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 DECEMBER 31, 1999
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[GRAPHIC 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: (858) 613-1300
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
The number of shares outstanding of the registrant's common stock as of February
16, 2000 was 90,714,988.
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TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Balance Sheets - December 31, 1999 (unaudited) and June 30, 1999 (audited)..................... 3
Consolidated Statements of Operations - 3 months ended December 31, 1999 and 1998 (unaudited).............. 4
Consolidated Statements of Operations - 6 months ended December 31, 1999 and 1998 (unaudited).............. 5
Consolidated Statements of Cash Flows - 6 months ended December 31, 1999 and 1998 (unaudited)............... 6
Notes to Consolidated Financial Statements.................................................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................................................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................. 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................... 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................... 17
ITEM 5. OTHER INFORMATION....................................................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................ 18
SIGNATURES 19
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PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
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ASSETS
DECEMBER 31, JUNE 30,
1999 1999
Current assets
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Cash $ 116 $ 75
Accounts receivable 268 1,959
Inventories 57 552
Prepaid expenses and other - 577
--------------- --------------
Total current assets 441 3,163
Property and equipment, net 752 986
Capitalized software, net 2,497 2,851
Other 204 250
--------------- --------------
$ 3,894 $ 7,250
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank note payable $ 7,253 $ 6,469
Short-term debt 2,962 5,010
Current portion of long-term debt - -
Accounts payable 4,153 5,532
Accrued expenses 3,065 2,671
--------------- --------------
Total current liabilities 17,433 19,682
Long-term debt, less current portion - -
--------------- --------------
Total liabilities 17,433 19,682
--------------- --------------
Commitments and contingencies (Note 11)
Stockholders' equity (deficit)
Series A preferred stock, $1,000 par value, 7,500 shares
authorized, 420.5 shares issued and outstanding 420 420
Series D preferred stock, $2,000 stated value, 1,200
shares authorized, no shares issued and outstanding - 1,800
Series E preferred stock, $5,000 stated value, 1,250
shares authorized, no shares issued and outstanding - 4,655
Common stock, $0.005 par value, 100,000,000 shares
Authorized, 90,714,988 shares issued and outstanding 435 110
Paid-in capital 51,814 39,804
Shareholder loans (105) (105)
Accumulated deficit (66,103) (59,116)
--------------- --------------
Total shareholders' equity (deficit) (13,539) (12,432)
--------------- --------------
$ 3,894 $ 7,250
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See Notes to Consolidated Financial Statements.
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IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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1999 1998
Revenues
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Sales of products $ 61 $ 4,195
Engineering fees - -
Licenses and royalties 248 -
------------- -------------
309 4,195
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Costs and expenses
Cost of products sold 904 3,309
Selling, general, and administrative 1,549 3,676
Cost of engineering fees, research, and development 979 230
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3,432 7,215
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Income (loss) from operations (3,123) (3,020)
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Other income (expense):
Interest, net (103) (335)
Restructuring, ITEC Europe (18) -
Other 82 -
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(39) (3,355)
------------- -------------
Income (loss) before income taxes (3,162) (3,355)
Income tax expense (10)
Net income (loss) $ (3,162) $ (3,365)
============= ==============
Earnings (loss) per common share
Basic $ 0.13) $ (0.26)
============= ==============
Diluted $ (0.13) $ (0.26)
============= ==============
Weighted average common shares 55,556 12,852
============= ==============
Weighted average common shares - assuming dilution 55,556 12,852
============= ==============
See Notes to Consolidated Financial Statements.
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IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1999 1998
Revenues
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Sales of products $ 1,001 $ 10,916
Engineering fees 25 395
Licenses and royalties 336 163
--------------- --------------
1,362 11,474
--------------- --------------
Costs and expenses
Cost of products sold 1,597 7,356
Selling, general, and administrative 4,927 7,316
Cost of engineering fees, research, and development 1,628 815
--------------- --------------
8,152 15,487
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Income (loss) from operations (6,790) (4,013)
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Other income (expense):
Interest, net (241) (543)
Restructuring, ITEC Europe (18) -
Other 62 -
--------------- --------------
(197) (543)
--------------- --------------
Income (loss) before income taxes (6,987) (4,556)
Income tax expense - (14)
Net income (loss) $ (6,987) $ (4,570)
================ ===============
Earnings (loss) per common share
Basic $ (0.13) $ (0.36)
================ ===============
Diluted $ (0.13) $ (0.36)
================ ===============
Weighted average common shares 55,566 12,852
================ ===============
Weighted average common shares - assuming dilution 55,566 12,852
================ ===============
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IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1999 1998
Cash flows from operating activities
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Net income (loss) $ (6,987) $ (4,570)
Adjustments to reconcile net income (loss) to - -
net cash from operating activities - -
Non-cash special charges
Depreciation and amortization 234 310
Amortization of capitalized software 354 -
Stock issued for services - -
Changes in operating assets and liabilities
Accounts receivable 1,691 (297)
Inventories 495 1,156
Prepaid expenses and other 623 (65)
Accounts payable and accrued expenses (985) 646
Deferred revenue - -
------ ------
Net cash from operating activities (4,575) (2,820)
------ ------
Cash flows from investing activities
Prepaid licenses - -
Capitalized software - (1,912)
Capital expenditures - (71)
Other - -
------- ------
Net cash from investing activities - (1,983)
------- ------
Cash flows from financing activities
Net borrowings under bank lines of credit 784 (62)
Net borrowings under short-term notes payable (2,048) 2,642
Net proceeds from issuance of common stock 5,880 1,250
Net proceeds from issuance of preferred stock - -
Redemption of preferred stock - (2,228)
Issuance of long-term debt - 675
Repayment of long-term debt - (294)
------ ------
Net cash from financing activities 4,616 1,983
------ ------
Net increase (decrease) in cash 41 (2,820)
Cash, beginning of period 75 3,023
------ ------
Cash, end of period $ 116 $ 203
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See Notes to Consolidated Financial Statements.
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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, 1999, 1998, and 1997 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 December 31, 1999, 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
primary lender to the Company, the Court appointed an operational receiver for
the Company. On August 23, 1999, the operational receiver took control of the
day-to-day operations of the Company. 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 sufficient to satisfy Imperial Bank and the other creditors of the
Company, as well as providing working capital for the Company, there can be no
assurances that such operations can continue. The Company continues to actively
work with entities capable of providing such funding. Management has continued
to implement its restructuring plan including reductions of personnel,
consolidation of facilities, disposal of subsidiaries, and the elimination of
product lines. 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 antidilutive effect on net earnings (loss) per share. The following is a
reconciliation of Basic EPS to Diluted EPS:
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
DECEMBER 31, 1999
Net loss $ (6,987)
Preferred dividends (625)
---------
Basic and diluted EPS $ (7,612) 55,566 $ (0.13)
======== ========= ========
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NOTE 4. INVENTORIES
DECEMBER 31, JUNE 30,
1999 1999
Inventories
Materials and supplies $ 5 $ 50
Finished goods 52 502
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$ 57 $ 552
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NOTE 5. BANK LINES OF CREDIT; LONG-TERM DEBT
The Company is in default under its credit agreements with Imperial Bank. The
bank is demanding immediate payment of all outstanding loan balances, including
the term loan which has been reclassified as a current liability. Borrowings
bear interest at the bank's prime interest rate plus 0.75% plus 5% penalty
default interest and are collateralized by substantially all assets of the
Company.
The Company is in default on its long-term debt obligations and, accordingly,
all outstanding balances have been classified as current obligations.
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 develop and commercialize its own
technology. The Company intends to continue to develop its target markets and to
pursue clearly defined commercial market opportunities in
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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, 1999 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 December 31, 1999, 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. There can be
no assurance, however, that the Company will be able to complete 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."
RESULTS OF OPERATIONS NET REVENUES
Revenues were $309 thousand and $4.2 million for the three month period
ended December 31, 1999 and 1998, respectively. Sales of products were $61
thousand and $4.2 million for the three month period ended December 31, 1999 and
1998, respectively. Revenues were $1.4 million and $11.5 million for the six
month period ended December 31, 1999 and 1998, respectively. Sales of products
were $1 million and $1.9 million for the six month period ended December 31,
1999 and 1998, respectively. The decrease in product sales from 1998 to 1999 was
due to an overall decrease in the sales activities of the Company due to
insufficient inventories and working capital. The Company's lack of sufficient
working capital has had a negative adverse effect on printer product sales in
particular, and overall revenues in general.
Licensing fees and royalties were $248 thousand and zero for the three
month period ended December 31, 1999 and 1998 respectively. For the six month
period ended December 31, 1999 and 1998, respectively, licensing fees and
royalties were $336 thousand and $163 thousand. Royalties and licensing fees
vary from quarter to quarter and are dependent on the sales of products sold by
OEM customers using ITEC technologies. These revenues, however, are expected to
decline in the future due to the Company's focus on product sales as opposed to
technology licensing activities.
There were no engineering fees for the three months period ended
December 31, 1999 and 1998, respectively, Engineering fees were $25 thousand and
$395 thousand for the six month period ended December 31, 1999 and 1998
respectively. The decrease in 1999 compared to 1998 was primarily the result of
the changing strategic focus of the Company toward product sales rather than on
the development of products and technologies for third parties.
COST OF PRODUCTS SOLD
Cost of products sold were $904 thousand of product sales for the
period ended December 31, 1999, or 1480% of sales. The loss of $843 thousand was
primarily due to the liquidation sale of inventories substantially below cost as
mandated by the court-appointed operational receiver. (See Note 2.) In the
year-earlier period, cost of products sold were $3,309 or 80% of sales.
For the six month period ended December 31, 1999 cost of products sold
were $1.6 million, or 160% of sales. The loss of $596 thousand was primarily due
to the liquidation of inventories under the direction of the operational
receiver. In the year-earlier period, cost of products sold were $7.3 million or
67% of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month period
ended December 31, 1999 and 1998, respectively, were $1.5 and $3.7 million.
Selling, general and administrative expenses for the six month
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period ended December 31, 1999 and 1998, respectively, were $4.9 million and
$7.3 million. Selling, general and administrative expenses have consisted
primarily of salaries and commissions of sales and marketing personnel,
operating receiver costs, salaries and related costs for general corporate
functions, including finance, accounting, facilities and legal, advertising and
other marketing related expenses, and fees for professional services. The
Company reduced its selling, general and administrative expenses $2.1 million or
57% for the three month period ended December 31, 1999 from the year earlier
period. Selling, general and administrative expenses were reduced by $2.4
million or 33% for the six month period ended December 31, 1999 from the year
earlier period. The reduction in selling, general and administrative has been
due primarily to a lack of operating capital and the liquidation of inventories
by the court-appointed operational receiver (also see Note 2 to the Consolidated
Financial Statements).
COST OF ENGINEERING
Engineering costs, including costs of research and development, were
$979 thousand and $230 thousand for the quarters ended December 31, 1999 and
1998, respectively. For the six month period ended December 31, 1999 and 1998,
respectively, engineering costs were $1.6 million and $815 thousand. In the
previous fiscal year, the Company had been phasing out its engineering and
licensing activities; and engineering costs were re-directed toward the
development of the Company's branded products, including printers and associated
digital imaging products. New products from these activities had been expected
to begin being shipped to customers during the current fiscal year; however, due
to the lack of working capital and the associated restrictions on the Company's
sales and marketing activities, there was an increased focus on engineering
during the first two quarters of fiscal 2000 in order to stimulate revenues from
license fees and royalties.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
cash generated from operations, debt financing, and from the sale of equity
securities.
As a result of some of the Company's financing activities, during the
six month period ended December 31, 1999, there has been a significant increase
in the number of issued and outstanding shares. The Company converted its Series
D and Series E Convertible Preferred Stock and issued additional common stock in
lieu of cash in order to preserve working capital. The Series D and Series E
Convertible Preferred Stock were converted into approximately 52.4 million
shares of common stock, including the exercise of warrants associated with these
securities. Approximately 14.9 million shares of common stock were issued for
corporate expenses in lieu of cash.
On August 20, 1999, at the request of Imperial Bank, the primary lender
to the Company, the Court appointed an operational receiver for the Company. On
August 23, 1999, the operational receiver took control of the day-to-day
operations of the Company. 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 Imperial Bank and the other
creditors of the Company, as well as providing working capital for the Company,
the Company will cease to operate. The Company continues to actively work with
entities capable of providing such funding.
As of December 31, 1999, the Company had negative working capital of
approximately $17 million, an increase of approximately $500 thousand as
compared to June 30, 1999. The Company's working capital deficit continues to
increase due to its operating losses, increased indebtedness, and suspension of
its sales and marketing activities.
Net cash used in operating activities increased to $4.6 million during
the six month period ended December 31, 1999, from $2.8 million during the
year-earlier period, due primarily to an increase in the Company's net loss.
Net cash used in investing activities decreased to xero during the six
month period ended December 31, 1999, from $2.0 million during the year-earlier
period. The decrease was due primarily to the absence of any prepaid license,
capitalized software, or capital expenditures in the period.
Net cash from financing activities increased to $4.6 million during the
six month period ended December 31, 1999, from $2.0 million during the
year-earlier period. The increase was due to primarily to and increase in
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proceeds from the issuance of common stock to $5.9 million from $1.3 million in
the year-earlier period.
The Company has no material commitments for capital expenditures. The
Company's 5% convertible preferred stock (which ranks prior to the Company's
common stock), carries cumulative dividends, when and as declared, at an annual
rate of $50.00 per share. The aggregate amount of such dividends in arrears at
December 31, 1999, was approximately $625 thousand.
The Company's capital requirements depend on numerous factors,
including market acceptance of the Company's products, the scope and success of
the Company's product development efforts, the resources the Company devotes to
marketing and selling its products, and other factors. The report of the
Company's independent auditors accompanying the Company's June 30, 1999
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.
(Also see Note 2 to the Consolidate Financial Statements.)
RISKS AND UNCERTAINTIES
FUTURE CAPITAL NEEDS
There can be no assurance with respect to the Company's future
profitability or revenue growth. Losses may occur on a quarterly or annual basis
for a number of reasons outside the Company's control. See "Potential
Fluctuation in 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. The Company
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 or, if
available, not on terms acceptable to the Company. Insufficient funds may
require the Company to delay, reduce or eliminate some or all of its planned
activities.
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 could be required
to cut back or stop operations if it is unable to raise or obtain needed
funding.
As of December 31, 1999, the Company had accumulated losses of
approximately $65.8 million. Management anticipates incurring additional losses
until the Company can successfully market and distribute its products and
develop new technologies and commercially viable future products. If it is
unable to do so, ITEC will continue to have losses and might not be able to
continue operations.
The report of the Company's independent accountants on the consolidated
financial statements contains an explanatory paragraph regarding ITEC's ability
to continue as an ongoing business. The independent accountants cited a
significant decline in working capital and net worth that has raised substantial
doubt as to the Company's ability to continue as an ongoing business. The "going
concern" qualification may reduce the Company's ability to obtain necessary
financing in the future to run its business.
APPOINTMENT OF OPERATIONAL RECEIVER
On August 20, 1999, at the request of Imperial Bank, the primary lender
to the Company, the Superior Court, San Diego appointed an operational receiver
for the Company. On August 23, 1999, the operational receiver took control of
the day-to-day operations of the Company. 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 Imperial Bank and
the other creditors of the Company, as well as providing working capital for the
Company, the Company will cease to operate. The Company continues to actively
work with entities capable of providing such funding. If such funding is not
obtained, the Company will need to reduce, suspend, or cease operations.
FLUCTUATION OF QUARTERLY PERFORMANCE
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The Company's quarterly operating results tend to fluctuate depending
on a number of factors. These include: (1) the timing of product announcements
and introductions of products by the Company and its competitors; (2)
availability and cost of components; (3) timing of shipments of the Company's
products; (4) product mix; (5) market acceptance of new products; (6)
seasonality; (7) currency fluctuations; (8) changes in prices by the Company and
its competitors; and (9) price protection for selling price reductions offered
to distributors and OEM customers. Accordingly, the timing of expenditures for
staffing and related support costs, advertising, trade show attendance,
promotion, research and development expenditures, and, changes in general
economic conditions impact quarterly performance. Any one of these factors could
have a material adverse effect on the Company's results of operations.
The Company may experience significant quarterly fluctuations in total
revenues as well as operating expenses with respect to future new product
introductions. In addition, the Company's component purchases, production, and
spending levels are based upon forecast demand for the Company's products.
Accordingly, any inaccuracy in forecasting could adversely affect the Company's
financial condition and results of operations. Demand for the Company's products
could be adversely affected by a slowdown in the overall demand for computer
systems, printer products, or digitally printed images. The Company's failure to
complete shipments during a quarter could have a material adverse effect on the
Company's results of operations for that quarter. Quarterly results are not
necessarily indicative of future performance for any particular period.
COMPETITIVE INDUSTRY
The markets for the Company's products are highly competitive and tend
to change rapidly. Some of the Company's current and prospective competitors
have significantly greater financial, technical, manufacturing and marketing
resources than the Company. The Company's ability to compete in its markets
depends on a number of factors within and outside its control, including the
success and timing of product introductions by the Company and its competitors,
selling prices, product performance, product distribution, marketing ability,
and customer support. A key element of the Company's strategy is to provide
competitively priced, quality products. There can be no assurance that the
Company's products will continue to be competitively priced. The Company has
reduced prices on certain of its 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 affect gross margins and may adversely affect the Company's
financial condition and results of operations.
The success of the Company will depend on its ability to market current
products, including digital printers and hardware and software products used in
digital imaging, and to rapidly introduce and market additional products. The
Company does not have control over the demand for digital imaging products,
including the preferences of users and the capability of personal computers to
run the Company's digital imaging software and hardware products and to use ITEC
printers. There can be no assurance that the products introduced by the Company
will achieve acceptance, or that other digital imaging products companies will
not develop and market products which render ITEC products obsolete or less
competitive. Failure to obtain significant customer satisfaction or market share
for ITEC products will significantly and negatively affect the Company's
revenues. Also see "Short Product Lives and Technological Change."
SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapidly
evolving technology, frequent new product introductions, and significant price
competition. Consequently, short product life cycles and reductions in unit
selling prices due to competitive pressures over the life of a product are
common. The Company's future success will depend on its ability to continue to
develop and manufacture competitive products and achieve cost reductions for its
existing products.
In addition, the Company monitors new technology developments and
coordinates with suppliers, distributors and dealers to enhance existing
products and lower costs. Advances in technology will require increased
investment to maintain the Company's market position. The Company's financial
condition and results of operations could be adversely affected if the Company
is unable to develop and manufacture new, competitive products in a timely
manner.
12
<PAGE>
DEVELOPING MARKETS AND APPLICATIONS
The markets for the Company's products are relatively new and are still
developing. The Company believes that there has been growing market acceptance
for color printers and related technologies and supplies. There can be no
assurance, however, that such markets will continue to grow. Other technologies
are constantly evolving and improving. There can be no assurance that products
based on these other technologies will not have a material adverse effect on the
demand for the Company's products.
The success of ITEC products in the marketplace depends on many
factors, including product performance, price, ease of use, support of industry
standards, and customer support and service. There can be no assurance that the
Company will be able to compete successfully given these factors. Competitors
may develop products comparable or superior to those of the Company and may
adapt more quickly than ITEC to new technologies, evolving industry trends, and
customer requirements. Therefore, the Company may have to spend more money to
effectively compete for market share, including funds to expand its
infrastructure, which is a capital- and time-intensive process. In addition, if
other companies aggressively compete against ITEC, the Company may have to spend
more money on advertising, promotion, trade shows, product development,
marketing and overhead expenses, hiring and retaining personnel, and developing
new technologies. These higher expenses may have a negative effect on net income
and profits.
The development of sophisticated digital imaging products is a lengthy
and intensive process and is subject to unforeseen risks, delays, problems and
costs. Unanticipated technical or other problems may occur which would result in
delays in our development program. If we fail to complete development of new
products or enhance existing products, we could suffer complete loss of the
funds committed by us to those products or enhancements. The losses could be
substantial.
DEPENDENCE UPON SUPPLIERS
At present, many of the Company's products use technology licensed from
outside suppliers. The Company relies heavily on Adobe for upgrades and support
of the PostScript language. In the case of its font products, the Company
licenses such fonts from outside suppliers, including Adobe, who also own the
intellectual property rights to such fonts. The reliance on third-party
suppliers involves risk, including limited control over potential hardware and
software incompatibilities with the Company's products. There can be no
assurance that all of the suppliers of products marketed by the Company will
continue to license their products to the Company indefinitely, or that these
suppliers will not license to other companies simultaneously.
The Company presently out-sources the production of most of its
manufactured products through one vendor located in California. This vendor
assembles products, using components purchased by the Company from other sources
or from its own inventory. If this manufacturer does not have sufficient
capacity to meet projected market demand for ITEC products, production will stop
and replacement of the manufacturer could take several months and cause
substantial disruption to Company operations.
While most components are available locally from multiple vendors,
certain components used in the Company's products are only available from single
sources. Although alternate suppliers are available for many of these
components, the process of qualifying replacement suppliers, replacing tooling
or ordering and receiving replacement some components could take several months
and cause substantial disruption to the Company's operations. Any significant
increase in component prices or decrease in component availability could have a
material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent, in part, on its ability to
attract and retain qualified management and technical personnel. Competition for
such personnel is intense, and the inability to attract additional key employees
or the loss of one or more key employees could adversely affect the Company.
There can be no assurance that the Company will retain its key personnel.
COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES OF SUPPLY
13
<PAGE>
ITEC presently out-sources the manufacturing and production of most of
its manufactured products to InCirT Technologies ("InCirT"). InCirT utilizes
components that it purchases from other sources or from its own internal
inventory; and assembles and packages ITEC products. The terms of supply
contracts are negotiated separately in each instance. The Company believes that
this vendor has sufficient capacity to meet projected market demand for the
Company's products or that alternate production sources are available without
undue disruption. ITEC has not experienced any difficulty over the past several
years in engaging contractors or in purchasing components. InCirT will perform
multi-step quality control testing prior to shipping the Company's products into
the Company's distribution channels.
In addition to buying such items as printed circuit boards and other
components from outside vendors, ITEC purchases and/or licenses software
programs, including operating systems and intellectual property modules
(pre-written software code to execute a specifically defined operation). ITEC
purchases these products from vendors who have licenses to sell such software to
the Company from the originators of such software, and has, from time to time,
directly licensed system software that is either embedded or otherwise
incorporated in certain ITEC products.
While most components are available locally from multiple vendors,
certain components used in the Company's products are only available from single
sources. Although alternate suppliers are readily available for many of these
components, for some selected components, the process of qualifying replacement
suppliers, replacing tooling, or ordering and receiving replacement components
could take several months and cause substantial disruption to the Company's
operations. Any significant increase in component prices or decrease in
component availability could have a material adverse effect on the Company.
POTENTIAL CHALLENGE TO PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS
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 the Company's software,
hardware designs or the integration of the two. The Company protects its
software source code as trade secrets and makes its Company 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 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 the complete lack of
potential for a competitor to replicate a feature or the benefit in a similar
product. The Company currently holds no patents. Because computer and printer
imaging technology is such a rapidly changing business environment, the Company
believes the effectiveness of patents, trade secrets, and copyright protection
are less important in influencing long term success than the experience of the
Company's technical team, contractual relationships, and a continuous focus on
technical advancement.
The Company has obtained U.S. registration for several of its trade
names or trademarks, including PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, and ImageNet. These trade names are used to distinguish
the Company's products in the marketplace. Pending trademarks for which
registration is currently being sought include NewGen, Xtinguisher, and
DealSeekers.
From time-to-time, certain competitors have asserted patent rights
relevant to the Company's business. The Company expects that this will continue.
The Company carefully evaluates each assertion relating to its products. If the
Company is not successful in establishing that asserted rights have not been
violated, the Company could be prohibited from marketing the products that
incorporate such technology. The Company could also incur substantial costs to
redesign its products or to defend any legal action taken against the Company.
If the Company's products should be found to infringe upon the intellectual
property rights of others, the Company could be enjoined from further
infringement and be liable for any damages. The Company relies on a combination
of trade secret, copyright and trademark protection and non-disclosure
agreements to protect its proprietary rights. There can be no assurance,
however, that the measures adopted by the Company for the protection of its
intellectual property will be adequate to protect its interests, or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies.
DEPENDENCE ON EXPORT SALES
14
<PAGE>
The Company intends to pursue international markets for growth. The
Company expects export sales to continue to represent a portion of its sales.
International sales and operations are subject to risks such as the imposition
of governmental controls, export license requirements, restrictions on the
export of critical technology, currency exchange fluctuations, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and managing international operations, and collecting accounts receivable. In
addition, the laws of certain countries do not protect the Company's products
and intellectual property rights to the same extent as do the laws of the United
States. As the Company continues to expand its international business, there can
be no assurance that these factors will not have an adverse effect on the
Company.
RELIANCE UPON INDIRECT, INDEPENDENT DISTRIBUTION CHANNELS
ITEC products are marketed and sold through established relationships
with OEM's, distributors, value-added resellers, manufacturers' representatives,
retail vendors, and systems integrators. The Company has a network of dealers
and distributors in the United States, Canada, and Europe. Additionally, the
Company has a number of resellers in Africa, Asia, the Middle East, Latin
America, and Australia, which we support through centralized manufacturing,
distribution and repair operations in San Diego and London. The sales of the
Company's products are principally made through distributors who may carry
competing product lines. These distributors could reduce or discontinue sales of
ITEC products, and they may not devote the resources necessary to provide
effective sales and marketing support, which could materially and adversely
affect the Company's sales. The Company believes that its future growth and
success will continue to depend in large part upon its distribution channels.
The Company is dependent upon the continued viability and financial
stability of its distributors, many of which are small organizations with
limited capital who are substantially dependent on general economic conditions
and specific factors affecting digital imaging markets. ITEC's business could be
materially adversely affected if its distributors fail to pay amounts to the
Company that exceed reserves that have been 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. In order to
prevent inventory write-downs, to the extent that OEM customers do not purchase
products as anticipated the Company may need to convert such products to make
them salable to other customers.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has historically
fluctuated significantly. The Company believes that a number of factors could
cause further significant fluctuations in the price of the Company's Common
Stock. These factors include: (1) general stock market trends; (2) announcements
of developments related to the Company's business; (3) fluctuations in the
Company's operating results; (4) general conditions in the computer peripheral
market and the markets served by the Company or in the worldwide economy; (5) a
shortfall in revenue or earnings from securities analysts' expectations; (6)
announcements of technological innovations or new products or enhancements by
the Company or its competitors; (7) developments in patents or other
intellectual property rights; and (8) developments in the Company's
relationships with its customers and suppliers.
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 operating performance.
DILUTION OF STOCKHOLDER INTERESTS
The issuance of the Company's reserved shares would dilute the equity
interest of existing stockholders and could have a significant adverse effect on
the market price of ITEC common stock.
The Company may seek additional financing, which would result in the
issuance of additional shares of our capital stock and/or rights to acquire
additional shares of the Company's capital stock. Additional issuances of
capital stock would result in a reduction of current shareholders' percentage
interest in the Company.
15
<PAGE>
The addition of a substantial number of shares of common stock into the
market or by the registration of any other of our securities under the
Securities Act may significantly and negatively affect the prevailing market
price for the Company's common stock. Furthermore, future sales of shares of
common stock issuable upon the exercise of outstanding warrants and options may
have a depressive effect on the market price of the common stock, as these
warrants and options would be more likely to be exercised at a time when the
price of the common stock is in excess of the applicable exercise price.
The sale or issuance of any shares of preferred stock having rights
superior to those of the common stock may result in a decrease in the value or
market price of the common stock. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of ownership without
further vote or action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock.
The Company's board of directors currently is authorized to issue up to
100,000 shares of preferred stock. The board has the power to establish the
dividend rates, preferential payments on our liquidation, voting rights,
redemption and conversion terms and privileges for any series of preferred
stock.
NASDAQ LISTING AND LIQUIDITY OF COMMON STOCK
The Company currently does not meet the listing maintenance
requirements of the Nasdaq SmallCap(TM) Market and Nasdaq rules, which include,
among other things, a minimum bid price for our common stock of $1.00. Since the
Company has not met all of these requirements, it is currently being reviewed by
Nasdaq. If the Company were no longer in compliance with Nasdaq rules and was
unable to receive a waiver or to achieve compliance, and if the Company's common
stock were to be de-listed from the SmallCap market, shareholders may find it
more difficult to sell their ITEC common stock. This lack of liquidity also may
make it more difficult for the Company to raise capital in the future.
In the event that ITEC securities are not listed on Nasdaq SmallCap,
trading of the Company's common stock would likely be 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about February 2, 1999, American Industries, Inc., Ellison Carl
Morgan and entities related to Ellison Carl Morgan (the "Plaintiffs") served the
Company and certain officers and directors of the Company (the "Defendants")
with a lawsuit filed in the Circuit Court of the State of Oregon for the County
of Multnomah, alleging that the Defendants violated certain Oregon Securities
Laws in connection with the Plaintiffs' investments in the Company, breached the
contracts with the Plaintiffs and committed fraud in connection with such
contracts. In this action, the plaintiffs are seeking reimbursement for their
investments and lost profits in an amount to be determined at trial. On or about
February 22, 1999, the Plaintiffs served Defendants with an Amended Complaint
seeking approximately $1.3 million for added allegations regarding alleged
breaches of agreements between the Company and American Industries providing the
Company with letters of credit. On or about September 1, 1999 American
Industries obtained a judgment on the issues in the case relating to the letters
of credit. Trial on the remaining securities law claims is currently scheduled
for April 2000. 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.
On or about July 9, 1999, Imperial Bank (the "Plaintiff") served the
Company and its various operating units with a lawsuit filed in the Superior
Court of the State of California for the County of San Diego, alleging breach of
credit agreements and seeking foreclosure of personal property security
interest, appointment of a receiver, and injunctive relief. At the same time,
the Plaintiff filed a motion asking the Court for the appointment of an
operational receiver. On August 20, 1999, the Court granted the Plaintiff's
request and, on August 23, 1999, an operational receiver assumed control of the
day-to-day operations of the Company (see discussion, supra, under Management's
Discussion and Analysis). The Company has filed an answer to the complaint and
the case is progressing through normal procedures.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default on its credit agreement with Imperial Bank. At August
31, 1999, the amount in default was $6.4 million. At December 31, 1999, the
amount in default was approximately $6.2 million. (Also see Note 2 to
Consolidated Financial Statements.)
17
<PAGE>
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 - No reports on Form 8-K were filed during the quarter
ended December 31, 1999.
18
<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: February 17, 2000
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/ BRIAN BONAR
-----------------
Brian Bonar
Chief Executive Officer
and Principal Financial and Accounting Officer
19
<PAGE>
EXHIBIT INDEX
27.1 ...................................................Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 116,000
<SECURITIES> 0
<RECEIVABLES> 5,680,000
<ALLOWANCES> 5,412,000
<INVENTORY> 57,000
<CURRENT-ASSETS> 441,000
<PP&E> 752,000
<DEPRECIATION> 221,000
<TOTAL-ASSETS> 3,894,000
<CURRENT-LIABILITIES> 17,433,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 420,000
<TOTAL-LIABILITY-AND-EQUITY> 3,894,000
<SALES> 61,000
<TOTAL-REVENUES> 309,000
<CGS> 904,000
<TOTAL-COSTS> 3,432,000
<OTHER-EXPENSES> (64,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,000
<INCOME-PRETAX> (3,162,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,162,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,162,000)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
