substantial doubt about the
Company's ability to continue as a going concern, due primarily to the decreases
in the Company's working capital and net worth. At September 30, 2000, and for
the three months then ended, the Company had a net loss, negative working
capital, and a decline in net worth which continue to raise substantial doubt
about its ability to continue as a going concern.
The Company needs to raise additional funds to operate its business and
has been actively pursuing solutions to its liquidity difficulties. To address
the Company's working capital needs, on July 12, 2000, it announced an agreement
for a financing facility providing commitments, under specific conditions, to
purchase up to $36 million of its common shares over the two years after
September 27, 2000, the effective date of a registration statement filed with
the SEC. The Company has also engaged a financial advisor to assist with
additional fund raising efforts and to help identify merger and acquisition
candidates. There can be no assurance, however, that the Company will be able to
complete this or any additional debt or equity financing on favorable terms or
at all, or that any such financings, if completed, will be adequate to meet the
Company's capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to the Company's stockholders.
If adequate funds are not available, the Company will be required to delay,
reduce or eliminate some or all of its planned activities. The Company's
inability to fund its capital requirements would have a material adverse effect
on the Company. See "Liquidity and Capital Resources" and "Risks and
Uncertainties -- Future Capital Needs."
7
<PAGE>
RESULTS OF OPERATIONS NET REVENUES
Revenues were $837 thousand and $1.05 million for the quarters ended
September 30, 2000 and 1999, respectively. The 20% decrease in sales was due
primarily to the Company's ongoing liquidity shortage, which substantially
reduces its ability to purchase components to build inventories for sale. During
most of the previous fiscal year and for the period ended September 30, 1999,
the Company was under the control of a court-appointed operational receiver.
Management resumed control of the Company on June 21, 2000.
COST OF PRODUCTS SOLD
Cost of products sold were $443 thousand or 53% of product sales and
$693 thousand or 74% of product sales for the quarters ended September 30, 2000
and 1999, respectively. The percentage decrease in 2000 as compared to 1999 was
primarily due to improved margins on product sales. During the prior year
period, when the Company was being operated by the court-appointed operational
receiver, products were sold at smaller profit margins; in some cases, at a
loss.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.4 million or 281%
of total revenue and $3.4 million or 321% of total revenues for the quarters
ended September 30, 2000 and 1999, respectively. Selling, general and
administrative expenses consisted primarily of general corporation functions,
salaries, facilities, and fees for professional services, including legal
expenses. The decrease in selling, general and administrative expenses in the
period ended September 30, 2000 as compared to the year-earlier period was due
primarily to management's reduction of associated activities, including
reductions in personnel, marketing expenses, and facilities, due to a lack of
working capital.
COST OF ENGINEERING AND RESEARCH AND DEVELOPMENT
Engineering and research and development expenses were $239 thousand or
29% of total revenue and $649 thousand or 62% of total revenues for the quarters
ended September 30, 2000 and September 30, 1999. The decrease in expenses 2000
compared to 1999 resulted primarily from reductions in engineering and research
and development activity during the period that the Company was under the
control of the court-appointed operational receiver and the associated reduction
in engineering personnel to support such activities, including the sale of
engineering development contracts with OEM customers.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
cash generated from operations, debt financing, and from the sale of equity
securities.
The Company has received and anticipates that it will continue to
receive cash from collections of accounts receivable from its customers,
distributors, and OEMs. These groups generally have a history of timely
payments; however, an increasing amount of international sales can increase
accounts receivable balances due to traditionally slower payments by
international customers. Any failure of the Company's customers, distributors or
OEMs to pay, or any significant delay in the payment of, a material portion of
the amounts owing to the Company could have a material adverse effect on the
Company.
In the near-term, however, the Company must rely on generating the
majority of its cash from the sale of equity securities. To address these needs,
on July 12, 2000, the Company announced an agreement for a financing facility
providing commitments, under specific conditions, to purchase up to $36 million
of its common shares over the two years after September 27, 2000, the effective
date of a registration statement filed with the SEC.
As of September 30, 2000, the Company had negative working capital of
approximately $15.2 million, a decrease of approximately $0.7 million as
compared to June 30, 1999. The decrease is primarily due to an increase in
accrued expenses.
To date, through further equity infusion into the Company, primarily in
the form of the exercise of warrants to purchase the common stock of the
Company, operations have continued. Without additional funding in the near
future, sufficient to satisfy the creditors of the Company, as well as providing
working capital for the Company, the
8
<PAGE>
Company will cease to operate. The Company continues to actively work with
entities capable of providing such funding.
Net cash used in operating activities decreased to $1.05 million during
the quarter ended September 30, 2000, from $1.6 million during the quarter ended
September 30, 1999, due primarily to a decrease in available cash.
Net cash used in investing activities decreased to $55 thousand during
the quarter ended September 30, 2000, from $358 thousand during the quarter
ended September 30, 1999, due primarily to decreases in capitalized software.
Net cash from financing activities decreased to $1.2 million during the
quarter ended September 30, 2000, from $1.9 million during the year-earlier
quarter, due to a decrease in proceeds on the issuance of common stock, which
has been the Company's primary source of liquidity.
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 September 30, 2000, was approximately $500 thousand.
The Company has no material commitments for capital expenditures.
The Company's capital requirements depend on numerous factors,
including market acceptance of the Company's products, the scope and success of
the Company's product development efforts, the resources the Company devotes to
marketing and selling its products, and other factors. The Company anticipates
that its capital requirements will increase in future periods as it continues to
develop new products and increases its sales and marketing efforts. The report
of the Company's independent auditors accompanying the Company's June 30, 2000
financial statements includes an explanatory paragraph indicating there is a
substantial doubt about the Company's ability to continue as a going concern,
due primarily to the decreases in the Company's working capital and net worth.
If adequate funds are not available, the Company may be required to delay,
reduce or eliminate some or all of its planned activities. The Company's
inability to fund its capital requirements would have a material adverse effect
on the Company. See "Risks and Uncertainties--Future Capital Needs."
RISKS AND UNCERTAINTIES FUTURE CAPITAL NEEDS
Need for Future Capital
ITEC's business has not been profitable in the past and it may not be
profitable in the future. The Company may incur losses on a quarterly or annual
basis for a number of reasons, some within and others outside its control. See
"Potential Fluctuation in Our Quarterly Performance." The growth of the
Company's business will require the commitment of substantial capital resources.
If funds are not available from operations, the Company will need additional
funds. ITEC may seek such additional funding through public and private
financing, including debt or equity financing. Adequate funds for these
purposes, whether through financial markets or from other sources, may not be
available when needed. Even if funds are available, the terms under which the
funds are available may not be acceptable to the Company. Insufficient funds may
require the delay, reduction, or elimination of some or all of the Company's
planned activities. Also see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Potential Fluctuation in Quarterly Performance
Quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a material adverse effect on the
Company's results of operations. The factors include: the timing of product
announcements and subsequent introductions of new or enhanced products by the
Company and by its competitors, the availability and cost of components, the
timing and mix of shipments of the Company's products, the market acceptance of
new products, seasonality, currency fluctuations, changes in the Company's
prices and in the Company's competitors' prices, price protection offered to
distributors and OEMs for product price reductions, the timing of expenditures
for staffing and related support costs, the extent and success of advertising,
research and development expenditures, and changes in general economic
conditions.
The Company may experience significant quarterly fluctuations in
revenues and operating expenses as it introduces new products. In addition,
component purchases, production and spending levels are based upon management's
forecast of future demand for the Company's products. Accordingly, any
inaccuracy in the Company's forecasts could adversely affect its financial
condition and results of operations. Demand for the
9
<PAGE>
Company's products could be adversely affected by a slowdown in the overall
demand for computer systems, printer products or digitally printed images. The
Company's failure to complete shipments during a quarter could have a material
adverse effect on its results of operations for that quarter. Quarterly results
are not necessarily indicative of future performance for any particular period.
Highly Competitive Industry
The markets for ITEC products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than ITEC. The Company's ability to compete in its markets depends on
a number of factors, some within and others outside its control. These factors
include: the frequency and success of product introductions by the Company and
by its competitors, the selling prices of ITEC products and of its competitors'
products, the performance of ITEC products and of its competitors' products,
product distribution by ITEC and by its competitors, ITEC's marketing ability
and the marketing ability of its competitors, and the quality of customer
support offered by ITEC and by its competitors.
A key element of ITEC's strategy is to provide competitively priced,
quality products. The Company cannot be certain that its products will continue
to be competitively priced. The Company has reduced prices on certain products
in the past and will likely continue to do so in the future. Price reductions,
if not offset by similar reductions in product costs, will reduce gross margins
and may adversely affect the Company's financial condition and results of
operations.
Short Product Lives and Technological Change
The markets for ITEC's products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in product
selling prices due to competitive pressures over the life of a product are
common. The future success of the Company will depend on its ability to continue
to develop and manufacture competitive products and achieve cost reductions for
existing products. In addition, the Company monitors new technology developments
and coordinates with suppliers, distributors and dealers to enhance its existing
products and to lower costs. Advances in technology will require increased
investment in product development to maintain the Company's market position. If
the Company is unable to develop and manufacture new, competitive products in a
timely manner, its financial condition and results of operations will be
adversely affected.
Developing Markets and Applications
The markets for ITEC products are relatively new and are still
developing. Management believes that there has been growing market acceptance
for color printers, color management software and supplies. The Company cannot
be certain, however, that these markets will continue to grow. Other
technologies are constantly evolving and improving. The Company cannot be
certain that products based on these other technologies will not have a material
adverse effect on the demand for its products.
Dependence Upon Suppliers
At present, many of ITEC's products use technology licensed from
outside suppliers. The Company relies heavily on these suppliers for upgrades
and support. In the case of ITEC font products, the Company licenses the fonts
from outside suppliers, who also own the intellectual property rights to the
fonts. The Company's reliance on third-party suppliers involves many risks,
including limited control over potential hardware and software incompatibilities
with ITEC products. Furthermore, the Company cannot be certain that all of the
suppliers of products it markets will continue to license their products to
ITEC, or that these suppliers will not license their products to other companies
simultaneously.
Risks Related to Acquisitions
In order to grow the business, the Company may acquire businesses that
management believes are complementary. To successfully implement this strategy,
the Company must identify suitable acquisition candidates, acquire these
candidates on acceptable terms, integrate their operations and technology
successfully with the Company, retain existing customers and maintain the
goodwill of the acquired business. The Company may fail in its efforts to
implement one or more of these tasks. Moreover, in pursuing acquisition
opportunities, the Company may compete for acquisition targets with other
companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than those of the Company.
Competition for these
10
<PAGE>
acquisition targets likely could also result in increased prices of acquisition
targets and a diminished pool of companies available for acquisition. Overall
financial performance will be materially and adversely affected if the Company
is unable to manage internal or acquisition-based growth effectively.
Acquisitions involve a number of risks, including: integrating acquired
products and technologies in a timely manner; integrating businesses and
employees with the Company's business; managing geographically-dispersed
operations; reductions in the Company's reported operating results from
acquisition-related charges and amortization of goodwill; potential increases in
stock compensation expense and increased compensation expense resulting from
newly-hired employees; the diversion of management attention; the assumption of
unknown liabilities; potential disputes with the sellers of one or more acquired
entities; the Company's inability to maintain customers or goodwill of an
acquired business; the need to divest unwanted assets or products; and the
possible failure to retain key acquired personnel.
Client satisfaction or performance problems with an acquired business
could also have a material adverse effect on the Company's reputation, and any
acquired business could significantly under perform relative to expectations.
The Company is currently facing all of these challenges and its ability to meet
them over the long term has not been established. As a result, the Company
cannot be certain that it will be able to integrate acquired businesses,
products or technologies successfully or in a timely manner in accordance with
its strategic objectives, which could have a material adverse effect on overall
financial performance.
In addition, if the Company issues equity securities as consideration
for any future acquisitions, existing stockholders will experience ownership
dilution and these equity securities may have rights, preferences or privileges
superior to those of ITEC common stock. See "Future Capital Needs."
Dependence on Key Personnel
The success of the Company is dependent, in part, upon its ability to
attract and retain qualified management and technical personnel. Competition for
these personnel is intense, and the Company will be adversely affected if it is
unable to attract additional key employees or if it loses one or more key
employees. The Company may not be able to retain its key personnel.
Component Availability and Cost; Dependence on Single Sources
The Company presently out-sources the production of some of its
manufactured products through a number of vendors located in California. These
vendors assemble products, using components purchased by the Company from other
sources or from their own inventory. The terms of supply contracts are
negotiated separately in each instance. Although the Company has not experienced
any difficulty over the past several years in engaging contractors or in
purchasing components, present vendors may not have sufficient capacity to meet
projected market demand for ITEC products and alternative production sources may
not be available without undue disruption.
Contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. The Company, in turn, includes
appropriate software, performs additional tests on the products, then packages
and ships products into the distribution channels. In addition to buying such
items as printed circuit boards and other components from outside vendors, the
Company purchases and/or licenses software programs, including operating systems
and intellectual property modules (pre-written software code to execute a
specifically defined operation). The Company purchases these products from
vendors who have licenses to sell the software to the Company from the
originators of the software, and have, from time to time, directly licensed
system software that is either embedded or otherwise incorporated in certain
ITEC products.
While most components are available locally from multiple vendors,
certain components used in ITEC products are only available from single sources.
Although alternative suppliers are readily available for many components, for
some components the process of qualifying replacement suppliers, replacing
tooling or ordering and receiving replacement components could take several
months and cause substantial disruption to operations. Any significant increase
in component prices or decrease in component availability could have a material
adverse effect on the Company's business and overall financial performance.
Possibility of Challenge to Products or Intellectual Property Rights
The Company currently holds no patents. The Company's software
products, hardware designs, and circuit layouts are copyrighted. However,
copyright protection does not prevent other companies from emulating the
features and benefits provided by its software, hardware designs or the
integration of the two. The Company protects
11
<PAGE>
its software source code as trade secrets and makes its proprietary source code
available to OEM customers only under limited circumstances and specific
security and confidentiality constraints. In many product hardware designs, the
Company develops application-specific integrated circuits (ASICs) which
encapsulate proprietary technology and are installed on the circuit board. This
can serve to significantly reduce the risk of duplication by competitors, but in
no way ensures that a competitor will be unable to replicate a feature or the
benefit in a similar product.
Competitors may assert that the Company infringes their patent rights.
If the Company fails to establish that it has not violated the asserted rights,
it could be prohibited from marketing the products that incorporate the
technology and it could be liable for damages. The Company could also incur
substantial costs to redesign its products or to defend any legal action taken
against it. The Company has obtained U.S. registration for several of its trade
names or trademarks, including: PCPI, NewGen, ColorBlind, LaserImage,
ColorImage, ImageScript and ImageFont. These trade names are used to distinguish
the Company's products in the marketplace.
Risks Associated with International Operations
The Company conducts business globally. Accordingly, future results
could be adversely affected by a variety of uncontrollable and changing factors
including: foreign currency exchange fluctuations; regulatory, political or
economic conditions in a specific country or region; the imposition of
governmental controls; export license requirements; restrictions on the export
of critical technology; trade restrictions; changes in tariffs; government
spending patterns; natural disasters; difficulties in staffing and managing
international operations; and difficulties in collecting accounts receivable.
In addition, the laws of certain countries do not protect ITEC products
and intellectual property rights to the same extent as the laws of the United
States.
Dependence on Export Sales
The Company intends to pursue international markets as key avenues for
growth and to increase the percentage of sales generated in international
markets. In the Company's past few fiscal years, sales outside the United States
represented over half of its net sales. The Company expects sales outside the
United States to continue to represent a significant portion of its sales. As
the Company continues to expand its international sales and operations, the
business and overall financial performance may be adversely affected by factors
such as those described under "Risks Associated with International Operations."
Reliance on Indirect Distribution
ITEC products are marketed and sold through an established distribution
channel of value added resellers, manufacturers' representatives, retail
vendors, and systems integrators. The Company has a network of dealers and
distributors in the United States and Canada, in the European Community and on
the European Continent, as well as a growing number of resellers in Africa,
Asia, the Middle East, Latin America, and Australia. The Company supports its
worldwide distribution network and end-user customers through centralized
manufacturing, distribution, and repair operations headquartered in San Diego.
As of October 6, 2000, the Company directly employed nine individuals involved
in marketing and sales activities.
Sales are principally made through distributors, which may carry
competing product lines. These distributors could reduce or discontinue sales of
ITEC products, which could materially and adversely affect the Company. These
independent distributors may not devote the resources necessary to provide
effective sales and marketing support of ITEC products. In addition, the Company
is dependent upon the continued viability and financial stability of these
distributors, many of which are small organizations with limited capital. These
distributors, in turn, are substantially dependent on general economic
conditions and other unique factors affecting the Company's markets. Management
believes that the future growth and success of the Company will continue to
depend in large part upon its distribution channels. The business could be
materially and adversely affected if the Company's distributors fail to pay
amounts to the Company that exceed reserves it has established. To expand its
distribution channels, the Company has entered into select OEM arrangements that
allow it to address specific market segments or geographic areas. To prevent
inventory write-downs in the event that OEM customers do not purchase products
as anticipated, the Company may need to convert such products to make them
salable to other customers.
12
<PAGE>
Volatility of Stock Price
The market price of ITEC's common stock historically has fluctuated
significantly. The Company's stock price could fluctuate significantly in the
future based upon any number of factors such as: general stock market trends;
announcements of developments related to ITEC's business; fluctuations in the
Company's operating results; a shortfall in revenues or earnings compared to the
estimates of securities analysts; announcements of technological innovations,
new products or enhancements by the Company or its competitors, general
conditions in the computer peripheral market and the imaging markets served by
the Company; general conditions in the worldwide economy; developments in
patents or other intellectual property rights; and developments in the Company's
relationships with its customers and suppliers.
In addition, in recent years the stock market in general, and the
market for shares of technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. Similarly, the market price of ITEC common stock may
fluctuate significantly based upon factors unrelated to the Company's operating
performance.
Absence of Dividends
The Company has not paid any cash dividends on its common stock to date
and it does not anticipate paying cash dividends in the foreseeable future.
Appointment and Removal of Operational Receiver
On August 20, 1999, at the request of Imperial Bank, the Company's
primary lender, the Superior Court, San Diego appointed an operational receiver.
On August 23, 1999, the operational receiver took control of ITEC's day-to-day
operations. Through further equity infusion, primarily in the form of the
exercise of warrants to purchase ITEC common stock, operations have continued,
and on June 21, 2000, the Superior Court, San Diego issued an order dismissing
the operational receiver. However, in the future, without additional funding
sufficient to satisfy Imperial Bank and other creditors, as well as providing
for working capital, there can be no assurances that such operations can
continue. In addition, the Company may not be able to satisfy all conditions
required to sell shares under the Private Equity Line of Credit Agreement. In
that case, the Company would likely need to raise money from other sources in
order to continue to fund operations. Such alternative funding may not be
available. If such funding is not obtained, the Company will need to reduce or
suspend operations.
Nasdaq Listing and Liquidity of Common Stock
The Nasdaq(R) SmallCap(R) Market and Nasdaq Marketplace Rules require
an issuer to evidence a minimum of $2,000,000 in net tangible assets, a
$35,000,000 market capitalization or $500,000 in net income in the latest fiscal
year or in two of the last three fiscal years, and a $1.00 per share bid price,
respectively. On October 21, 1999, Nasdaq notified the Company that it no longer
complied with the bid price and net tangible assets/market capitalization/net
income requirements for continued listing on The Nasdaq SmallCap Market. At a
hearing on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised
public interest concerns relating to the Company's financial viability. While
the Panel acknowledged that ITEC was in technical compliance with the bid price
and market capitalization requirements, the Panel was of the opinion that the
continued listing of ITEC common stock on The Nasdaq Stock Market was no longer
appropriate. This conclusion was based on the Panel's concerns regarding the
future viability of the Company. ITEC common stock was delisted from The Nasdaq
Stock Market effective with the close of business on March 1, 2000. As a result
of being delisted from The Nasdaq SmallCap Market, stockholders may find it more
difficult to sell ITEC common stock. This lack of liquidity also may make it
more difficult for the Company to raise capital in the future.
Trading of ITEC common stock is now being conducted over-the-counter
through the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
13
<PAGE>
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock does constitute a penny stock
because our common stock has a market price less than $5.00 per share, our
common stock is no longer quoted on Nasdaq, and our net tangible assets do not
exceed $2,000,000. As ITEC common stock falls within the definition of penny
stock, these regulations require the delivery, prior to any transaction
involving ITEC common stock, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Furthermore, the ability of
broker/dealers to sell ITEC common stock and the ability of shareholders to sell
ITEC common stock in the secondary market would be limited. As a result, the
market liquidity for ITEC common stock would be severely and adversely affected.
The Company can provide no assurance that trading in ITEC common stock will not
be subject to these or other regulations in the future, which would negatively
affect the market for ITEC common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
On or about October 7, 1999, the law firms of Weiss & Yourman and
Stull, Stull & Brody made a public announcement that they had filed a lawsuit
against the Company and certain current and past officers and/or directors,
alleging violation of federal securities laws during the period of April 21,
1998 through October 9, 1998. On or about November 17, 1999, the lawsuit, filed
in the name of Nahid Nazarian Behfarin, on her own behalf and others purported
to be similarly situated, was served on the Company. The Company has not yet
been required to file an answer or other pleading in response to the lawsuit.
The Company believes these claims are without merit and intends to vigorously
defend against them on its own behalf as well as on behalf of the other
defendants.
Throughout fiscal 1999 and 2000, and through the date of this filing,
various creditors of the Company have made claims and/or served the Company with
lawsuits alleging the failure of the Company to pay its obligations to them in a
total amount exceeding $2.5 million. The lawsuits are in various stages. Some
have resulted in judgments being entered against the Company. Should the Company
be required to pay the full amount demanded in each of these claims and
lawsuits, such a requirement would have a material adverse impact on the
operations of the Company. However, the superior security interest held by
Imperial Bank has prevented these creditors from collecting on their judgments.
Furthermore, from time to time, the Company may be involved in
litigation relating to claims arising out of its operations in the normal course
of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 5, 2000, the Company entered into a Private Equity Line of
Credit Agreement with Impany Investment Limited ("Impany"). Pursuant to this
agreement, the Company has the right, subject to certain conditions, to sell up
to $36,000,000 of common stock over the next two years to Impany, which Impany
may resell to the public under a registration statement filed with the SEC in
September 2000. Additionally, the Company issued a warrant to Impany to purchase
up to 2,000,000 shares of its common stock at an exercise price equal to $.57
per share. Shares issuable upon exercise of Impany's warrant may also be resold
to the public under this registration statement.
Beginning on September 27, 2000, the date the registration statement
was declared effective by the SEC, and continuing for two years thereafter, the
Company may in its sole discretion sell, or put, shares of our common stock to
Impany. From time to time during the two-year term, the Company may make 18
monthly draw downs, by giving notice and requiring Impany to purchase shares of
our common stock, for the draw down amount. Impany's purchase price will be
based upon the average of the three lowest closing bid prices of the common
stock over the period of five (5) trading days during which the purchase price
of the common stock is determined with respect to
14
<PAGE>
the put date, which period shall begin two (2) trading days prior to the put
date and end two (2) trading days following the put date. The maximum put amount
that we may sell is as set forth in the table below:
<TABLE>
<CAPTION>
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
Bid Average Daily Average Daily Average Daily Average Daily Average Daily
Price Trading Volume Trading Volume Trading Volume of Trading Volume Trading Volume
of up to 75,000 of 75,001-150,000 150,001-250,000 of 250,001- of 400,001 and
400,000 above
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
0.25-0.49 $ 200,000 $ 300,000 $ 500,000 $ 650,000 $ 750,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
0.50-0.74 $ 300,000 $ 500,000 $ 650,000 $ 750,000 $ 1,000,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
0.75-0.99 $ 350,000 $ 550,000 $ 600,000 $ 800,000 $ 1,250,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
1.00-1.24 $ 400,000 $ 600,000 $ 750,000 $ 850,000 $ 1,500,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
1.25-1.49 $ 500,000 $ 675,000 $ 800,000 $ 925,000 $ 1,750,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
1.50-1.99 $ 600,000 $ 750,000 $ 850,000 $ 1,000,000 $ 2,000,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
2.00-2.24 $ 675,000 $ 825,000 $ 925,000 $ 1,000,000 $ 2,250,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
2.25-2.49 $ 700,000 $ 850,000 $ 950,000 $ 1,000,000 $ 2,500,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
2.50-3.50 $ 750,000 $ 900,000 $ 1,000,000 $ 1,000,000 $ 2,750,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
Above 3.50 $ 800,000 $ 1,000,000 $ 1,250,000 $ 1,500,000 $ 3,000,000
----------------- ------------------ ------------------ ------------------- ------------------ ------------------
</TABLE>
The Company's ability to cause Impany to purchase shares of its common
stock under the Private Equity Line of Credit Agreement is subject to certain
conditions, including, but not limited to:
o The number of shares the Company may sell to Impany on any put
date, when aggregated with all other shares then owned by
Impany, cannot exceed 9.9% of the total common stock then
outstanding.
o If we are listed on The Nasdaq SmallCap Market, the total
number of shares that the Company may sell to Impany under the
agreement and warrant cannot exceed 19.9% of its common stock,
unless it has obtained shareholder approval as required by the
rules of the Nasdaq Stock Market Inc.
o The registration statement must remain effective so that
Impany may publicly resell the shares that it acquires from
the Company under the agreement.
o There has not been an effect on the business, operations,
properties, prospects or financial condition of the Company
that is material and adverse to the Company and such other
entities controlling or controlled by the Company, taken as a
whole, and/or any condition, circumstance or situation that
would prohibit or otherwise interfere with the ability of the
company to enter into and perform its obligations under the
agreement.
The Company may not be able to satisfy all conditions required to put
shares to Impany at any given time. If this occurs, the Company would likely
need to raise money from other sources in order to continue to fund its
operations. Such alternative funding may not be available. Also, we cannot put
shares to Impany at a time when we have not publicly disclosed material
information about our company.
In connection with the Private Equity Line of Credit Agreement, the
Company issued a warrant on July 5, 2000 to Impany to purchase up to 2,000,000
shares of its common stock at an exercise price equal to $.57 per share. Impany
may exercise the warrant through January 5, 2003.
Impany is an "underwriter" within the meaning of the Securities Act in
connection with its resale of shares of the Company's common stock.
To date, the Company has received $750,000 from a draw-down against the
equity line of credit, issuing 3,225,808 shares of common stock to Impany.
In August 2000, the Company issued "retention" warrants to employees
that allow the purchase of up to 2,821,000 shares of common stock at a purchase
price of $.01 per share. These warrants become exercisable in January 2001 for
those employees who have remained employed by the Company through that period.
In addition, subsequent to June 30, 2000, the Company issued warrants to
officers and key employees that allow the purchase of 2,136,000 shares of common
stock at a purchase price of $0.30 per share. These warrants are exercisable
immediately.
15
<PAGE>
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:
None.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated July 28, 2000 related to
its Private Equity Line of Credit Agreement with Impany Investment Limited.
(Also see, Item 2.)
16
<PAGE>
SIGNATURES
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 1, 2000
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/ Brian Bonar
-------------------
Brian Bonar
Chairman and Chief Executive Officer
By: /s/ Scott Kiefer
--------------------
Scott Kiefer
Chief Accounting Officer
17
