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
June 30, 1997 Commission File
No. 33-27627
3D IMAGE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0265438
(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, including area code: (770) 416-8848
(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 _____
29,682,788 COMMON SHARES WERE OUTSTANDING AS OF JUNE 30, 1997
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 . . . . . . . 1
Condensed Consolidated Statements of Operations
three months ended June 30, 1997 and 1996;
six months ended June 30, 1997 and 1996 . . . . . . . . .3
Condensed Consolidated Statements of Cash Flows
six months ended June 30, 1997 and 1996 . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements June 30,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders .12
Item 5. Other Information .12
Item 6. Exhibits and Reports on Form 8-K . .12
Signatures
3D Image Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
June 30, December 31
1997 1996
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 54,644 $ 55,138
Accounts receivable, net 467,039 1,339,228
Other Receivable 872,070 ----------
Inventories 804,076 1,813,976
Prepaid expenses and other current assets 87,857 72,147
Total current assets 2,285,686 3,280,489
Property and equipment, at cost:
Machinery and equipment 1,911,149 2,094,973
Leasehold improvements 19,403 16,514
Furniture and fixtures 20,382 19,807
1,950,934 2,131,294
Less accumulated depreciation (655,480) (541,490)
Net property and equipment 1,295,454 1,589,804
Patents 3,145,428 ----------
Total assets $6,726,568 $4,870,293
Note:
The balance sheet at December 31, 1996 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.
3D Image Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
June30 December 31
1997 1996
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Promissory note in default $3,000,000 $3,000,000
Trade accounts payable 1,036,865 816,251
Payable to affiliates 851,671 428,104
Accrued liabilities 372,119 285,594
Other current liabilities 140,324 -----------
Total current liabilities 5,400,979 4,529,949
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 - 29,682,788(including
1,492,538 shares of redeemable common stock) 28,190 19,625
Additional paid in capital 10,048,010 5,806,510
Accumulated deficit (4,647,611) (3,698,804)
Less: Receivables from affiliates ----------- (1,786,987)
Less: Subscription Receivable (4,103,000) -----------
Total shareholders' equity 1,325,589 340,344
Total liabilities and shareholders' equity $6,726,568 $4,870,293
See notes to condensed consolidated financial statements.
3D Image Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Net Revenue:
Print Material $ 21,033 $81,528 $52,331 $177,325
Cameras 520,527 641,253 727,707 1,251,018
Printer Processors --------- 113,087 --------- 633,875
Print Development 317,694 231,606 604,200 398,506
Total Net Revenue 859,254 1,067,474 1,384,238 2,460,724
Cost of Sales
Print Material 10,594 47,268 30,906 103,260
Cameras 232,442 457,656 351,239 886,603
Printer Processors -------- 67,852 --------- 358,834
Print Development 297,573 165,119 468,732 315,645
Total Cost of Sales 540,609 737,895 850,877 1,664,342
Gross Margin 318,645 329,579 533,361 796,382
Operating Expenses
Selling Expense 121,603 157,159 228,853 417,722
Research and Development 9,016 103,360 81,767 210,103
General and Administrative 397,941 454,042 842,724 947,618
Total Operating expenses 528,560 714,561 1,153,344 1,575,443
Operating Loss -209,915 -384,982 -619,983 -779,061
Net Interest Expens -93,765 -33,578 -192,636 -68,583
Net Loss $-303,680 $-418,560 $-812,619 $847,644
Net loss per share $ - .01 $ - .02 $ - .02 $ - .04
Weighted avg. shares outst.21,117,788 19,625,000 23,057,926 19,625,000
See notes to condensed consolidated financial statements.
3D Image Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended;
June 30
OPERATING ACTIVITIES 1997 1996
Net Loss $-812,620 $-847,644
Adjustments to reconcile net income/(loss),
to net cash used in operating activities:
Depreciation 113,992 112,205
Changes in operating assets and liabilities:
Accounts Receivable 872,189 -153,991
Inventories 1,009,900 40,993
Prepaid expenses and other -887,780 -35,881
Accounts payable and accrued expenses 303,096 -1,028,884
Other liabilities and unearned revenue 567,933 -213,421
Net cash (used) provided by operating activities 1,166,710 -2,126,623
INVESTING ACTIVITIES
Acquisition of patents, Note E -3,145,428 ---------
Disposition of property and equipment, Note E 180,360 ---------
Purchase of property and equipment --------- -96,056
Net cash used in investing activities -2,965,068 -96,056
FINANCING ACTIVITIES
Proceeds from promissory note payable --------- 3,000,000
Proceeds from common stock --------- 1,175,500
Net increase in paid in capital, Note C 4,241,500 ----------
Common stock subscription, Note C -4,103,000 ----------
Issuance of common stock 8,565 ----------
Net increase in receivable from affiliate 1,650,799 -1,186,852
Net cash used in financing activities 1,797,864 2,988,648
(Decrease) or Increase in cash -494 765,969
Cash, beginning of period 55,138 360,571
Cash, end of period $54,644 $1,126,540
See notes to condensed consolidated financial statements.
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 six month period
ended June 30, 1997, are not necessarily indicative of results that
may be expected for the year ended December 31, 1997. 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, 1996.
Note B - Inventories
The components of inventory consist of the following:
June 30 December 31
1997 1996
Finished goods:
Consumer cameras $ 43,411 $108,249
Printer processors -------- 271,126
Print material 760,665 684,127
Raw material and component parts --------- 750,474
$804,076 $1,813,976
Note C - Shareholders' Equity
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
registration, the Company has agreed to register the shares. 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 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. Since
the shares underlying the initial warrants have not been included
in an effective registration statement, the one year warrant
exercise period has not yet commenced.
In September 1996, the Company issued warrants for the sales of
60,000 shares of $.001 par
value common stock to Legacy Investments Group, Inc., a
contractor for the Company, at a price of $2.63 per share. The
warrants expire on September 13, 2001.
On September 10, 1994, the Company issued a warrant to a third
party to purchase 50,000 shares of $.001 per value common stock.
The warrant carries an exercise price of $1.50 per share and is
exercisable at any time during the five year period following the
date of issuance.
On May 20, 1997, Olajuwon Venture Capital, Inc. of Houston,
Texas, executed a Subscription Agreement for 8,500,000 shares of
common stock of the Company for a total of $4,250,000. A
promissory note for $4,250,000 was executed and delivered to the
Company on May 20, 1997 and the subscribed shares have been
issued. The promissory note is secured by the shares issued to
Olajuwon Venture Capital, Inc. and is payable in installments
over the next seven months, with the full balance due on or
before December 31, 1997.
Note D - Contingent Matters
Included in accounts payable at June 30, 1997 is approximately
$615,000 payable to a vendor for print material. This balance is
past due and accrues interest at the rate of 24% per annum,
beginning on June 1, 1996, payable monthly. For the three months
ended June 30, 1996 and 1997, interest paid and incurred on such
indebtedness totaled approximately $34,000 and $36,000,
respectively.
The Company is a named defendant in a legal proceeding filed by a
former employee of the former parent of the Company and a Dutch
corporation in which that former employee is a shareholder. The
litigation arises out of a proposed acquisition of the Dutch
corporation by the former parent of the Company in July 1995.
Management of the Company does not believe that such actions will
result in material adverse judgments against the Company and has
obtained an opinion of counsel to that effect.
Note E - Corporate Restructuring
In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31,
1996, and in the subsequent interim period, there were no
disagreements between Ernst & Young and the Registrant on any
matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if
not resolved to the satisfaction of Ernst & Young would have
caused Ernst & Young to make reference to the matter in their
report.
Ernst & Young issued a material weakness letter to the Company
for the year ended December 31, 1996 due to internal control
deficiencies in the following areas: recording of accounts
payable, assessing the allowance for doubtful accounts, and
ensuring proper sales cut-offs.With the agreement by Olajuwon
Venture Capital Inc. to invest $4.3 million in the Company,
Management now believes that there is no longer a risk regarding
the Company's ability to continue as going concern. Management
also has implemented steps to eliminate the deficiencies noted by
Ernst & Young and has completed a reorganization of its
management and operations.
As part of the restructuring of the Company in May 1997, the
Company exchanged certain fixed assets located in Hong Kong and
China, primarily, the manufacturing assets, four printer
processors held in inventory, a portion of its print material
inventories and an outstanding intercompany receivable of
approximately $2.2 million owed to the Company, for certain fixed
assets located in Atlanta, primarily the photo finishing
laboratory and digital assets, and all of the 3D photographic
patents held by its former parent.
In addition, Image Technology International (Far East) Ltd.,
purchased the raw materials inventory of the Company located in
Hong Kong for $755,000, which is reflected as a receivable. This
receivable will be collected as an offset to amounts due by the
Company in the future for cameras and printer processors
manufactured for the Company by Image Technology International
(Far East) Ltd.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
In the first six months of 1997, the Company increased print
development sales. Print material sales were approximately the
same percentage as compared to the first quarter of 1996. Sales
by product type in 1997 as compared to 1996 were as follows:
Revenues 1997 % 1996 %
Print Materials $ 52,331 4% 177,325 7%
Cameras $ 727,707 53% 1,251,018 51%
Printer Processors --------- ------ 633,875 26%
Print Development $604,199 44% 398,506 16%
Total sales decreased by $1,077,000 to approximately $1,384,000
for the six months ended June 30, 1997, from approximately
$2,461,000 for the six months ended June 30, 1996. This decrease
was the result of the sale of eight printer processors in the
second quarter of 1996, which was not repeated in the second
quarter of 1997, and a decrease in camera sales, which was a
direct result of reduced marketing expenditures due to working
capital shortages.
Cost of sales decreased by approximately $813,000 from
approximately $1,664,000 for the six months ended June 30, 1996,
to approximately $851,000 for the six months ended June 30, 1997.
This decrease was directly related to the decrease in printer
processors and camera sales.
Gross margins on revenues decreased from approximately $796,000
for the six months ended June 30, 1996 to approximately $533,000
for the six months ended June 30, 1997, as the Company sold fewer
cameras and printer processors in the second quarter of 1997
compared to the second quarter in 1996. The gross margin
percentage for the six months ended June 30, 1997 was 39% as
compared to 32% for the six months ended June 30, 1996.
Selling expenses decreased from approximately $418,000 for the
six months ended June 30, 1996, to approximately $229,000 for
the six months ended June 30, 1997. General and Administrative
expenses decreased from approximately $948,000 for the six months
ended June 30, 1996 to approximately $843,000 for the six months
ended June 30, 1997.
Selling expenses as a percentage of net sales were approximately
15% and 23% for the three and six month periods ended June 30,
1997, as compared to 19% and 26% for the comparable periods of
1996. Selling expenses have continued to decline as a percentage
of net sales as a result of the Company's cost reduction program.
Research and development expenses were approximately $82,000 for
the six months ended June 30, 1997, or 6% of total revenues, as
compared to approximately $210,000 for the six months ended June
30, 1997, or 9% of total revenues. The significant reduction in
research and development expenses are a result of the business
restructuring. No additional product research or development
work is expected for the remainder of the fiscal year 1997.
Interest expense was up in 1997 due primarily to the interest on
the $3,000,000 promissory note and interest paid on a past due
accounts payable .
The net loss decreased by approximately $35,000 from
approximately $848,000 to approximately $813,000 for the six
months ended June 30, 1996 and 1997, respectively. The decrease
in the 1997 loss as compared to 1996 is primarily a result of a
decrease in sales, netted against a decrease in selling, research
and development, and general and administrative expenses, and
increases in interest expense.
Receivables from affiliates decreased in the second quarter of
1997 due to the business resctructuring agreement.
Accounts payable increased by approximately $220,000 from
approximately $816,000 for the year ended December 31, 1996 to
approximately $1,036,000 for the six months ended June 30, 1997.
Payables to affiliates was $852,000 for the six months ended June
30, 1997, and $428,000 for the year ended December 31, 1996 due
to the purchase of print material from the Company's affiliate in
Japan.
Liquidity and Sources of Capital
Cash provided by operations during the period ended June 30, 1997
totaled approximately $1,167,000 as compared to cash used by
operations for the period ended December 31, 1996 totaling
approximately $2,340,000.
On January 30, 1996, the Company executed a letter of intent with
an Asian investor (the "Investor"), providing for equity
financing in an amount up 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 would
determine whether to contribute an additional $17 million for an
additional 8,457,711 shares of common stock. On May 21, 1996,
the Company and the Investor amended certain sections of the
Agreement and extended the due diligence period 90 days. If the
Investor then 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 former parent, due 120
days thereafter, with interest thereon at prime plus 2%. The
investor determined not to make the additional investment and, as
agreed, the shares were redeemed for a promissory note for $3
million, secured by fixed assets of the Company and its former
parent, as well as the shares. After several extensions of the
due date of the promissory note, the Investor called the note
and the $3 million note is reflected as past due. Management
continues to work with the Investor regarding this liability.
On May 20, 1997, the Company entered into a restructuring of the
management and operations of the Company and accepted an
investment of $4.25 million in the Company by Olajuwon Venture
Capital, Inc. of Houston, Texas. Under the restructuring plan,
the Company terminated its direct manufacturing operation
previously conducted in China and in the future will contract
with independent camera manufacturers to manufacture cameras for
the Company, at an expected substantial savings to the Company.
Initially, the Company will contract with Image Technology
International (Far East), Ltd., a former subsidiary of the former
parent of the Company which had acted as manager of the Company's
manufacturing facilities. Image Technology International (Far
East), Ltd., is now controlled by certain former executives of
the Company. The Company has negotiated a fixed delivered price
per camera and no longer directly supports the China
manufacturing operations, which had contributed a substantial
portion of the Company's operating losses in the past.
Management anticipates substantial savings from this restructure
. This operational savings, together with further reductions in
operating costs in Europe and United States, are expected to
return the Company to profitable status by the end of the year.
The new investment by Olajuwon Venture Capital Inc. of $4.25
million for 8.5 million shares of common stock of the Company,
will be contributed in installments as needed for operations over
the remainder of the year, with the total investment contributed
by December 31,1997 pursuant to the promissory note executed by
Olajuwon Venture Capital, Inc. secured by the common stock issued
to it.
In conjunction with the restructuring of the Company and the
investment by Olajuwon Venture Capital, Inc., Image Technology
International, Inc., the former parent of the Company, granted
Olajuwon Venture Capital, Inc. an option to acquire 6,500,000
shares of the Company's common stock held by it for a period of
two years at an option price of $0.75 per share, and gave
Olajuwon Venture Capital, Inc. an irrevocable proxy to vote the
option shares during the two year term of the option. The option
terminates automatically in the event that the promissory note
for the 8.5 million shares of stock in the Company is not paid in
full by Olajuwon Venture Capital, Inc. by December 31, 1997. As
a result of the additional investment in the Company and the
option arrangement, Olajuwon Venture Capital, Inc. has acquired
control of the company.
On completion of the restructuring of the Company on May 20,
1997, Allen K. W. Lo, former Chairman and President of the
Company, and Sunny Ip, former Director and Vice President of the
Company, resigned. Akinola Olajuwon, President of Olajuwon
Venture Capital, Inc., became a Director and Chairman of the
Company and Bruce Herstowski, formerly Vice President of Sales
and Marketing, was elected a Director and President.
Subsequently, the Board of Directors was increased by the
addition of James T. Rash of Houston, Texas, a Director of
Laidlaw Holdings, Inc. a Wall Street investment banking firm, and
a director of several other companies; Donald Franz, of Bonita
Springs, Florida, Publisher of Photofinishing News, and Breck
McKinley, an independent investment consultant of Los Angeles,
California, as Directors of the Company.
On July 2, 1997, the Company entered into a two year endorsement
agreement with Hakeem, Inc. for the endorsement and sponsorship
of the Company's products by Hakeem Olajuwon. As consideration
for the endorsement agreement, Hakeem, Inc. received a warrant
for the purchase of 300,000 shares of the Company's common stock
at a price of $1.00 per share and a second warrant for an
additional 300,000 shares at a price of $1.50 per share. Each
warrant continues for the term of the endorsement contract.
Total sales for the second quarter, and for the six months ending
June 30, 1997, decreased substantially over the comparable
periods for 1996, although a reduction in unit cost of sales
resulted in a smaller decrease in gross margin. This reduction
in sales reflects the substantial decrease in direct selling
efforts in the United States during the first half of 1997 due to
the Company's working capital deficit, and the elimination of any
significant sales in Asia, as the Company engaged in the
restructuring which terminated the Company's direct involvement
in the Asian market.
Camera sales for July 1997 to date exceed $400,000, based on
current orders, which compares to total camera sales of $520,527
for the entire second quarter of 1997. This increased sales
activity together with additional savings in manufacturing costs
over those incurred in the second quarter, while the Company was
still supporting the China manufacturing facility, should go a
long way to establish profitable operations in the third quarter.
Part II. Other Information
Item 1. Legal Proceedings
On February 21, 1997, Image Technology International, Inc.,
former parent of the Company, filed a Declaratory Judgment action
in Superior Court of Gwinnett County against Andrew Joel, ND3D
B.V., Ruud Kallenbach and Marc Wolters, to establish that an
Acquisition and Cooperation Agreement dated June 21, 1995 between
Image Technology International, Inc., ND3D BV and ElectroGig
Netherlands BV was not an enforceable contract and that the terms
of the agreement had never been satisfied. That Agreement had
proposed that Image Technology International, Inc. acquire either
the assets or the stock of ND3D, with the form of the acquisition
to be determined at a later date, after a detailed list of the
assets of ND3D was provided. The Agreement also proposed the
formation of a joint marketing and distribution venture with
ElectroGig and the delivery to Image Technology of 500 copies of
new ElectroGig 3D software, represented to have a retail value of
$10,000 per copy. The Company was not a party to the June 1995
Agreement or the contemplated transaction, had no part in its
negotiation, and received no assets, consideration, or other
benefit from either ND3D or ElectroGig.
On February 27, 1997, one day before a scheduled hearing on
Image Technology's request for a temporary restraining order, Mr.
Wolters removed the case from the state court to the federal
court in Atlanta on the theory that, as a Dutch court appointed
administrator of the ElectroGig bankruptcy estate, he was a
"sovereign foreign state". Simultaneously, ND3D BV filed a
separate action in the Atlanta federal court seeking unspecified
damages, including delivery of the Image Technology
International, Inc. shares provided for in the expired Agreement
and damages for alleged delivery by ND3D of its assets to Image
Technology without compensation. The new lawsuit named Image
Technology International, Inc., the Company, Allen Lo, former
President of the Company, and Robert Hipple, Secretary of the
Company, as defendants, although only Image Technology
International, Inc. was a party to the expired Agreement on the
basis of which ND3D filed its suit, and only Image Technology
International, Inc. allegedly received any benefit from the
relationship with ND3D. All of the named defendants in the
second action, including the Company, filed a Motion to Dismiss
the case on multiple grounds, including failure to state a cause
of action and lack of jurisdiction in the federal court. That
Motion is still pending along with a Motion to Remand the
original case filed by Image Technology International, Inc.,
seeking to return the case to the State court so that Image
Technology can pursue its declaratory judgment that the June 1995
Agreement, on which ND3D is claiming recovery, is null and void.
The Company has obtained an opinion of independent counsel that
the claim by ND3D against the Company is completely without merit
and appears to have been filed against it primarily as leverage
in an attempt to extort a settlement from its former parent,
Image Technology International, Inc. The Company intends to
vigorously defend against the unsupported claims of ND3D and will
pursue frivolous litigation damages against ND3D, Joel, and their
respective legal counsel, once the claims against the Company
have been dismissed.
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.
On May 16, 1997, Olajuwon Venture Capital, Inc. executed a
subscription agreement for 8.5 million new shares for a total
consideration of $4.25 million payable in full by December 31,
1997. The new shares have been issued to Olajuwon Venture
Capital, Inc. in return for a promissory note in the amount of
$4.25 million due December 31, 1997, secured by a pledge of the
new shares.
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 second quarter of the fiscal period
covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
On May 9, 1997, Ernst & Young LLP ("Ernst & Young") resigned as
auditors of the Company.
The report of Ernst & Young on the Company's financial
statements for the year ended December 31, 1996 stated that the
Company's financial statements had been prepared assuming that
the Company would continue as a going concern, but contained an
uncertainty paragraph stating that there was substantial doubt
about the Company's ability to continue as a going concern based
upon the deficiency in working capital and recurring operating
losses, without any committed sources of equity capital.
In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31,
1996, and in the subsequent interim period, there were no
disagreements between Ernst & Young and the Registrant on any
matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if
not resolved to the satisfaction of Ernst & Young would have
caused Ernst & Young to make reference to the matter in their
report.
Ernst & Young issued a material weakness letter to the Company
for the year ended December 31, 1996 due to internal control
deficiencies in the following areas: recording of accounts
payable, assessing the allowance for doubtful accounts, and
ensuring proper sales cut-offs. The form 8K was subsequently
amended on June 26, 1997 as a result of a request by the
Commission for additional information.
The Company has requested Ernst & Young to furnish a letter
addressed to the Commission stating whether it agrees with the
above statements, and Ernst & Young has confirmed its agreement
by letter. With the agreement by Olajuwon Venture Capital Inc. to
invest $4.3 million in the Company, Management now believes that
there is no longer a risk regarding the Company's ability to
continue as going concern. Management also has implemented steps
to eliminate the deficiencies noted by Ernst & Young and has
completed a reorganization of its management and
operations. Ernst & Young was neither advised nor consulted
with respect to the steps by management to correct the noted
deficiencies and to reorganize the Company and the statements
regarding the investment by Olajuwon Venture Capital Inc,. and
the letter confirming its agreement with the above statements
made no reference to such matters.
(b) Exhibits
Exhibit No. Description of Exhibit
1 Former 8K filed May 9, 1997
2 Amended Form 8K June 26, filed 1997
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 officers.
3D IMAGE TECHNOLOGY, INC.
July 9, 1997
Date BRUCE HERSTOWSKI
Chairman and Chief Executive
Officer
July 9, 1997
Date GRACE M. WILLIAMS,CPA
Controller
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) MAY 9,
1997
3D IMAGE TECHNOLOGY, INC.
-------------------------------------------
(Exact Name of Registrant as Specified in Its
Charter)
Delaware 33-27627
76-0265438
- --------------- ------------
----------------
(State or Other (Commission
(I.R.S. Employer
Jurisdiction File Number)
Identification No.)
of Incorporation)
5172-G Brook Hollow Parkway, Norcross, Georgia 30071
-------------------------------------------------------------
-------
(Address of Principal Executive Offices)
(Zip Code)
(770) 416-8848
-------------------
Registrant's telephone number, including area code
(Former Name or Former Address, If Changed Since Last
Report)
ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
On May 9, 1997, Ernst & Young LLP ("Ernst & Young") resigned as
auditors of the Company.
The report of Ernst & Young on the Company's financial
statements for the year ended December 31, 1996 stated that the
Company's financial statements had been prepared assuming that
the Company would continue as a going concern, but contained an
uncertainty paragraph stating that there was substantial doubt
about the Company's ability to continue as a going concern based
upon the deficiency in working capital and recurring operating
losses, without any committed sources of equity capital.
In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31,
1996, and in the subsequent interim period, there were no
disagreements between Ernst & Young and the Registrant on any
matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if
not resolved to the satisfaction of Ernst & Young would have
caused Ernst & Young to make reference to the matter in their
report.
Ernst & Young issued a material weakness letter to the Company
for the year ended December 31, 1996 due to internal control
deficiencies in the following areas: recording of accounts
payable, assessing the allowance for doubtful accounts, and
ensuring proper sales cut-offs.
The Company has requested Ernst & Young to furnish a letter
addressed to the Commission stating whether it agrees with the
above statements. A copy of that letter dated May 9, 1997 is
filed as Exhibit 1 to this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Exhibits.
Exhibit No. Description of Exhibit
1 Letter from Ernst & Young LLP
to the
Securities and Exchange
Commission
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 hereunto duly authorized.
3D Image Technology, Inc.
--------------------------------
(Registrant)
Date: May 9, 1997 /s/ALLEN LO
--------------------
ALLEN LO
Chairman and
Chief Executive Officer
Date: May 9, 1997 /s/ SUNNY IP
--------------------
SUNNY IP
Director and
Treasurer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDED FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
Date of Report Original 8-K (Date of earliest event reported)
MAY 9, 1997
Date of Report this amended 8-K June 23, 1997
3D IMAGE TECHNOLOGY, INC.
- -------------------------------------------
(Exact Name of Registrant as Specified in
Its Charter)
Delaware 33-27627
76-0265438
- --------------- ------------
- ----------------
(State or Other (Commission
(I.R.S. Employer
Jurisdiction File Number)
Identification No.)
of Incorporation)
5172-G Brook Hollow Parkway, Norcross, Georgia 30071
---------------------------------------------- -------
(Address of Principal Executive Offices)
(Zip Code)
(770) 416-8848
- -------------------
Registrant's telephone number, including area code
(Former Name or Former Address, If Changed Since Last
Report)
ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
On May 9, 1997, Ernst & Young LLP ("Ernst & Young") resigned as
auditors of
the Company.The report of Ernst & Young on the Company's
financial statements for the year ended December 31, 1996 stated
that the Company's financial statements had been prepared
assuming that the Company would continue as a going concern, but
contained an uncertainty
paragraph stating that there was substantial doubt about the
Company's ability to continue as a going concern based upon the
deficiency in working capital and recurring operating losses,
without any committed sources of equity capital.
In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31,
1995 and December 31, 1996, and in the subsequent interim period,
there were no disagreements between Ernst & Young and the
Registrant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope
and procedures which, if not resolved to the satisfaction of
Ernst & Young would have caused Ernst
& Young to make reference to the matter in their report.
Ernst & Young issued a material weakness letter to the Company
for the year ended December 31, 1996 due to internal control
deficiencies in the following areas: recording of accounts
payable, assessing the allowance for doubtful accounts, and
ensuring proper sales cut-offs.
The material weakness letter to the Company identified an
internal control deficiency in the recording of accounts payable
due to the company's failure to record all vendor invoices when
the invoices were received , and the company's recording of
invoices without considering the applicable period for matching
purposes. As a result, approximately $336,000 in accounts payable
had not been accrued for the year ending December 31, 1996 when
Ernst & Young
began its audit procedures. The accounts payable were properly
accrued in the audited financial statements of the Company as
reported in the Company's Form 10K for the fiscal year ended
December 31, 1996, in accordance with Ernst & Young's comments.
Ernst & Young's material weakness letter to the Company also
identified an internal control deficiency in assessing the
allowance for doubtful accounts, because the company did not have
formal procedures in place for such an analysis on an on-going
basis. As a result, an additional reserve of $100,000 was
recorded for the fiscal year ended December 31, 1996 associated
with the company's Asian customer base.
Finally, the material weakness letter identified internal control
deficiencies relating to ensuring proper sales cut-offs. This
deficiency resulted from incorrect reporting of a significant
transaction occurring near the end of the fiscal year, due
primarily to communication problems between the company and its
Asian affiliate. As a result, approximately $300, 000 of the
sales transaction was appropriately reversed and not reported on
the Company's audited financial statements for the fiscal year
ended December 31, 1996, included in the Company's Form 10KSB for
that period.
No committee of the Board of Directors of the Company discussed
these internal control deficiencies with Ernst & Young, as the
company does not have an audit committee. On May 9, 1997 Ernst &
Young communicated the material weekness to a majority of the
Board of Directors at that time and to the current president of
the Company, Mr. Bruce Herstowski. The Company has authorized
Ernst & Young to respond fully to any inquiries of the Company's
new auditors regarding these deficiencies, although the Company
has not yet identified or engaged a successor accounting firm. To
the best knowlodge of management of the Company,
there have been no transaction or events in the current year
similar to those described in Ernst & Young's material weakness
letter.
The Company has requested Ernst & Young to furnish a letter
within ten business days from the date of this filing addressed
to the Commission stating whether it agrees with the above
statements, and, if not, stating the respects in which it does
not agree.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned hereunto duly authorized.
3D Image Technology,Inc.
--------------------------------
(Registrant)
Date: June 26, 1997 /s/ Bruce
Herstowski
--------------------
President
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