<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
September 30, 1996 Commission File No. 33-27627
- -------------------------------------------------------------------------------
3D IMAGE TECHNOLOGY, INC.
-------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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:
</TABLE>
Not applicable
------------------------------------------------
(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 SEPTEMBER 30, 1996
<PAGE> 2
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations
three months ended September 30, 1996 and 1995;
nine months ended September 30, 1996 and 1995; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows
nine months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements September 30, 1996 . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Change In Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures
</TABLE>
<PAGE> 3
3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
(Unaudited) (Note)
------------ ------------
<S> <C> <C>
ASSETS
Currents assets:
Cash and cash equivalents $ 581,945 $ 360,571
Accounts receivable, net 977,684 754,623
Receivables from affiliates, net 2,229,052 -------
Inventories-Note B 1,511,412 1,811,806
Prepaid expenses and other current assets 191,752 146,254
---------- ----------
Total current assets 5,491,845 3,073,254
Property and equipment, at cost:
Machinery and equipment 2,143,371 1,994,757
Leasehold improvements 13,321 13,321
Furniture and fixtures 19,047 19,047
---------- ----------
2,175,739 2,027,125
Less accumulated depreciation 528,899 369,279
---------- ----------
1,646,840 1,657,846
Other assets 2,863 11,451
---------- ----------
Total assets $7,141,548 $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.
1
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3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
(Unaudited) (Note)
------------ -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $1,155,707
$2,041,088
Promissory note payable -1,492,537 shares 3,000,000 ------
of redeemable common stock
Accrued liabilities 514,807 255,706
Unearned revenue ------ 52,057
---------- ----------
Total current liabilities 4,670,514 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
(including 1,492,537 shares of redeemable
common stock) shares at September 30, 1996
and December 31, 1995, respectively 19,625 19,125
Additional paid-capital 5,924,510 4,749,510
Accumulated deficit -3,473,101 -2,374,935
---------- ----------
Total shareholders' equity 2,471,034 2,393,700
---------- ----------
Total liabilities and shareholders' equity $7,141,548 $4,742,551
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
3D IMAGE TECHNOLOGY, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------- -------------
1996 1995 1996 1995
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net Revenue:
Print Material $ 55,104 $ 63,905 $ 232,429 $2,124,066
Cameras 899,987 660,748 2,151,005 1,422,156
Printer Processors 127,500 197,500 676,375 349,500
Print Development 242,341 155,339 640,847 391,565
---------- ---------- ----------- ----------
Total Net Revenue 1,324,932 1,077,492 3,700,656 4,287,287
Cost of Sales
Print Material 32,153 23,343 135,413 1,292,454
Cameras 518,066 311,887 1,326,168 664,732
Printer Processors 88,213 118,459 458,709 216,981
Print Development 151,894 148,213 467,539 350,516
---------- ---------- ----------- ----------
Total Cost of Sales 790,326 601,902 2,387,829 2,524,683
---------- ---------- ----------- ----------
Gross Margin 534,606 475,590 1,312,827 1,762,604
---------- ---------- ----------- ----------
Operating Expenses
Selling Expense 201,449 124,766 619,171 316,709
Research and Development 129,805 156,080 339,908 592,180
General and Administrative 413,626 577,095 1,310,920 1,607,145
---------- ---------- ----------- ----------
Total Operating expenses 744,880 857,941 2,269,999 2,516,034
Operating Loss -210,274 -382,351 -957,172 -753,430
---------- ---------- ----------- ----------
Net Interest Expense -72,411 -36,442 -140,994 -109,326
---------- ---------- ----------- ----------
Net Loss $ -282,685 $ -418,793 $-1,098,166 $ -862,756
========== ========== =========== ==========
Net loss per share $ -.01 $ - .02 $ - .06 $ - .05
========== ========== =========== ==========
Weighted average shares outstanding 19,375,250 18,102,189 19,375,250 18,102,189
========== ========== =========== ==========
</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>
Nine Months Ended
September 30
------------
1996 1995
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $-1,098,166 $-862,759
Adjustments to reconcile net income/(loss),
to net cash used in operating activities:
Depreciation 159,620 159,194
Changes in operating assets and liabilities:
Accounts Receivable -223,061 -401,840
Inventories 418,216 47,254
Prepaid expenses and other -36,910 -61,631
Accounts payable and accrued expenses -885,381 1,421,164
Other liabilities and unearned revenue 207,044 -403,954
----------- ---------
Net cash used by operating activities -1,458,638 -102,572
INVESTING ACTIVITIES
Purchases of property and equipment -148,614 -7,182
----------- ---------
Net cash used -148,614 -7,182
FINANCING ACTIVITIES
Proceeds from promissory note payable 3,000,000 -----
Proceeds from common stock subscribed 1,175,500 762,385
Net increase in receivable from affiliates -2,346,874 -433,103
----------- ---------
Net cash provided by financing activities 1,828,626 329,282
Increase in cash 221,374 219,528
Cash, beginning of period 360,571 56,745
----------- ---------
Cash, end of period $ 581,945 $ 276,273
=========== =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
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 quarter
period ended September 30, 1996, are not necessarily indicative of results that
may be expected for the year ended December 31, 1996. Certain
reclassifications have been made in the first and second quarter Condensed
Consolidated Statements of Operations between cost of sales, and operating
expenses (including selling expense, research and development, and general and
administrative). 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 September 30, are summarized as follows:
<TABLE>
<CAPTION>
Finished goods: 1996 1995
---- ----
<S> <C> <C>
Consumer cameras $ 138,506 $ 192,137
Printer processors 44,106 201,152
Print material 739,689 919,462
Raw material and component parts 589,111 499,055
---------- ----------
$1,511,412 $1,811,806
========== ==========
</TABLE>
Note C - Promissory Note
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.
5
<PAGE> 8
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 would be converted to a
promissory note secured by the 1,492,537 shares already issued and by certain
assets of the Company, and the Parent, due 120 days thereafter, with interest
thereon at prime plus 2%.
On May 21, 1996, the Company and the Investor amended certain sections of the
Agreement, which 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 determined 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 was 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, were resumed. On
August 12, 1996, the Investor gave notice of their intent to exercise the Put
Right, and the conversion of the equity investment to a promissory note has
been reflected in the financial statements for the quarter ended June 30, 1996.
The due date of the promissory note has been extended, and on November 12,
1996, the Investor proposed a further extension of the due date to January 12,
1997. The 1,492,537 shares of stock issued by the Company remain outstanding as
part of the securities for the note, and the Investor can sell the shares with
the sale proceeds applied to the balance due on the note. The interest on this
note has been properly reflected in the increased interest expense for the
quarter ended September 30, 1996.
Note D - Shareholder's Equity
In March 1996, a previous subscription agreement for 500,000 shares of common
stock of the Company was funded and the shares were issued for total
consideration of $1,175,000 received by the Company. The 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
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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 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 E - 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 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. The merger has been approved by the shareholders and is
expected to be completed on December 31, 1996, subject, however, to the results
of the funding negotiations which are still underway.
Note F - Management's Plan of Operations
In connection with the promissory note discussed in Note C, the Company is
seeking additional sources of capital. In addition, the rapid increase in
sales, and the related demands on working capital, have further intensified the
Company's efforts to obtain capital and reduce operating costs. The increase
in camera sales requires the Company to increase raw material purchases and
camera production to meet demand and also to increase both printer/processors
and print material production to service the increased camera volume.
Management is working to reduce or defer any costs, such as general and
administrative, marketing and research and development, that will not
negatively impact the long term growth of the Company, and to increase gross
margin.
The low volume production of cameras has resulted in increases in the cost of
goods sold in 1996 due to the need to maintain certain fixed manufacturing
overhead in spite of fluctuating sales. Management believes recent increases in
sales volume will provide opportunities for improved production planning and
lower cost freight alternatives, with related cost of goods sold reductions.
Additionally, management is currently reviewing the feasibility of establishing
a recycling center for the one time use cameras at its headquarters in Atlanta,
thereby eliminating certain costs of shipping the used cameras to the Chinese
manufacturing facility, and then back to the United States, and the related
import duties.
Regarding print development costs, the Company's Atlanta operations have now
implemented new procedures by which each printer operator's productivity is
tracked on a daily basis to provide for comparisons among employees so that
processing improvements can be tracked.
7
<PAGE> 10
Management is also evaluating the purchase of additional equipment to enhance
the productivity of the current printer processors by improving the processing
of over and under exposed film and the processing of different types of films.
The first unit of this equipment is expected to be installed in the next three
months, and should result in savings in both labor and material costs. At this
time all aspects of manufacturing and production are being analyzed. Cost
cutting measures, where appropriate, are being instituted.
In addition Mr. Allen Lo, President of the Company, has been meeting with a new
investor group in Asia during November 1996 in an effort to complete this new
financing. Management believes that additional capital is necessary to enable
the Company to effectively market and distribute its 3D cameras, as well as to
establish an adequate print development infrastructure in the markets in which
the Company plans to increase distribution. A preliminary understanding has
been reached with the new investor in Asia which will result in a total
investment of $20,000,000 for 10,000,000 shares of common stock, if completed.
Management is continuing to pursue this agreement and meetings have been held
with this investor group in Atlanta and in Asia. A final decision is expected
in the next few weeks. No assurance can be given that the Company will be able
to obtain additional capital in order to continue the Company's investment in
marketing, distribution, and the establishment of a print development network.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total sales increased by $247,500 to approximately $1,325,000 for the quarter
ended September 30, 1996, from approximately $1,077,500 for the quarter ended
September 30, 1995. This 23% increase was a direct result of increases in the
Company's core business of cameras sales up $239,200 and related print
development sales increases up $87,000.
Year to date sales were down by $586,700 for the three quarter period ending
September 30, 1996, to approximately $3,700,600, from approximately $4,287,300
for the same period ended September 30, 1995. During the first quarter of 1995
there was a one time print material sale to a related party of $1,900,000. This
drop in print material sales in 1996 was mitigated by increases in consumer
camera sales of $728,900, printer processor sales of $326,900 and print
development sales of $249,300.
Cost of sales was $790,300 for the quarter ended September 30, 1996, an
increase of approximately $188,400, from approximately $601,900 for the
quarter ended September 30, 1995. This increase was directly related to
increased sales volumes of cameras, printer processors, and print development.
For the three quarter period ended September 30, 1996, cost of sales decreased
by approximately $136,900, from approximately $2,524,700 for the three quarter
period ended September 30, 1995 to approximately $2,387,800 for the period
ended September 30, 1996.
8
<PAGE> 11
Gross margins on revenues increased from approximately $ 475,600 for the
quarter ended September 30, 1995 to approximately $534,600 for the quarter
ended September 30, 1996. The gross margin percentage for the quarter ended
September 30, 1995 was 44% as compared to 40% for the quarter ended September
30, 1996.
Gross margins on revenues decreased from approximately $1,762,600 for the three
quarter period ended September 30, 1995 to approximately $1,312,800 for the
period ended September 30, 1996. However, it should be noted that the
$1,900,000 print material sale in the first quarter of 1995 produced a gross
margin of approximately $722,000. The year to date September 30, 1995 gross
margin with this sale removed would be $1,040,600 as compared to the year to
date September 30, 1996 contribution margin of $1,312,000, an increase of
$271,400 over 1995. The gross margin percentage for the three quarter period
ended September 30, 1995 was 41% as compared to 35% for the period ended
September 30, 1996.
Selling expenses were approximately $201,500 for the quarter ending September
30, 1996, or 15% of total revenues, as compared to approximately $124,800 for
the quarter ending September 30, 1995, or 12% of total revenues. Selling
expenses were approximately $619,200 for the three quarter period ended
September 30, 1996, or 17% of total revenues, as compared to approximately
$316,700 for the three quarter period ended September 30, 1995, or 7% of total
revenues. Additional selling expenses bear a direct relationship to increased
camera sales.
Research and development expenses decreased from approximately $156,000 for the
quarter ended September 30, 1995 to approximately $130,000 for the quarter
ended September 30, 1996. For the three quarter period ended September 30,
1996 research and development expenses were $340,000 a decrease over the
expenditure of $592,000 for the same period ended September 30, 1995. Such
expenditures are associated with research and development of existing and
potential new three dimensional products and services.
Interest expense for the quarter ended September 30, 1996 was $72,400, an
increase of approximately $36,000 over the quarter ended September 30, 1995.
This increase was directly related to the interest expense recorded on the
$3,000,000 promissory note.
The net loss for the quarter ended September 30, 1996 was $282,700 as compared
to a loss of $418,800 for the same period last year, a decrease of $136,100.
For the nine months period ended September 30, 1996 the net loss was $1,098,200
as compared to $862,800 for the same period in 1995. This increase in
year-to-date losses of $235,400 in 1996, as compared to 1995, is a direct
result of the decrease in gross margin from the decline in print material
sales, mitigated by declines in research and development and general and
administrative expense in 1996. Management is striving to improve gross profit
margins and cut unnecessary expenses to achieve break-even without sacrificing
sales increases or technology advancement.
Receivables from affiliates increased to $2,229,100 in 1996 from payment of
expenses for costs charged to an affiliate, in anticipation of the merger.
This affiliate is included in the plan of merger discussed in Note E.
9
<PAGE> 12
Trade accounts payable decreased to $1,155,700 in 1996 due to the payment of a
large balance due to an unrelated party for print material. The $3,000,000
promissory note payable relates to the exercise of the Put Right by a former
investor as discussed in Note C.
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, based on projected cash flows from future
operations, which consider both revenue increases and expense reduction
measures, management believes no recognition of impairment losses is required
on any Company assets.
Liquidity and Sources of Capital
Net increase in cash during the nine month period ended September 30, 1996
totaled approximately $221,400 as compared to the net increase in cash for the
period ended September 30, 1995 totaling approximately $219,500.
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
$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 the additional investment, the Company,
pursuant to the Investor's exercise of the Put Right provisions of Section 11
of the Agreement, agreed to redeem the initial $3 million investment. If not
redeemed in cash, that amount would be converted to a promissory note secured
by the 1,492,537 shares of common stock, which remain outstanding, and by
certain assets of the Company, and the Parent, due 120 days thereafter, with
interest thereon at prime plus 2%.
On May 21, 1996, the Company and the Investor amended certain sections of the
Agreement, which extended the due diligence period for 90 days. In connection
with the amendment, the Company and the Investor agreed that in the event the
Investor determined not to make the additional investment, at the end of the
extended due diligence period the Put Right may be exercisable during the
period August 6, 1996 to August 13, 1996 (including such dates). If the Put
Right was exercised but was not redeemed in cash, the unpaid portion of the Put
Right would be converted to a promissory note secured by the stock and by
certain assets of the Company, and the Parent, due 60 days thereafter (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 equity issuances by the Company,
except that the Company will be required to apply the proceeds of any such
equity issuance to repay any
10
<PAGE> 13
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, were resumed. On August 12, 1996,
the Investor gave notice of its intent to exercise the Put Right, and the
conversion of the equity investment to a promissory note was reflected in the
financial statements for the quarter ended June 30, 1996. The due date of the
promissory note has been extended, and on November 12, 1996, the Investor
proposed a further extension of the due date to January 12, 1997. The Investor
also is able to sell the stock and apply the proceeds to the note.
Additionally, the rapid increase in sales, and the related demands on working
capital, has further intensified the Company's efforts to obtain capital and
reduce operating costs. The increase in cameras sales requires the Company to
increase raw material purchases and camera production to meet demand and also
to increase both printer/processors and print material production to service
the increased camera volume. Management is working to reduce or defer any
costs, such as general and administrative, marketing and research and
development, that will not negatively impact the long term growth of the
company, and to increase gross margin.
The low volume production of cameras has resulted in increases in the cost of
goods sold in 1996 due to the need to maintain certain fixed manufacturing
overhead in spite of fluctuating sales. Management believes recent increases in
sales volume will provide opportunities for improved production planning and
lower cost freight alternatives, with related cost of goods sold reductions
Additionally, management is currently reviewing the feasibility of establishing
a recycling center for the one time use cameras at its headquarters in Atlanta,
thereby eliminating certain costs of shipping the used cameras to the Chinese
manufacturing facility, and then back to the United States, and the related
import duties.
Regarding print development costs, the Company's Atlanta operations have now
implemented new procedures by which each printer operator's productivity is
tracked on a daily basis to provide for comparisons among employees so that
processing improvements can be tracked. Management is also evaluating the
purchase of additional equipment to enhance the productivity of the current
printer processors by improving the processing of over and under exposed film
and the processing of different types of films. The first unit of this
equipment is expected to be installed in the next three months, and should
result in savings in both labor and material costs. At this time all aspects of
manufacturing and production are being analyzed. Cost cutting measures, where
appropriate, are being instituted.
Management of the Company continues to seek additional sources of capital. Mr.
Allen Lo, President of the Company, has been meeting with a new investor group
in Asia during November 1996 in an effort to complete this new financing.
Management believes that additional capital is necessary to enable the Company
to effectively market and distribute its 3D cameras, as well as to establish an
adequate print development infrastructure in the markets in which the Company
plans to increase distribution. A preliminary understanding has been reached
with the new investor in Asia which will result in a total investment of
$20,000,000 for 10,000,000 shares of common stock, if completed. Management is
continuing to pursue this agreement and meetings
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<PAGE> 14
have been held with this investor group in Atlanta and in Asia. A final
decision is expected in the next few weeks. No assurance can be given that the
Company will be able to obtain additional capital in order to continue the
Company's investment in marketing, distribution, and the establishment of a
print development network.
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. There have been no further developments in the case.
Although not involving the Company directly, an issue has been raised with
respect to a proposed, but never completed, transaction in June 1995 between
the parent company, Image Technology International, Inc. (ITII) and several
companies in Europe. Although management of ITII believes that there is no
basis for any dispute, the issue is being noted because of the planned merger
of ITII into the Company. This matter relates to a proposed acquisition of the
assets of ND3D BV, a Dutch privately-held company which had acted as a
non-exclusive marketing representative for ITII in Europe for hard copy 3D
prints of images produced by the digital imaging technology of ITII. After
several earlier joint venture agreements with ND3D BV had been abandoned due to
ND3D's inability to perform, in June 1995, ITII entered into an agreement in
principle with ND3D BV and its new majority shareholder, ElectroGig Holdings,
BV under which ITII agreed that it would issue 3.25 percent of its stock
outstanding, after the then proposed merger of the Company into ITII, to ND3D
and ElectroGig in return for (1) all
12
<PAGE> 15
of the assets of ND3D, to be identified in detail; (2) ElectroGig 3D rendering
software with a retail value of $5 million; and, (3) an ongoing manufacturing
and marketing arrangement with ElectroGig. Completion of the transaction was
subject to a number of preconditions including the delivery of a detailed asset
list by ND3D to establish the nature and value of the assets to be acquired,
negotiation and delivery of agreements between ITII and ElectroGig and delivery
of the 3D modeling software; employment of Andrew Joel, a principal of ND3D by
ITII to replace his employment with ND3D, which would no longer be able to
employ him; and approval of the transaction by the respective Boards of
Directors of the parties. All of the conditions were required to be met by
closing, which was scheduled on or before July 15,1995. Although Mr. Joel
became an employee of ITII in July 1995, under a written employment contract,
none of the other conditions were met and no assets list was provided. As a
result, the transaction was never submitted to or approved by the Board of ITII
and never closed.
Renewed discussions of a possible asset acquisition and a joint venture were
begun again with ElectroGig in early 1996 and continued until mid-Summer 1996,
when all further discussions with ElectroGig ended, for reasons not known to
ITII. In September, 1996, ITII was informed that ElectroGig had filed for
bankruptcy in The Netherlands and was in the process of liquidation. At that
time ITII began receiving demands from the shareholders of ND3D BV, including
Mr. Joel, and the bankruptcy trustee for ElectroGig, to complete the June 1995
transaction. ITII, through legal counsel, has advised ND3D that it is still
prepared to discuss a form of asset acquisition with ND3D, which had earlier
ended as a result of ElectroGig's bankruptcy, provided that a detailed,
realistic list of the ND3D assets being offered was made available. With the
demise of ElectroGig, ND3D also was advised that any such discussions would be
limited to the identity and value of the assets to be acquired and the share
consideration to be exchanged. In view of the pending merger of ITII into the
Company, any proposal by ND3D would have to be submitted to the Board of
Directors of the Company for consideration and approval, since any
consideration to be paid for any assets acquired would presumably involve
shares of the Company after the merger. The matter remains under discussion
between legal counsel for ITII and the Trustee for ElectroGig.
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 they claimed 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 judgment 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. ITHK has made formal
application for dissolution under Hong Kong law, and is in the process of
winding up. The dissolution of ITHK, which has no assets, is not expected to
have any effect on ITII or the Company. The Company has obtained a formal
opinion of independent Hong Kong legal counsel that the Company has no
liability for any legal fees or costs assessed against ITHK.
13
<PAGE> 16
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.
The promissory note for $3 million due to the Asian investor, secured by
certain assets of the Company as well as 1,492,537 shares of stock in the
Company has come due, but the Investor has proposed to an extension of the due
date until January 12, 1997. The Investor also has indicated that it would
consider additional extensions. The Company has agreed to continue its efforts
to raise additional equity capital and to apply the additional equity to the
loan. Mr. Allen Lo, President of the Company, has met with the principals of
the Investor as well as other interested investors in Asia in order to
finalize the terms of the extension and the new equity funding.
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 third quarter of the fiscal period covered by this report. The
majority shareholder of the Company executed a written consent under Delaware
Corporation laws to the merger of Image Technology International, Inc. into
the Company.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
27 Financial Data Schedule (for SEC use only)
14
<PAGE> 17
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.
November 20, 1996 /s/ ALLEN LO
- -------------------------------- --------------------------------------
Date ALLEN LO
Chairman and Chief Executive Officer
November 20, 1996 /s/ SUNNY IP
- -------------------------------- --------------------------------------
Date SUNNY IP
Director and Treasurer
15
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