-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QjycNnOh/rljQdW2kFOjKKyG53cqqk/YBa9jru3EsvK+sIOMkGF45IwR68iEMjJS esSDXLt0h89GGAGDJBLxhw== 0000910680-00-000350.txt : 20000522 0000910680-00-000350.hdr.sgml : 20000522 ACCESSION NUMBER: 0000910680-00-000350 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMAGING TECHNOLOGIES CORP/CA CENTRAL INDEX KEY: 0000725394 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 330021693 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12641 FILM NUMBER: 640633 BUSINESS ADDRESS: STREET 1: 15175 INNOVATION DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92128 BUSINESS PHONE: 6196131300 FORMER COMPANY: FORMER CONFORMED NAME: PERSONAL COMPUTER PRODUCTS INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR IMAGING TECHNOLOGIES CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 or TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file No. 0-12641 [ITECH LOGO OMITTED] IMAGING TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 33-0021693 (State or other jurisdiction of (IRS Employer ID No.) incorporation or organization) 15175 INNOVATION DRIVE SAN DIEGO, CALIFORNIA 92128 (Address of principal executive offices) Registrant's Telephone Number, Including Area Code: (858) 613-1300 Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No The number of shares outstanding of the registrant's common stock as of May 15, 2000, was 94,517,427.
PAGE PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets March 31, 2000 (unaudited) and June 30, 1999 (audited) 2 Consolidated Statements of Operations Three and nine months ended March 31, 2000 and 1999 (unaudited) 3 Consolidated Statements of Cash Flows Nine months ended March 31, 2000 and 1999 (unaudited) 4 Notes to Consolidated Financial Statements. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited) ASSETS
MARCH 31, JUNE 30, 2000 1999 Current assets Cash $ 701 $ 75 Accounts receivable, net 255 1,959 Inventories 50 552 Prepaid expenses and other 231 577 ---------- -------- Total current assets 1,237 3,163 Property and equipment, net 615 986 Capitalized software, net - 2,851 Other 156 250 --------- -------- Total Assets $ 2,008 $ 7,250 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Borrowings under bank lines of credit $ 6,846 $ 6,469 Short-term debt 2,501 5,010 Accounts payable 3,859 5,532 Accrued expenses 1,088 2,671 -------- -------- Total current liabilities 14,294 19,682 Long-term debt, less current portion - - ----------- ----------- Total liabilities 14,294 19,682 --------- ------- Shareholders' equity (deficit) Series A preferred stock, $1,000 par value, 7,500 shares authorized, 420.5 shares issued and outstanding 420 420 Series D preferred stock, $1,000 par value, 1,200 shares authorized, none issued and outstanding - 1,800 Series E preferred stock, $1,000 par value, 1,250 shares authorized, none issued and outstanding - 4,655 Common stock, $0.005 par value, 100,000,000 shares authorized, 94,417,012 shares issued and outstanding 472 110 Paid-in capital 55,376 39,804 Shareholder loans (105) (105) Accumulated deficit (68,449) (59,116) -------- --------- Total shareholders' equity (deficit) (12,286) (12,432) --------- ---------- $ 2,008 $ 7,250 ========= ==========
See notes to consolidated financial statements. 2 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, 2000 1999 2000 1999 Revenues Sales of products $ 260 $ 3,230 $ 1,261 $ 14,146 Engineering fees 240 110 265 505 Licenses and royalties 221 320 557 483 --------- --------- --------- ---------- 721 3,660 2,083 15,134 --------- --------- --------- ---------- Costs and expenses Costs of products sold 225 2,504 1,822 9,860 Selling, general, and administrative 822 2,868 5,749 10,184 Cost of engineering fees 508 215 2,136 1,030 --------- --------- --------- ---------- 1,555 5,587 9,707 21,074 --------- --------- --------- ---------- (834) (1,927) (7,624) (5,940) Income (loss) from operations Other expense Interest, net (150) (368) (329) (911) Restructuring (1,362) - (1,380) - --------- --------- --------- ---------- (1,512) (368) (1,709) (911) --------- --------- --------- ---------- Income (loss) before income taxes (2,346) (2,295) (9,333) (6,851) Income tax expense - - - (14) --------- --------- --------- ---------- Net income (loss) $ (2,346) $ (2,295) $ (9,333) $ (6,865) ========= ========= ========= ========== Earnings (loss) per common share Basic $ (.03) $ (.13) $ (.10) $ (.12) ========= ========= ========= ========== Diluted $ (.03) $ (.13) $ (.10) $ (.12) ======= ============ ============ ============ Weighted average common shares 90,807 55,556 90,807 58,686 Weighted average common shares - assuming dilution 90,807 55,556 90,807 58,686
See notes to consolidated financial statements. 3 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (in thousands, except share data) (unaudited)
MARCH 31, MARCH 31, 2000 1999 Cash flows from operating activities Net income (loss) $ (9,333) $ (6,865) Adjustments to reconcile net income (loss) to net cash from operating activities Non-cash special charges Depreciation and amortization 371 579 Amortization of capitalized software 2,851 - Changes in operating assets and liabilities Accounts receivable 1,704 285 Inventories 502 3,391 Prepaid expenses and other 896 (587) Accounts payable and accrued expenses (3,713) (2,160) ------- -------- Net cash from operating activities (6,722) (5,357) ------- -------- Cash flows from investing activities Capitalized software - (2,901) Capital expenditures - (71) ----------- ---------- Net cash from investing activities - (2,972) ----------- ------- Cash flows from financing activities Net borrowings under bank lines of credit 377 (601) Net borrowings under short-term notes payable - 2,642 Net proceeds from issuance of common stock 6,971 2,034 Net proceeds from issuance of preferred stock - 3,506 Redemption of preferred stock - (2,228) Issuance of long term debt - 675 Repayment of long-term debt - (354) ----------- -------- Net cash from financing activities 7,348 5,674 -------- ------- Net increase (decrease) in cash 626 (2,655) Cash, beginning of period 75 3,023 ---------- ------- Cash, end of period $ 701 $ 368 ========= ========
See notes to consolidated financial statements. 4 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) (unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Imaging Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have been prepared pursuant to the rules of the Securities and Exchange Commission (the "SEC") for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These financial statements and notes herein are unaudited, but in the opinion of management, include all the adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the years ended June 30, 1999, 1998, and 1997 included in the Company's annual report on Form 10-K filed with the SEC. Interim operating results are not necessarily indicative of operating results for any future interim period or for the full year. NOTE 2. GOING CONCERN CONSIDERATIONS The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. At March 31, 2000, and for the three months then ended, the Company had a net loss, negative working capital, and a decline in net worth which raise substantial doubt about its ability to continue as a going concern. The Company's losses have resulted primarily from an inability to achieve product sales and contract revenue targets due to insufficient working capital. ITEC's ability to continue operations will depend on positive cash flow, if any, from future operations and on the Company's ability to raise additional funds through equity or debt financing. The Company has cut back and/or discontinued some of its operations and, if it is unable to raise or obtain needed funding, the Company may be forced to discontinue operations generally. On August 20, 1999, at the request of Imperial Bank, the primary lender to the Company, the Court appointed an operational receiver for the Company. On August 23, 1999, the operational receiver took control of the day-to-day operations of the Company. To date, through further equity infusion into the Company, primarily in the form of the exercise of warrants to purchase the common stock of the Company, operations have continued. Without additional funding sufficient to satisfy Imperial Bank and the other creditors of the Company, as well as providing working capital for the Company, there can be no assurances that such operations can continue. The Company continues to actively work with entities capable of providing such funding. Management has continued to implement its restructuring plan including reductions of personnel, consolidation of facilities, disposal of subsidiaries, and the elimination of product lines. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 3. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) available to common shareholders (the "numerator") by the weighted average number of common shares outstanding (the "denominator") during the period. Diluted earnings (loss) per common share ("Diluted EPS") is similar to the computation of Basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net earnings (loss) per share. The following is a reconciliation of Basic EPS to Diluted EPS: 5
EARNINGS (LOSS) SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT MARCH 31, 2000 Net loss $ (9,333) Preferred dividends (625) -------- Basic and diluted EPS $ (9,958) 90,807 $ (0.10) ========= ======== ======
NOTE 4. INVENTORIES
MARCH 31, DECEMBER 31, 2000 1999 Inventories Materials and supplies $ 5 $ 5 Finished goods 45 52 -------- ----- $ 50 $ 57 ======== =====
NOTE 5. BANK LINES OF CREDIT The Company is in default under its credit agreements with Imperial Bank. The bank is demanding immediate payment of all outstanding loan balances, including the term loan which has been reclassified as a current liability. Borrowings bear interest at the bank's prime interest rate plus 0.75% plus 5% penalty default interest and are collateralized by substantially all assets of the Company. The Company is in default on its long-term debt obligations and, accordingly, all outstanding balances have been classified as current obligations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The discussion of the Company's business contained in this Quarterly Report on Form 10-Q may contain certain projections, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed below at "Risks and Uncertainties." While this outlook represents management's current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof. OVERVIEW Imaging Technologies Corporation develops, manufactures, and distributes high-quality digital imaging solutions. The Company produces printer and imaging products for use in graphics and publishing, digital photography and other niche business and technical markets. Beginning with a core technology in the design and development of controllers for non-impact printers and multifunction peripherals, the Company has expanded its product offerings to include monochrome and color printers, external print servers, digital image storage devices, and software to improve the accuracy of color reproduction. 6 The Company's business continues to be in a significant transitional phase and there are important short-term operational and liquidity challenges. Accordingly, quarter-to-quarter financial comparisons may be of limited usefulness now and for the next several quarters due to these important changes in the Company's business. Historically, a portion of the Company's income was derived from non-recurring engineering fees and royalty income from a relatively small number of original equipment manufacturing ("OEM") customers. Over the past several years, the Company has experienced shortfalls in income as a result of engineering contracts with OEM manufacturers for products that were never completed by the OEM, were never introduced into the market and shipped or were canceled by the customer before ITEC completed the deliverables portion of the contract. Failure of these OEMs to achieve significant sales of products incorporating the Company's technology and fluctuations in the timing and volume of such sales had a materially adverse effect on the Company. The Company's current strategy is to continue to focus on rebuilding its OEM business and develop, commercialize and distribute its own technology products. The Company intends to continue to develop its target markets and to pursue clearly defined commercial market opportunities in order to leverage its core technologies. To successfully execute its current strategy, the Company will need to improve its working capital position. The report of the Company's independent auditors accompanying the Company's June 30, 1999 financial statements includes an explanatory paragraph indicating there is a substantial doubt about the Company's ability to continue as a going concern, due primarily to the decreases in the Company's working capital and net worth. At March 31, 2000, and for the three months then ended, the Company had a net loss, negative working capital, and a decline in net worth which continue to raise substantial doubt about its ability to continue as a going concern. The Company needs to raise additional funds to operate its business and has been actively pursuing solutions to its liquidity difficulties. There can be no assurance, however, that the Company will be able to complete any additional debt or equity financing on favorable terms or at all, or that any such financings, if completed, will be adequate to meet the Company's capital requirements. Any additional equity or convertible debt financings could result in substantial dilution to the Company's stockholders. If adequate funds are not available, the Company will be required to delay, reduce or eliminate some or all of its planned activities. The Company's inability to fund its capital requirements would have a material adverse effect on the Company. See "Liquidity and Capital Resources" and "Risks and Uncertainties -- Future Capital Needs." RESULTS OF OPERATIONS NET REVENUES Revenues were $721 thousand and $3.7 million for the quarters ended March 31, 2000 and 1999, respectively. Sales of product were $260 thousand and $3.2 million for the quarters ended March 31, 2000 and 1999, respectively. For the nine months ended March 31, 2000 sales of product were $ 1.3 million compared to $14.1 million for the nine months ended March 31, 1999. The decrease in product sales from 1999 to 2000 was due to an overall decrease in the sales activities of the Company due to insufficient inventories and working capital. The Company's lack of sufficient working capital has had a negative adverse effect on printer product sales in particular, and overall revenues in general. Engineering fees were $240 thousand and $110 thousand for the quarters ended March 31, 2000 and 1999, respectively. For the nine months ended March 31, 2000 engineering fees were $265 thousand compared to $505 thousand for the nine months ended March 31, 1999. The decrease in 2000 compared to 1999 was primarily the result of the Company's change in strategic direction, focusing more on internal product development and sales and less on engineering for third parties. License fees and royalties were $221 thousand for the quarter ended March 31, 2000 compared to $320 thousand in license fees and royalties in the third quarter of fiscal 1999. For the nine months ended March 31, 2000 license fees and royalties were $557 thousand compared to $483 thousand for the nine months ended March 31, 1999. Royalties and licensing fees vary from quarter to quarter and are dependent on the sales of products sold by OEM customers using ITEC technologies. COST OF PRODUCTS SOLD Cost of products sold were $225 thousand or 87% of product 7 sales and $2.5 million or 78% of product sales for the quarters ended March 31, 2000 and 1999, respectively. For the nine months ended March 31, 2000 cost of products sold were $1.8 million or 144% of product sales compared to $9.9 million or 70% of product sales for the nine months ended March 31, 1999. The large percentages of cost of goods sold in both 2000 and 1999 is due to the liquidation sale of inventories substantially below cost as mandated by the court-appointed operational receiver. (See Note 2 to the Consolidated Financial Statements.) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses were $822 thousand and $2.9 million for the quarters ended March 31, 2000 and 1999, respectively. For the nine months ended March 31, 2000 selling, general, and administrative expenses were $5.8 million compared to $10.2 million for the nine months ended March 31, 1999. Selling, general, and administrative expenses have consisted primarily of court-appointed operational receiver costs, salaries and commissions of sales and marketing personnel, salaries and related costs for general corporate functions, including finance, accounting, facilities and legal, advertising and other marketing related expenses, and fees for professional services. The Company reduced its selling, general, and administrative expenses $2.0 million or 71% for the three month period ended March 31, 2000 from the year earlier period. Selling, general, and administrative expenses for the nine month period ended March 31, 2000 were $5.7 million as compared to $10.2 million in the year earlier nine month period, a reduction of $4.4 million or 44%. The decrease in selling, general and administrative has been due primarily to an ongoing lack of operating capital and the liquidation of inventories by the court-appointed operational receiver. (Also see Note 2 to the Consolidated Financial Statements.) COST OF ENGINEERING Engineering costs were $508 thousand and $215 thousand for the quarters ended March 31, 2000 and March 31, 1999, respectively. For the nine months ended March 31, 2000 engineering costs were $2.1 million compared to $1.0 million for the nine months ended March 31, 1999. In the previous fiscal year, the Company had reduced its engineering and licensing activities; and engineering costs were re-directed toward the development of the Company's branded products, including printers and associated digital imaging products. New products from these activities had been expected to begin being shipped to customers during the current fiscal year. However, due to the lack of working capital and the associated restrictions on the Company's sales and marketing activities (Note 2 to the Consolidated Financial Statements), such product introductions have not been realized. During fiscal 2000, the Company has increased its focus on engineering in order to stimulate revenues from license fees and royalties, which are not dependent upon inventories. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations primarily through cash generated from operations, debt financing, and from the sale of equity securities. On August 20, 1999, at the request of Imperial Bank, the primary lender to the Company, the Court appointed an operational receiver for the Company. On August 23, 1999, the operational receiver took control of the day-to-day operations of the Company. To date, through further equity infusion into the Company, primarily in the form of the exercise of warrants to purchase the common stock of the Company, operations have continued. Without additional funding in the near future, sufficient to satisfy Imperial Bank and the other creditors of the Company, as well as providing working capital for the Company, the Company will cease to operate. The Company continues to actively work with entities capable of providing such funding. As of March 31, 2000, the Company had negative working capital of $13.1 million as compared to negative working capital of $16.5 million at June 30, 1999. The $3.4 million increase in working capital is due primarily to increases in paid-in capital, which has been the Company's principal source of liquidity during fiscal 2000. During the three month period ended March 31, 2000, the Company wrote down $2.9 million in capitalized software. Management took this step due to the Company's inability to provide the necessary resources to release, manufacture, and market the associated products. 8 Net cash used in operating activities increased to $6.7 million during the nine month period ended March 31, 2000, from $5.4 million during the year-earlier period, due primarily to an increase in the Company's net loss. Net cash used in investing activities were zero during the nine month period ended March 31, 2000, from $3.0 million during the year-earlier period. The decrease was due primarily to the absence of any prepaid license, capitalized software, or capital expenditures in the period. Net cash from financing activities increased to $7.3 million during the nine month period ended March 31, 2000, from $5.7 million during the year-earlier period. The increase was due to primarily to an increase in proceeds from the issuance of common stock to $7.0 million from $2.0 million in the year-earlier period. The Company has no material commitments for capital expenditures. The Company's 5% convertible preferred stock (which ranks prior to the Company's common stock), carries cumulative dividends, when and as declared, at an annual rate of $50.00 per share. The aggregate amount of such dividends in arrears at March 31, 2000, was approximately $625 thousand. The Company's capital requirements depend on numerous factors, including market acceptance of the Company's products, the scope and success of the Company's product development efforts, the resources the Company devotes to marketing and selling its products, and other factors. The report of the Company's independent auditors accompanying the Company's June 30, 1999 financial statements includes an explanatory paragraph indicating there is a substantial doubt about the Company's ability to continue as a going concern, due primarily to the decreases in the Company's working capital and net worth. (Also see Note 2 to the Consolidate Financial Statements.) RISKS AND UNCERTAINTIES FUTURE CAPITAL NEEDS There can be no assurance with respect to the Company's future profitability or revenue growth. Losses may occur on a quarterly or annual basis for a number of reasons outside the Company's control. See "Potential Fluctuation in Quarterly Performance." The growth of the Company's business will require the commitment of substantial capital resources. If funds are not available from operations, the Company will need additional funds. The Company may seek such additional funding through public and private financing, including debt or equity financing. Adequate funds for these purposes, whether through financial markets or from other sources, may not be available when needed or, if available, not on terms acceptable to the Company. Insufficient funds may require the Company to delay, reduce or eliminate some or all of its planned activities. ITEC's ability to continue operations will depend on positive cash flow, if any, from future operations and on the Company's ability to raise additional funds through equity or debt financing. The Company could be required to cut back or stop operations if it is unable to raise or obtain needed funding. As of March 31, 2000, the Company had accumulated losses of approximately $68.2 million. Management anticipates incurring additional losses until the Company can successfully market and distribute its products and develop new technologies and commercially viable future products. If it is unable to do so, ITEC will continue to have losses and might not be able to continue operations. The report of the Company's independent accountants on the consolidated financial statements contains an explanatory paragraph regarding ITEC's ability to continue as an ongoing business. The independent accountants cited a significant decline in working capital and net worth that has raised substantial doubt as to the Company's ability to continue as an ongoing business. The "going concern" qualification may reduce the Company's ability to obtain necessary financing in the future to run its business. 9 APPOINTMENT OF OPERATIONAL RECEIVER On August 20, 1999, at the request of Imperial Bank, the primary lender to the Company, the Superior Court, San Diego appointed an operational receiver for the Company. On August 23, 1999, the operational receiver took control of the day-to-day operations of the Company. To date, through further equity infusion into the Company, primarily in the form of the exercise of warrants to purchase the common stock of the Company, operations have continued. Without additional funding in the near future, sufficient to satisfy Imperial Bank and the other creditors of the Company, as well as providing working capital for the Company, the Company will cease to operate. The Company continues to actively work with entities capable of providing such funding. If such funding is not obtained, the Company will need to reduce, suspend, or cease operations. FLUCTUATION OF QUARTERLY PERFORMANCE The Company's quarterly operating results tend to fluctuate depending on a number of factors. These include: (1) the timing of product announcements and introductions of products by the Company and its competitors; (2) availability and cost of components; (3) timing of shipments of the Company's products; (4) product mix; (5) market acceptance of new products; (6) seasonality; (7) currency fluctuations; (8) changes in prices by the Company and its competitors; and (9) price protection for selling price reductions offered to distributors and OEM customers. Accordingly, the timing of expenditures for staffing and related support costs, advertising, trade show attendance, promotion, research and development expenditures, and, changes in general economic conditions impact quarterly performance. Any one of these factors could have a material adverse effect on the Company's results of operations. The Company may experience significant quarterly fluctuations in total revenues as well as operating expenses with respect to future new product introductions. In addition, the Company's component purchases, production, and spending levels are based upon forecast demand for the Company's products. Accordingly, any inaccuracy in forecasting could adversely affect the Company's financial condition and results of operations. Demand for the Company's products could be adversely affected by a slowdown in the overall demand for computer systems, printer products, or digitally printed images. The Company's failure to complete shipments during a quarter could have a material adverse effect on the Company's results of operations for that quarter. Quarterly results are not necessarily indicative of future performance for any particular period. COMPETITIVE INDUSTRY The markets for the Company's products are highly competitive and tend to change rapidly. Some of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. The Company's ability to compete in its markets depends on a number of factors within and outside its control, including the success and timing of product introductions by the Company and its competitors, selling prices, product performance, product distribution, marketing ability, and customer support. A key element of the Company's strategy is to provide competitively priced, quality products. There can be no assurance that the Company's products will continue to be competitively priced. The Company has reduced prices on certain of its products in the past and will likely continue to do so in the future. Price reductions, if not offset by similar reductions in product costs, will affect gross margins and may adversely affect the Company's financial condition and results of operations. The success of the Company will depend on its ability to market its products, including digital printers and hardware and software products used in digital imaging, and to rapidly introduce and market additional products. The Company does not have control over the demand for digital imaging products, including the preferences of users and the capability of personal computers to run the Company's digital imaging software and hardware products and to use ITEC printers. There can be no assurance that the products introduced by the Company will achieve acceptance, or that other digital imaging products companies will not develop and market products which render ITEC products obsolete or less competitive. Failure to obtain significant customer satisfaction or market share for ITEC products will significantly and negatively affect the Company's revenues. Also see "Short Product Lives and Technological Change." 10 SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE The markets for the Company's products are characterized by rapidly evolving technology, frequent new product introductions, and significant price competition. Consequently, short product life cycles and reductions in unit selling prices due to competitive pressures over the life of a product are common. The Company's future success will depend on its ability to continue to develop and manufacture competitive products and achieve cost reductions for its existing products. In addition, the Company monitors new technology developments and coordinates with suppliers, distributors and dealers to enhance existing products and lower costs. Advances in technology will require increased investment to maintain the Company's market position. The Company's financial condition and results of operations could be adversely affected if the Company is unable to develop and manufacture new, competitive products in a timely manner. DEVELOPING MARKETS AND APPLICATIONS The markets for the Company's products are relatively new and are still developing. The Company believes that there has been growing market acceptance for color printers and related technologies and supplies. There can be no assurance, however, that such markets will continue to grow. Other technologies are constantly evolving and improving. There can be no assurance that products based on these other technologies will not have a material adverse effect on the demand for the Company's products. The success of ITEC products in the marketplace depends on many factors, including product performance, price, ease of use, support of industry standards, and customer support and service. There can be no assurance that the Company will be able to compete successfully given these factors. Competitors may develop products comparable or superior to those of the Company and may adapt more quickly than ITEC to new technologies, evolving industry trends, and customer requirements. Therefore, the Company may have to spend more money to effectively compete for market share, including funds to expand its infrastructure, which is a capital- and time-intensive process. In addition, if other companies aggressively compete against ITEC, the Company may have to spend more money on advertising, promotion, trade shows, product development, marketing and overhead expenses, hiring and retaining personnel, and developing new technologies. These higher expenses may have a negative effect on net income and profits. The development of sophisticated digital imaging products is a lengthy and intensive process and is subject to unforeseen risks, delays, problems and costs. Unanticipated technical or other problems may occur which would result in delays in our development program. If we fail to complete development of new products or enhance existing products, we could suffer complete loss of the funds committed by us to those products or enhancements. The losses could be substantial. DEPENDENCE UPON SUPPLIERS At present, many of the Company's products use technology licensed from outside suppliers. The Company relies heavily on Adobe for upgrades and support of the PostScript language. In the case of its font products, the Company licenses such fonts from outside suppliers, including Adobe, who also own the intellectual property rights to such fonts. The reliance on third-party suppliers involves risk, including limited control over potential hardware and software incompatibilities with the Company's products. There can be no assurance that all of the suppliers of products marketed by the Company will continue to license their products to the Company indefinitely, or that these suppliers will not license to other companies simultaneously. While most components are available locally from multiple vendors, certain components used in the Company's products are only available from single sources. Although alternate suppliers are available for many of these components, the process of qualifying replacement suppliers, replacing tooling or ordering and receiving replacement some components could take several months and cause substantial disruption to the Company's operations. Any significant increase in component prices or decrease in component availability could have a material adverse effect on the Company. 11 DEPENDENCE ON KEY PERSONNEL The success of the Company is dependent, in part, on its ability to attract and retain qualified management and technical personnel. Competition for such personnel is intense, and the inability to attract additional key employees or the loss of one or more key employees could adversely affect the Company. There can be no assurance that the Company will retain its key personnel. POTENTIAL CHALLENGE TO PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS The Company's software products, hardware designs, and circuit layouts are copyrighted. However, copyright protection does not prevent other companies from emulating the features and benefits provided by the Company's software, hardware designs or the integration of the two. The Company protects its software source code as trade secrets and makes its Company proprietary source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints. In many product hardware designs, the Company develops ASICs, which encapsulate proprietary technology and are installed on the circuit board. This can serve to significantly reduce the risk of duplication by competitors, but in no way ensures the complete lack of potential for a competitor to replicate a feature or the benefit in a similar product. The Company currently holds no patents. Because computer and printer imaging technology is such a rapidly changing business environment, the Company believes the effectiveness of patents, trade secrets, and copyright protection are less important in influencing long term success than the experience of the Company's technical team, contractual relationships, and a continuous focus on technical advancement. The Company has obtained U.S. registration for several of its trade names or trademarks, including PCPI, NewGen, ColorBlind, LaserImage, ColorImage, ImageScript, ImageFont, and ImageNet. These trade names are used to distinguish the Company's products in the marketplace. Pending trademarks for which registration is currently being sought include NewGen, Xtinguisher, and DealSeekers. From time-to-time, certain competitors have asserted patent rights relevant to the Company's business. The Company expects that this will continue. The Company carefully evaluates each assertion relating to its products. If the Company is not successful in establishing that asserted rights have not been violated, the Company could be prohibited from marketing the products that incorporate such technology. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against the Company. If the Company's products should be found to infringe upon the intellectual property rights of others, the Company could be enjoined from further infringement and be liable for any damages. The Company relies on a combination of trade secret, copyright and trademark protection and non-disclosure agreements to protect its proprietary rights. There can be no assurance, however, that the measures adopted by the Company for the protection of its intellectual property will be adequate to protect its interests, or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. DEPENDENCE ON EXPORT SALES The Company intends to pursue international markets for growth. The Company expects export sales to continue to represent a portion of its sales. International sales and operations are subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, currency exchange fluctuations, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, and collecting accounts receivable. In addition, the laws of certain countries do not protect the Company's products and intellectual property rights to the same extent as do the laws of the United States. As the Company continues to expand its international business, there can be no assurance that these factors will not have an adverse effect on the Company. RELIANCE UPON INDIRECT, INDEPENDENT DISTRIBUTION CHANNELS ITEC products are marketed and sold through established relationships with OEM's, distributors, value-added resellers, manufacturers' representatives, retail vendors, and systems integrators. The Company has a network of dealers and distributors in the United States, Canada, and Europe. Additionally, the Company has a number of 12 resellers in Africa, Asia, the Middle East, Latin America, and Australia, which we support through centralized manufacturing, distribution and repair operations in San Diego and London. The sales of the Company's products are principally made through distributors who may carry competing product lines. These distributors could reduce or discontinue sales of ITEC products, and they may not devote the resources necessary to provide effective sales and marketing support, which could materially and adversely affect the Company's sales. The Company believes that its future growth and success will continue to depend in large part upon its distribution channels. The Company is dependent upon the continued viability and financial stability of its distributors, many of which are small organizations with limited capital who are substantially dependent on general economic conditions and specific factors affecting digital imaging markets. ITEC's business could be materially adversely affected if its distributors fail to pay amounts to the Company that exceed reserves that have been established. To expand its distribution channels, the Company has entered into select OEM arrangements that allow it to address specific market segments or geographic areas. In order to prevent inventory write-downs, to the extent that OEM customers do not purchase products as anticipated the Company may need to convert such products to make them salable to other customers. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock has historically fluctuated significantly. The Company believes that a number of factors could cause further significant fluctuations in the price of the Company's Common Stock. These factors include: (1) general stock market trends; (2) announcements of developments related to the Company's business; (3) fluctuations in the Company's operating results; (4) general conditions in the computer peripheral market and the markets served by the Company or in the worldwide economy; (5) a shortfall in revenue or earnings from securities analysts' expectations; (6) announcements of technological innovations or new products or enhancements by the Company or its competitors; (7) developments in patents or other intellectual property rights; and (8) developments in the Company's relationships with its customers and suppliers. In recent years, the stock market in general, and the market for shares of technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations that are unrelated to the Company's operating performance. DILUTION OF STOCKHOLDER INTERESTS The issuance of the Company's reserved shares would dilute the equity interest of existing stockholders and could have a significant adverse effect on the market price of ITEC common stock. The Company may seek additional financing, which would result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of the Company's capital stock. Additional issuances of capital stock would result in a reduction of current shareholders' percentage interest in the Company. The addition of a substantial number of shares of common stock into the market or by the registration of any other of our securities under the Securities Act may significantly and negatively affect the prevailing market price for the Company's common stock. Furthermore, future sales of shares of common stock issuable upon the exercise of outstanding warrants and options may have a depressive effect on the market price of the common stock, as these warrants and options would be more likely to be exercised at a time when the price of the common stock is in excess of the applicable exercise price. The sale or issuance of any shares of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of ownership without further vote or action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. 13 The Company's board of directors currently is authorized to issue up to 100,000 shares of preferred stock. The board has the power to establish the dividend rates, preferential payments on our liquidation, voting rights, redemption and conversion terms and privileges for any series of preferred stock. LIQUIDITY OF COMMON STOCK The Company currently does not meet the listing maintenance requirements of the Nasdaq SmallCap(TM) Market and Nasdaq rules, which include, among other things, a minimum bid price for our common stock of $1.00. The Company's shares of Common Stock were de-listed from trading on the Nasdaq SmallCap Market in March 2000. The Company has appealed the de-listing and Nasdaq is in the process of reviewing the de-listing. However, the Company cannot be sure that Nasdaq will grant its appeal. The result of the de-listing of the Company's stock from the Nasdaq SmallCap Market may continue to have a negative effect on the liquidity of the stock and also may make it more difficult for the Company to raise capital in the future. The Company's common stock is currently listed on the NASD Electronic Bulletin Board. The Company's common stock is covered by Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend these securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are exempt from this rule if the market price is at least $5.00 per share. ABSENCE OF DIVIDENDS No cash dividends have been paid on the Company's Common Stock to date and the Company does not anticipate paying cash dividends in the foreseeable future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On or about February 2, 1999, American Industries, Inc., Ellison Carl Morgan and entities related to Ellison Carl Morgan (the "Plaintiffs") served the Company and certain officers and directors of the Company (the "Defendants") with a lawsuit filed in the Circuit Court of the State of Oregon for the County of Multnomah, alleging that the Defendants violated certain Oregon Securities Laws in connection with the Plaintiffs' investments in the Company, breached the contracts with the Plaintiffs and committed fraud in connection with such contracts. On or about February 22, 1999, the Plaintiffs served Defendants with an Amended Complaint seeking approximately $1.3 million for added allegations regarding alleged breaches of agreements between the Company and American Industries providing the Company with letters of credit. On or about September 1, 1999 American Industries obtained a judgment on the issues in the case relating to the letters of credit. On May 5, 2000, the jury in a Portland, Oregon trial returned a verdict in favor of the Company and Brian Bonar, the only remaining individual defendant, on all issues other than those related to the letters of credit discussed above. On or about July 9, 1999, Imperial Bank (the "Plaintiff") served the Company and its various operating units with a lawsuit filed in the Superior Court of the State of California for the County of San Diego, alleging breach of credit agreements and seeking foreclosure of personal property security interest, appointment of a receiver, and injunctive relief. At the same time, the Plaintiff filed a motion asking the Court for the appointment of an operational receiver. On August 20, 1999, the Court granted the Plaintiff's request and, on August 23, 1999, an operational receiver assumed control of the day-to-day operations of the Company (see discussion, supra, under Management's Discussion and Analysis). The Company has filed an answer to the complaint and the case is progressing through normal procedures. On or about October 7, 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody made a public announcement that they had filed a lawsuit against the Company and certain current and past officers and/or directors, alleging violation of federal securities laws during the period of April 21, 1998 through October 9, 1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid Nazarian Behfarin, on her own behalf and others purported to be similarly situated, was served on the Company. The Company has not yet been required to file an answer or other pleading in response to the lawsuit. The Company believes these claims are without merit and intends to vigorously defend against them on its own behalf as well as on behalf of the other defendants. Throughout fiscal 1999 and 2000, and through the date of this filing, various creditors of the Company have made claims and/or served the Company with lawsuits alleging the failure of the Company to pay its obligations to them in a total amount exceeding $2.5 million. The lawsuits are in various stages. Some have resulted in judgments being entered against the Company. Should the Company be required to pay the full amount demanded in each of these claims and lawsuits, such a requirement would have a material adverse impact on the operations of the Company. However, the superior security interest held by Imperial Bank has prevented these creditors from collecting on their judgments. Furthermore, from time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company is in default on its credit agreement with Imperial Bank. At March 31, 2000, the amount in default was approximately $4,734,000. (Also see Note 2 to Consolidated Financial Statements.) 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its 1999 Annual Meeting of Stockholders on May 11, 2000 to consider a number of proposals; the disposition of which is described below: 1. Shareholders elected five persons to serve as directors on the Company's Board of Directors until their successors are duly elected and qualified. Directors elected were Brian Bonar, Keith Meadows, Robert A. Dietrich, Eric W. Gaer, and Stephen J. Fryer. The breakdown of voting was as follows: For Against Abstain Unvoted Bonar 82,035,653 2,043,744 - - Meadows 82,041,103 2,038,324 - - Dietrich 82,041,103 2,038,324 - - Gaer 82,041,053 2,038,374 - - Fryer 82,041,053 2,038,374 - - 2. Shareholders approved an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock from 100,000,000 to 200,000,000. There were 79,311,439 votes cast for the Proposal, 4,389,695 votes against, and 430,054 abstentions. 3. Shareholders approved an amendment to the Certificate of Incorporation in order to effect a stock combination (reverse split) of the Common Stock in an exchange ratio to be approved by the Board of Directors before December 31, 2000, ranging from one newly issued share for each two outstanding shares of Common Stock to one newly issued share for each six outstanding shares of Common Stock. There were 78,582,824 votes cast for the Proposal, 4,720,934 votes against, and 775,669 abstentions. 4. Shareholders approved the appointment of Boros & Farrington APC as the Company's independent auditors for the fiscal year ending June 30, 2000. There were 82,056,453 votes cast for the appointment, 1,390,916 votes against, and 632,058 abstentions. 5. Proposals for approval of the Company's Employee Stock Purchase Plan and the Company's 2000 Stock Option plan were not approved by the shareholders because an insufficient number of votes were cast for their consideration (67,723,839 shares were not voted). ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Sheet (b) Reports on Form 8-K: A report on Form 8-K was filed with the Securities and Exchange Commission on January 7, 2000 with regard to a press release of January 3, 2000. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 18, 2000 IMAGING TECHNOLOGIES CORPORATION (Registrant) By: /s/ BRIAN BONAR - ----------------------- Brian Bonar Chief Executive Officer (Principal Financial and Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS JUN-30-2000 JUL-01-1999 MAR-31-2000 701,000 0 255,000 25,000 50,000 1,237,000 615,000 371,000 2,008,000 14,294,000 0 0 420,000 472,000 (68,554) 2,008,000 1,261,000 2,083,000 1,822,000 9,707,000 (1,380,000) 0 (329,000) (9,333,000) 0 (9,333,000) 0 0 0 (9,333,000) (0.10) (0.10)
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