SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[ITECH LOGO 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 May 15,
2000, was 94,517,427.
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<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
<S> <C>
March 31, 2000 (unaudited) and June 30, 1999 (audited) 2
Consolidated Statements of Operations
Three and nine months ended March 31, 2000 and 1999 (unaudited) 3
Consolidated Statements of Cash Flows
Nine months ended March 31, 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 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
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
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<PAGE>
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
Current assets
<S> <C> <C>
Cash $ 701 $ 75
Accounts receivable, net 255 1,959
Inventories 50 552
Prepaid expenses and other 231 577
---------- --------
Total current assets 1,237 3,163
Property and equipment, net 615 986
Capitalized software, net - 2,851
Other 156 250
--------- --------
Total Assets $ 2,008 $ 7,250
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under bank lines of credit $ 6,846 $ 6,469
Short-term debt 2,501 5,010
Accounts payable 3,859 5,532
Accrued expenses 1,088 2,671
-------- --------
Total current liabilities 14,294 19,682
Long-term debt, less current portion - -
----------- -----------
Total liabilities 14,294 19,682
--------- -------
Shareholders' 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, $1,000 par value, 1,200 shares
authorized, none issued and outstanding - 1,800
Series E preferred stock, $1,000 par value, 1,250 shares
authorized, none issued and outstanding - 4,655
Common stock, $0.005 par value, 100,000,000 shares authorized,
94,417,012 shares issued and outstanding 472 110
Paid-in capital 55,376 39,804
Shareholder loans (105) (105)
Accumulated deficit (68,449) (59,116)
-------- ---------
Total shareholders' equity (deficit) (12,286) (12,432)
--------- ----------
$ 2,008 $ 7,250
========= ==========
</TABLE>
See notes to consolidated financial statements.
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IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
Revenues
<S> <C> <C> <C> <C>
Sales of products $ 260 $ 3,230 $ 1,261 $ 14,146
Engineering fees 240 110 265 505
Licenses and royalties 221 320 557 483
--------- --------- --------- ----------
721 3,660 2,083 15,134
--------- --------- --------- ----------
Costs and expenses
Costs of products sold 225 2,504 1,822 9,860
Selling, general, and administrative 822 2,868 5,749 10,184
Cost of engineering fees 508 215 2,136 1,030
--------- --------- --------- ----------
1,555 5,587 9,707 21,074
--------- --------- --------- ----------
(834) (1,927) (7,624) (5,940)
Income (loss) from operations
Other expense
Interest, net (150) (368) (329) (911)
Restructuring (1,362) - (1,380) -
--------- --------- --------- ----------
(1,512) (368) (1,709) (911)
--------- --------- --------- ----------
Income (loss) before income taxes (2,346) (2,295) (9,333) (6,851)
Income tax expense - - - (14)
--------- --------- --------- ----------
Net income (loss) $ (2,346) $ (2,295) $ (9,333) $ (6,865)
========= ========= ========= ==========
Earnings (loss) per common share
Basic $ (.03) $ (.13) $ (.10) $ (.12)
========= ========= ========= ==========
Diluted $ (.03) $ (.13) $ (.10) $ (.12)
======= ============ ============ ============
Weighted average common shares 90,807 55,556 90,807 58,686
Weighted average common shares -
assuming dilution 90,807 55,556 90,807 58,686
</TABLE>
See notes to consolidated financial statements.
3
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IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (9,333) $ (6,865)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Non-cash special charges
Depreciation and amortization 371 579
Amortization of capitalized software 2,851 -
Changes in operating assets and liabilities
Accounts receivable 1,704 285
Inventories 502 3,391
Prepaid expenses and other 896 (587)
Accounts payable and accrued expenses (3,713) (2,160)
------- --------
Net cash from operating activities (6,722) (5,357)
------- --------
Cash flows from investing activities
Capitalized software - (2,901)
Capital expenditures - (71)
----------- ----------
Net cash from investing activities - (2,972)
----------- -------
Cash flows from financing activities
Net borrowings under bank lines of credit 377 (601)
Net borrowings under short-term notes payable - 2,642
Net proceeds from issuance of common stock 6,971 2,034
Net proceeds from issuance of preferred stock - 3,506
Redemption of preferred stock - (2,228)
Issuance of long term debt - 675
Repayment of long-term debt - (354)
----------- --------
Net cash from financing activities 7,348 5,674
-------- -------
Net increase (decrease) in cash 626 (2,655)
Cash, beginning of period 75 3,023
---------- -------
Cash, end of period $ 701 $ 368
========= ========
</TABLE>
See notes to consolidated financial statements.
4
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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 March 31, 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
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 anti-dilutive effect on net earnings (loss) per share. The following is
a reconciliation of Basic EPS to Diluted EPS:
5
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<TABLE>
<CAPTION>
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
MARCH 31, 2000
<S> <C> <C> <C>
Net loss $ (9,333)
Preferred dividends (625)
--------
Basic and diluted EPS $ (9,958) 90,807 $ (0.10)
========= ======== ======
</TABLE>
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
Inventories
<S> <C> <C>
Materials and supplies $ 5 $ 5
Finished goods 45 52
-------- -----
$ 50 $ 57
======== =====
</TABLE>
NOTE 5. BANK LINES OF CREDIT
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.
6
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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
canceled 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. 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, 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 March 31, 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. 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 $721 thousand and $3.7 million for the quarters ended
March 31, 2000 and 1999, respectively. Sales of product were $260 thousand and
$3.2 million for the quarters ended March 31, 2000 and 1999, respectively. For
the nine months ended March 31, 2000 sales of product were $ 1.3 million
compared to $14.1 million for the nine months ended March 31, 1999. The decrease
in product sales from 1999 to 2000 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.
Engineering fees were $240 thousand and $110 thousand for the quarters ended
March 31, 2000 and 1999, respectively. For the nine months ended March 31, 2000
engineering fees were $265 thousand compared to $505 thousand for the nine
months ended March 31, 1999. The decrease in 2000 compared to 1999 was primarily
the result of the Company's change in strategic direction, focusing more on
internal product development and sales and less on engineering for third
parties. License fees and royalties were $221 thousand for the quarter ended
March 31, 2000 compared to $320 thousand in license fees and royalties in the
third quarter of fiscal 1999. For the nine months ended March 31, 2000 license
fees and royalties were $557 thousand compared to $483 thousand for the nine
months ended March 31, 1999. Royalties and licensing fees vary from quarter to
quarter and are dependent on the sales of products sold by OEM customers using
ITEC technologies.
COST OF PRODUCTS SOLD
Cost of products sold were $225 thousand or 87% of product
7
<PAGE>
sales and $2.5 million or 78% of product sales for the quarters ended March 31,
2000 and 1999, respectively. For the nine months ended March 31, 2000 cost of
products sold were $1.8 million or 144% of product sales compared to $9.9
million or 70% of product sales for the nine months ended March 31, 1999. The
large percentages of cost of goods sold in both 2000 and 1999 is due to the
liquidation sale of inventories substantially below cost as mandated by the
court-appointed operational receiver. (See Note 2 to the Consolidated Financial
Statements.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $822 thousand and
$2.9 million for the quarters ended March 31, 2000 and 1999, respectively. For
the nine months ended March 31, 2000 selling, general, and administrative
expenses were $5.8 million compared to $10.2 million for the nine months ended
March 31, 1999. Selling, general, and administrative expenses have consisted
primarily of court-appointed operational receiver costs, salaries and
commissions of sales and marketing personnel, salaries and related costs for
general corporate functions, including finance, accounting, facilities and
legal, advertising and other marketing related expenses, and fees for
professional services. The Company reduced its selling, general, and
administrative expenses $2.0 million or 71% for the three month period ended
March 31, 2000 from the year earlier period. Selling, general, and
administrative expenses for the nine month period ended March 31, 2000 were $5.7
million as compared to $10.2 million in the year earlier nine month period, a
reduction of $4.4 million or 44%. The decrease in selling, general and
administrative has been due primarily to an ongoing 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 were $508 thousand and $215 thousand for the quarters
ended March 31, 2000 and March 31, 1999, respectively. For the nine months ended
March 31, 2000 engineering costs were $2.1 million compared to $1.0 million for
the nine months ended March 31, 1999. In the previous fiscal year, the Company
had reduced 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 (Note 2
to the Consolidated Financial Statements), such product introductions have not
been realized. During fiscal 2000, the Company has increased its focus on
engineering in order to stimulate revenues from license fees and royalties,
which are not dependent upon inventories.
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.
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 March 31, 2000, the Company had negative working capital of $13.1
million as compared to negative working capital of $16.5 million at June 30,
1999. The $3.4 million increase in working capital is due primarily to increases
in paid-in capital, which has been the Company's principal source of liquidity
during fiscal 2000.
During the three month period ended March 31, 2000, the Company wrote
down $2.9 million in capitalized software. Management took this step due to the
Company's inability to provide the necessary resources to release, manufacture,
and market the associated products.
8
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Net cash used in operating activities increased to $6.7 million during
the nine month period ended March 31, 2000, from $5.4 million during the
year-earlier period, due primarily to an increase in the Company's net loss.
Net cash used in investing activities were zero during the nine month
period ended March 31, 2000, from $3.0 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 $7.3 million during the
nine month period ended March 31, 2000, from $5.7 million during the
year-earlier period. The increase was due to primarily to an increase in
proceeds from the issuance of common stock to $7.0 million from $2.0 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
March 31, 2000, 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 March 31, 2000, the Company had accumulated losses of
approximately $68.2 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.
9
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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
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 its
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."
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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.
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.
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.
11
<PAGE>
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.
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
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
12
<PAGE>
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.
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.
13
<PAGE>
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.
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. The
Company's shares of Common Stock were de-listed from trading on the Nasdaq
SmallCap Market in March 2000. The Company has appealed the de-listing and
Nasdaq is in the process of reviewing the de-listing. However, the Company
cannot be sure that Nasdaq will grant its appeal. The result of the de-listing
of the Company's stock from the Nasdaq SmallCap Market may continue to have a
negative effect on the liquidity of the stock and also may make it more
difficult for the Company to raise capital in the future.
The Company's common stock is currently listed on the NASD Electronic
Bulletin Board. The Company's common stock is 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
None.
14
<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. 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. On May 5, 2000, the jury in a Portland,
Oregon trial returned a verdict in favor of the Company and Brian Bonar, the
only remaining individual defendant, on all issues other than those related to
the letters of credit discussed above.
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 March
31, 2000, the amount in default was approximately $4,734,000. (Also see Note 2
to Consolidated Financial Statements.)
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders on May 11,
2000 to consider a number of proposals; the disposition of which is described
below:
1. Shareholders elected five persons to serve as directors on the
Company's Board of Directors until their successors are duly elected
and qualified. Directors elected were Brian Bonar, Keith Meadows,
Robert A. Dietrich, Eric W. Gaer, and Stephen J. Fryer. The breakdown
of voting was as follows:
For Against Abstain Unvoted
Bonar 82,035,653 2,043,744 - -
Meadows 82,041,103 2,038,324 - -
Dietrich 82,041,103 2,038,324 - -
Gaer 82,041,053 2,038,374 - -
Fryer 82,041,053 2,038,374 - -
2. Shareholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
Common Stock from 100,000,000 to 200,000,000. There were
79,311,439 votes cast for the Proposal, 4,389,695 votes against,
and 430,054 abstentions.
3. Shareholders approved an amendment to the Certificate of
Incorporation in order to effect a stock combination (reverse
split) of the Common Stock in an exchange ratio to be approved by
the Board of Directors before December 31, 2000, ranging from one
newly issued share for each two outstanding shares of Common Stock
to one newly issued share for each six outstanding shares of
Common Stock. There were 78,582,824 votes cast for the Proposal,
4,720,934 votes against, and 775,669 abstentions.
4. Shareholders approved the appointment of Boros & Farrington APC as
the Company's independent auditors for the fiscal year ending June
30, 2000. There were 82,056,453 votes cast for the appointment,
1,390,916 votes against, and 632,058 abstentions.
5. Proposals for approval of the Company's Employee Stock Purchase
Plan and the Company's 2000 Stock Option plan were not approved by
the shareholders because an insufficient number of votes were cast
for their consideration (67,723,839 shares were not voted).
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Sheet
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Securities and Exchange
Commission on January 7, 2000 with regard to a press release of January 3, 2000.
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: May 18, 2000
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/ BRIAN BONAR
- -----------------------
Brian Bonar
Chief Executive Officer
(Principal Financial and Accounting Officer)
17
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<PERIOD-END> MAR-31-2000
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