<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended
March 31, 1996 Commission File No. 33-27627
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3D IMAGE TECHNOLOGY, INC.
-------------------------
(Exact name of Registrant as specified in its charter)
Delaware 76-0265438
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(State of Incorporation) (IRS Employer Identification No.)
5172-G Brook Hollow Parkway, Norcross, Georgia 30071
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (770) 416-8848
including area code: --------------
(Former name, former address and former
fiscal year, if changed since last report)
INDICATE BY CHECK MARK 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 PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS THAT
THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES XXX NO
----- -----
21,117,787 COMMON SHARES WERE OUTSTANDING AS OF MARCH 31, 1996
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INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations
three months ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows
three months ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Change In Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Signatures
</TABLE>
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3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31
1996 1995
(Unaudited) (Note)
----------- -----------
ASSETS
<S> <C> <C>
Currents assets:
Cash and cash equivalents $2,885,926 $ 360,571
Accounts receivable net 780,771 754,623
Receivables from affiliates, net 1,083,616 --
Inventories 1,656,142 1,811,806
Prepaid expenses and other current assets 153,822 146,255
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Total current assets 6,560,276 3,073,254
Property and equipment, at cost:
Machinery and equipment 2,083,907 1,994,757
Leasehold improvements 13,321 13,321
Furniture and fixtures 19,047 19,047
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2,116,275 2,027,125
Less accumulated depreciation 420,609 369,279
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1,695,666 1,657,846
Other assets 8,589 11,451
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$8,264,531 $4,742,551
========== ==========
</TABLE>
NOTE:
The balance sheet at December 31, 1995 was derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
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3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31
1996 1995
(Unaudited) (Note)
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payables $ 1,881,391 $ 2,041,088
Accrued liabilities 611,831 255,706
Unearned revenue 49,194 52,057
----------- -----------
Total current liabilities 2,542,416 2,348,851
Shareholders' equity:
Preferred stock, par value $.001 per share:
Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Common stock, par value $.001 per share:
Authorized - 35,000,000, shares
Issued and outstanding - 21,117,787 and
19,125,250 shares 21,118 19,125
Additional paid-capital 8,505,017 4,749,510
Accumulated deficit (2,804,020) (2,374,935)
----------- -----------
Total shareholders' equity 5,722,115 2,393,700
----------- -----------
Total liabilities and shareholders' equity $ 8,264,531 $ 4,742,551
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
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3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
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<S> <C> <C>
Net Revenue:
Print Material $ 95,797 $ 2,030,608
Cameras 609,765 272,255
Printer Processors 520,788 75,000
Print Development 166,900 96,327
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Total Net Revenue 1,393,250 2,474,190
Cost of Sales
Print Material $ 55,992 $ 1,257,684
Cameras 359,099 122,224
Printer Processors 290,982 49,604
Print Development 81,619 29,560
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Total Cost of Sales 787,692 1,459,072
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Gross Margin 605,558 1,015,118
Operating Expenses
Selling Expense 315,349 90,283
Research and Development 37,780 70,938
General and Administrative 646,508 662,137
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Total Operating expenses 999,637 823,358
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Operating (Loss)/Income (394,079) 191,760
Net Interest Expense (35,005) (36,442)
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Net (Loss)/Income ($ 429,084) $ 155,318
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (Loss)/Income ($ 429,084) $ 155,318
Adjustments to reconcile net income/(loss),
to net cash used in operating activities:
Depreciation 51,329 53,560
Changes in operating assets and liabilities:
Accounts Receivable (26,147) 151,705
Inventories 155,664 727,672
Prepaid expenses and other assets (10,431) (258)
Accounts payable and accrued expenses 2,899,291 507,179
Other liabilities and unearned revenue -- (463,834)
----------- ----------
Net cash provided by operating activities 2,640,622 1,100,913
INVESTING ACTIVITIES
Purchases of property and equipment (89,150) --
----------- ----------
Net cash used in investing activities (89,150) 0
FINANCING ACTIVITIES
Net increase in receivable from affiliates (1,083,617) (446,358)
Proceeds from common stock subscribed 1,057,500 --
----------- ----------
Net cash used in financing activities (26,117) (446,358)
Increase (decrease) in cash 2,525,355 (654,555)
Cash, beginning of quarter 360,571 56,745
----------- ----------
Cash, end of quarter $ 2,885,926 $ 711,300
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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3D IMAGE TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB and Article
10 of Regulation S-X. Accordingly they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month periods
ended March 31, 1996, are not necessarily indicative of results that may be
expected for the year ended December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
3D Image Technology, Inc. annual report on Form 10-K for the year ended
December 31, 1995.
Note B - Inventories
Inventories at March 31 are summarized as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Finished goods:
Consumer cameras $ 153,751
Printer processors 219,612
Print material 786,135
Raw material and component parts 496,644
----------
$1,656,142
==========
</TABLE>
Note C - Shareholders' Equity
On January 30, 1996, the Company executed a letter of intent with an Asian
investor (the "Investor"), providing for equity financing in an amount equal
to or less than $20 million. On February 6, 1996, the Company received $3
million as part of this financing agreement, and in exchange issued 1,492,537
common shares at a price of $2.01 per share. The initial funding agreement
(the "Agreement") provided for a 90 day due diligence period, ending May 6,
1996, at the conclusion of which, the Investor was to contribute an additional
$17 million for an additional 8,457,711 shares of common stock. In the event
that the Investor determined not to make an
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additional investment, the Company, pursuant to the Investor's exercise of the
Put Right provisions of Section 11 of the Agreement, agreed to redeem such
initial $3 million investment.
If not redeemed in cash, such amount would be converted to a promissory note
secured by certain assets of the Company, and the Parent, due 120 days
thereafter, with interest thereon at prime plus 2%. On May 2, 1996, the
Investor requested an extension of the 90 day due diligence period. No
extension was granted thus on May 6, 1996, the Investor gave notice of their
intention not to proceed with the transaction and exercise the Put Right.
On May 21, 1996, the Company and the Investor amended certain sections of the
Agreement, which revoked the Investor's May 6 notices pertaining to the Put
Right and extended the due diligence period 90 days. In connection with the
amendment, the Company and the Investor agreed that in the event that the
Investor determines not to make an additional investment, the Put Right may be
exercisable during the period August 6, 1996 to August 13, 1996 (including such
dates). If the Put Right is exercised but is not redeemed in cash, the unpaid
portion of the Put Right will be converted to a promissory note secured by
certain assets of the Company, and the Parent, due 60 days thereafter (on or
about October 6, 1996), with interest thereon at prime plus 2%. In addition,
the amendment removed provisions whereby the Investor had rights of first
refusal and anti-dilution provisions related to other issuances by the Company,
except that the Company is required to apply the proceeds of any such issuance
to repay any amounts which may be outstanding resulting from the Investor's
exercise of the Put Right. As a result, negotiations with other funding
sources, suspended under the original terms of the agreement, have been
resumed.
In March 1996, a subscription agreement for 500,000 shares of common stock of
the Company was executed and the shares were issued for total consideration of
$1,175,000 received by the Company. A second subscription agreement for the
same price and number of shares has also been signed and is due July 21, 1996.
This subscriber is not affiliated in any way with the Company or any officer,
director, or employee of the Company.
On January 1, 1996, the Company issued warrants for the sale of 400,000 shares
of $.001 par value common stock to Kalimar, Inc. (the "Warrant holder") at a
price of $2.40 per share. Such warrants have a term of one year and the
Warrant holder or its successors may sell, assign, exchange or transfer these
warrants in accordance with applicable securities laws. If the shares
underlying the warrants are not included in an effective registration statement
filed by the Company prior to the exercise date, the Company has agreed to
register the shares and to extend the exercise date in order to complete the
registration. If the warrant is exercised according to its terms, the Company
also has agreed to issue a second warrant on similar terms, for 400,000 shares
at a price equal to 10% less the average trading price for the shares plus $.15
per share. In exchange for these warrants and in a
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separate agreement dated January 30, 1996, Kalimar, Inc. agreed to market and
distribute consumer cameras to certain customers on behalf of the Company up to
December 31, 1998.
Note D - Contingent Matters
On October 5, 1995, ITII and the Company approved a plan of merger of the
affiliated companies. Subsequent to the completion of this merger, the Company
will survive as the parent company of the affiliated group. Under the plan of
merger, each share of ITII common stock and Class A preferred stock will be
redeemed and canceled by ITII. Such redemption will be effected through the
issuance of common shares of the Company, the survivor, in proportion to the
pre-merger ITII ownership. This plan of merger has been postponed.
This plan of merger was postponed because of continuing negotiations with an
Asian investor group for a significant capital investment in the Company and
continuing management discussions regarding the optimum corporate structure
after the merger. It is anticipated that the merger will be submitted to the
shareholders at the next shareholder meeting.
Image Technology (Hong Kong) Ltd. (ITHK), an affiliate of the Company, is
liable for legal fees estimated to be in the range of $600,000, arising out of
a lawsuit filed by ITHK on its own behalf and on behalf of two unrelated
Chinese companies seeking damages for fraud and misrepresentation. The
defendants in that suit, an individual resident of Hong Kong and companies
controlled by or affiliated with that individual, were represented by Hong Kong
Legal Aid, after claiming no assets or income to pay legal expenses. While
ITHK believes that the individual transferred and concealed assets to avoid
liability, the cost of proceeding with the lawsuit was prohibitive and
collection of any judgement was problematic. Accordingly, ITHK withdrew the
lawsuit, giving rise to liability for legal fees under the Hong Kong (British)
system of reimbursement of costs of litigation. The Company has obtained a
formal opinion of independent Hong Kong legal counsel that the company has no
liability for any such legal fees or costs assessed against ITHK.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total sales decreased by $1,084,000, to approximately $1,390,000 for the
quarter ended March 31, 1996, from approximately $2,474,000 for the quarter
ended March 31, 1995. This decrease was the result of one large sale of print
material in the first quarter of 1995 of $1,900,000, which was not repeated in
the first quarter of 1996. This drop in the first quarter of 1996 sales was
mitigated by increases in consumer camera sales of $337,000, printer
processors sales of $445,000, and print development sales of $71,000.
Cost of sales decreased by approximately $670,000, from approximately
$1,459,000 for the quarter ended March 31, 1995 to approximately $788,000 for
the quarter ended March 31, 1996. This decrease was directly related to the
decrease in print material sales.
Gross margins on revenues decreased from approximately $1,015,000 for the
quarter ended March 31, 1995 to approximately change to $606,000 for the
quarter ended March 31, 1996, as the Company sold less print material in the
first quarter of 1996 as compared to the 1995 first quarter. The gross margin
percentage for the quarter ended March 31, 1996 was 43% as compared to 41% for
the quarter
7
<PAGE> 10
ended March 31, 1995.
Selling expenses were approximately $315,000 for the quarter ended March 31,
1996, or 23% of total revenues, as compared to approximately $90,000 for the
quarter ended March 31, 1995, or 3% of total revenues. Additional selling
expenses are instrumental to increased camera sales.
Research and development expenses decreased from approximately $71,000 for the
quarter ended March 31, 1995 to approximately $38,000 for the quarter ended
March 31, 1996. Such expenditures are associated with research and development
of existing and potential new three dimensional products and services.
The net loss increased by approximately $584,000 from income for the quarter
ending March 31,1995 of approximately $155,318 to a loss of approximately
$429,000 for the quarter ending March 31, 1996, respectively. The increase in
the 1996 loss as compared to 1995 is primarily a result of the decrease in
gross margin from the decline in print material sales, and the increase in
selling expenses.
Receivables from affiliates increased in the first quarter of 1996 due to the
payment of a large print material invoice for a related company by the Company.
Management expects this balance to be repaid by the end of 1996.
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company has adopted Statement
121 in the first quarter of 1996 and, and based on the best information
available regarding the undiscounted cash flows from future operations, no
recognition of impairment losses is required on any company assets.
Liquidity and Sources of Capital
Cash provided by operations during the period ended March 31, 1996 totaled
approximately $2,640,000 as compared to cash provided by operations for the
period ended March 31, 1995 totaling approximately $1,101,000. This cash was
provided from increases in accounts payable and accrued expenses in both 1996
and 1995, and reductions in inventory in 1995.
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<PAGE> 11
On January 30, 1996, the Company executed a letter of intent with an Asian
investor (the "Investor"), providing for equity financing in an amount equal to
or less than $20 million. On February 6, 1996, the Company received $3 million
as part of this financing agreement, and in exchange issued 1,492,537 common
shares at a price of $2.01 per share. The initial funding agreement (the
"Agreement") provided for a 90 day due diligence period, ending May 6, 1996, at
the conclusion of which, the Investor was to contribute an additional $17
million for an additional 8,457,711 shares of common stock. In the event that
the Investor determined not to make an additional investment, the Company,
pursuant to the Investor's exercise of the Put Right provisions of Section 11
of the Agreement, agreed to redeem such initial $3 million investment. If not
redeemed in cash, such amount was to be converted to a promissory note secured
by certain assets of the Company, and the Parent, due 120 days thereafter, with
interest thereon at prime plus 2%. On May 2, 1996, the Investor requested an
extension of the 90 day due diligence period. No extension was granted thus on
May 6, 1996, the Investor gave notice of their intention not to proceed with
the transaction and exercise the Put Right.
On May 21, 1996, the Company and the Investor amended certain sections of the
Agreement, which revoked the Investor's May 6 notices pertaining to the Put
Right and extended the due diligence period 90 days. In connection with the
amendment, the Company and the Investor agreed that in the event that the
Investor determines not to make an additional investment, the Put Right may be
exercisable during the period August 6, 1996 to August 13,1996 (including such
dates). If the Put Right is exercised but is not redeemed in cash, the unpaid
portion of the Put Right will be converted to a promissory note secured by
certain assets of the Company, and the Parent, due 60 days thereafter (on or
about October 6, 1996), with interest thereon at prime plus 2%. In addition,
the amendment removed provisions whereby the Investor had rights of first
refusal and anti-dilution provisions related to other issuances by the Company,
except that the Company is required to apply the proceeds of any such issuance
to repay any amounts which may be outstanding resulting from the Investor's
exercise of the Put Right. As a result, negotiations with other funding
sources, suspended under the original terms of the agreement, have been
resumed. The Company has also delayed the plan of merger at this point.
Management of the Company continues to seek additional sources of capital
including the completion of the financing discussed above. Management believes
that such additional capital is necessary to enable the Company to effectively
market and distribute its 3D cameras, as well as establish an adequate print
development infrastructure in the markets in which the Company plans to
increase distribution. No assurance can be given that the Company will be able
to obtain such capital in order to continue the Company's investment in
marketing, distribution, and the development of a print development network.
9
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending in 1996 in which the Registrant was
named as a party.
On March 13, 1995, Image Technology International, Inc. ("ITII"), parent of the
Registrant, filed a Complaint against Jerry C. Nims, NimsTec, LLC, LenTec
Imaging, Inc., and Thomas J. Steimer in the Superior Court of Fulton County,
Georgia. Subsequently, the case was transferred to the Superior Court of
Walton County, Georgia. The Complaint alleges that commencing in approximately
February, 1994, Defendants engaged in a course of conduct and conspiracy to
injure and destroy the business and reputation of ITII, including the 3D camera
business operated by the Company, in order to gain unfair and unlawful
competitive advantage, by making and disseminating false statements and false
claims regarding ITII and its principal officers and directors.
ITII was granted a temporary restraining order against Defendants on March 14,
1995. This restraining order was extended indefinitely on April 14, 1995 and
remains in effect. ITII is also seeking damages for Defendants' intentional
interference with ITII's business and contractual relations, and for exemplary
damages to deter similar fraudulent and unlawful conduct, in an amount to be
determined at trial. Defendants filed answers to the Complaint generally
denying the allegations. No claims have been filed in the case by any
Defendant against the Company or ITII.
The case is still pending and the period for discovery has now ended,
although the Defendants engaged in no discovery. Defendants recently filed a
motion to disqualify ITII's legal counsel in the action on the grounds that he
was also a director of ITII and the Company and allegedly owned an interest in
either ITII or the Company. Defendants' theory was that, if such an interest
existed and, as Defendants further argued, ITII sought the restraining order
against further false statements by Defendants, solely as an
anti-competitive device to prevent Defendants from entering into the 3D
consumer markets, then ITII's counsel would have a conflict of interest. As a
second theory, Defendants argued that the Company, with the assistance of
counsel, issued unregistered shares in 1993 to a Bahamas company, Drummend Pal,
S.A., an unrelated entity, in reliance on the Regulation S exemption from
registration, but that this exemption did not apply. This motion has been
responded to on behalf of ITII, denying that any such conflict exists, among
other reasons because counsel owns no stock or stock options either in the
Company or in ITII. With respect to the alleged Regulation S offering
violation, prior to 1994, the Company was an inactive shell company
unaffiliated with ITII and no shares were issued by the Company to Drummend
Pal, S.A. or anyone else in 1993, whether or not in reliance on Regulation S.
The Company first became affiliated with ITII in January 1994 (after the
alleged Regulation S offering), when the Company acquired all of the assets of
a subsidiary of ITII for stock. No decision has been entered yet by the Court,
although ITII is confident that the motion will be denied since there is no
basis for the motion. In addition, despite lack of any factual or legal basis
for the motion to disqualify, ITII's counsel in the lawsuit, Mr. Robert Hipple,
advised the board of Directors of the Company that he would not stand for
re-election to the Board of the Company or ITII at the next annual shareholder
meeting, so that such similar frivolous
10
<PAGE> 13
motions can be prevented. On June 5, 1996, Defendants also filed a Motion to
Dissolve the Temporary Restraining Order, on the grounds that it had been
entered without their consent and knowledge, despite actual service on
Defendants and their appearance at the last hearing extending the restraining
order. This motion also has been responded to by ITII.
Item 2. Change in Securities
In January 1996, the Company issued a warrant for the purchase of 400,000
shares of common stock at $2.40 per share, exercisable until June 30, 1997 or
one year after the effective date of a registration statement including the
shares underlying the warrant, whichever is later, to Kalimar, Inc., a
manufacturer and distributor of cameras and photographic supplies, as part of a
distribution agreement between the Company and Kalimar. On exercise of the
initial warrant, a second warrant will be issued to Kalimar for an additional
400,000 shares at a price equal to ten percent less than the average trading
price of the shares when the warrant was issued, plus $0.15.
In March 1996, a Subscription Agreement for 500,000 shares of common stock of
the Company was executed and the shares were issued for total consideration of
$1,175,000 received by the Company. A second subscription agreement for the
same price and number of shares has also been signed and is due July 21, 1996.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's security holders
during the first quarter of the fiscal period covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
11
<PAGE> 14
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 hereunto duly authorized.
3D IMAGE TECHNOLOGY, INC.
7/3/96 /s/ ALLEN LO
- ------------------------------ ------------------------------------
Date ALLEN LO
Chairman and Chief Executive Officer
7/3/96 /s/ SUNNY IP
- ------------------------------ ------------------------------------
Date SUNNY IP
Director and Treasurer
12
