-----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, I/Miq5/q1Y99QH4/pKsWyNH3BKr78DygI0SN5wnsJKEGnZGVbOg9meSmfUJfxINh CyU2ZT6eonNAVcZ1tY1fjA== /in/edgar/work/20001102/0000910680-00-000738/0000910680-00-000738.txt : 20001106 0000910680-00-000738.hdr.sgml : 20001106 ACCESSION NUMBER: 0000910680-00-000738 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMAGING TECHNOLOGIES CORP/CA CENTRAL INDEX KEY: 0000725394 STANDARD INDUSTRIAL CLASSIFICATION: [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: 752058 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 0001.txt QUARTERLY REPORT ON FORM 10-Q FOR ITECH SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 or |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file No. 0-12641 [OBJECT 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: (619) 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 October 31, 2000, was 107,673,916.
PAGE PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets September 30, 2000 (unaudited) and June 30, 2000 (audited) 2 Consolidated Statements of Operations Three months ended September 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Cash Flows Three months ended September 30, 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 7 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 14 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16 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
1 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND JUNE 30, 2000 (in thousands, except share data)
ASSETS 9/30/00 6/30/00 Current assets Cash $ 345 $ 291 Accounts receivable 372 175 Inventories 65 203 Prepaid expenses and other 281 333 --------- -------- Total current assets 1,063 1,002 Property and Equipment, net 514 531 Other 70 150 --------- -------- $ 1,647 $ 1,683 ========= ========= LIABILITIES AND SHAREHOLDERS' NET CAPITAL DEFICIENCY Current liabilities Borrowings under bank notes payable $ 5,465 $ 5,765 Short-term debt 2,813 2,563 Accounts payable 5,351 5,378 Accrued expenses 2,584 1,828 --------- -------- Total current liabilities 16,213 15,534 --------- -------- Stockholders' net capital deficiency Series A preferred stock, $1,000 par value, 7,500 shares authorized, 420.5 shares issued and outstanding 420 420 Common stock, $0.005 par value, 200,000,000 shares Authorized; 105,507,937 shares issued and outstanding 528 507 Paid-in capital 60,283 58,641 Shareholder loans (105) (105) Accumulated deficit (75,692) (73,314) --------- -------- Total shareholders' net capital deficiency (14,566) (13,851) --------- -------- $ 1,647 $ 1,683 =========== ===========
See Notes to Consolidated Financial Statements. 2 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 (in thousands, except share data)
SEPTEMBER 30, 2000 1999 Revenues Sales of products $ 660 $ 940 Engineering fees - 25 Licenses and royalties 177 88 --------- -------- 837 1,053 --------- -------- Costs and expenses Cost of products sold 443 693 Selling, general, and administrative 2,351 3,378 Cost of engineering fees, research, and development 239 649 --------- -------- 3,033 4,720 --------- -------- Loss from operations (2,196) (3,667) --------- -------- Other income (expense): Interest and finance costs, net (182) (138) Other - (20) --------- -------- (182) (158) --------- -------- Loss before income taxes (2,378) (3,825) Income tax benefit (expense) - - --------- -------- Net loss $ (2,378) $ (3,825) ============ ============ Earnings (loss) per common share Basic $ (0.02) $ (0.12) ============== ============== Diluted $ (0.02) $ (0.12) ============== ============== Weighted average common shares 103,160 30,889 ======= ====== Weighted average common shares - assuming dilution 103,160 30,889 ======= ======
See Notes to Consolidated Financial Statements. 3 IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 (in thousands, except share data)
2000 1999 ---- ---- Cash flows from operating activities Net loss $ (2,378) $ (3,825) Adjustments to reconcile net loss to net cash from operating activities Depreciation and amortization 72 59 Amortization of capitalized software - 356 Stock issued for services 450 326 Changes in operating assets and liabilities Accounts receivable (197) 546 Inventories 138 140 Prepaid expenses and other 132 211 Accounts payable and accrued expenses 729 543 --------- ---------- Net cash from operating activities (1,054) (1,644) --------- ---------- Cash flows from investing activities Capitalized software - (358) Capital expenditures (55) - --------- ---------- Net cash from investing activities (55) (358) --------- ---------- Cash flows from financing activities Net borrowings under bank notes payable (300) (1,049) Issuance of other notes payable 250 - Net proceeds from issuance of common stock 1,213 884 --------- ---------- Net cash from financing activities 1,163 1,933 --------- ---------- Net increase (decrease) in cash 54 (69) Cash, beginning of period 291 75 --------- ---------- Cash, end of period $ 345 $ 6 ========= ========== Supplemental disclosure of cash flow information Cash paid during the period for interest $ 182 $ 192 Cash paid during the period for income taxes $ - - ========= ==========
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, 2000, 1999, and 1998 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 September 30, 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 Company's primary lender, the Superior Court of San Diego appointed an operational receiver who took control of the Company's day-to-day operations on August 23, 1999. On June 21, 2000, in connection with a settlement agreement reached with Imperial Bank, the Superior Court of San Diego issued an order dismissing the operational receiver. On October 21, 1999, Nasdaq notified the Company that it no longer complied with the bid price and net tangible assets/market capitalization/net income requirements for continued listing on The Nasdaq SmallCap Market. At a hearing on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public interest concerns relating to the Company's financial viability. The Company's common stock was delisted from The Nasdaq Stock Market effective with the close of business on March 1, 2000. As a result of being delisted from The Nasdaq SmallCap Market, stockholders may find it more difficult to sell common stock. This lack of liquidity also may make it more difficult to raise capital in the future. Trading of the Company's common stock is now being conducted over-the-counter through the NASD Electronic Bulletin Board and 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. The Securities and Exchange Commission adopted regulations that generally define a "penny stock" as any equity security that has a market price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange or the Nasdaq and the issuer has net tangible assets under $2,000,000, the equity security also would constitute a "penny stock." Our common stock does constitute a penny stock because our common stock has a market price less than $5.00 per share, our common stock is no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000. As our common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common stock, of a disclosure schedule explaining the penny stock market and the risks associated with it. Furthermore, the ability of broker/dealers to sell our common stock and the ability of shareholders to sell our common stock in the secondary market would be limited. As a result, the market liquidity for our common stock would be severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock. 5 The Company is in the process of reestablishing management control of its operations and resuming its strategic plan. In order to succeed, however, Company must obtain additional funds to provide adequate working capital and finance operations. To address the Company's working capital needs, on July 12, 2000, it announced an agreement for a financing facility providing commitments, under specific conditions, to purchase up to $36 million of its common shares over the two years after September 27, 2000, the effective date of a registration statement filed with the Securities and Exchange Commission. The Company has also engaged a financial advisor to assist with additional fund raising efforts and to help identify merger and acquisition candidates. There can be no assurance, however, that the Company will be able to comply with the Imperial Bank settlement agreement, meet the conditions under the financing facility, or complete any additional debt or equity financings 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 may be required to delay, reduce or eliminate some or all of its planned activities, including any potential mergers or acquisitions. The Company's inability to fund its capital requirements would have a material adverse effect on the Company. 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:
EARNINGS (LOSS) SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT SEPTEMBER 30, 2000 Net loss $ (2,378) Preferred dividends (6) ------------- Basic and diluted EPS $ (2,384) 103,160 $ (0.02) ========== ========== ======
NOTE 4. INVENTORIES
SEPTEMBER 30, JUNE 30, 2000 2000 Inventories Materials and supplies $ 24 $ 87 Finished goods 40 116 -------- --------- $ 65 $ 203 ======== ========
6 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. 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 cancelled 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, including its software 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, 2000 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 September 30, 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. To address the Company's working capital needs, on July 12, 2000, it announced an agreement for a financing facility providing commitments, under specific conditions, to purchase up to $36 million of its common shares over the two years after September 27, 2000, the effective date of a registration statement filed with the SEC. The Company has also engaged a financial advisor to assist with additional fund raising efforts and to help identify merger and acquisition candidates. There can be no assurance, however, that the Company will be able to complete this or 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." 7 RESULTS OF OPERATIONS NET REVENUES Revenues were $837 thousand and $1.05 million for the quarters ended September 30, 2000 and 1999, respectively. The 20% decrease in sales was due primarily to the Company's ongoing liquidity shortage, which substantially reduces its ability to purchase components to build inventories for sale. During most of the previous fiscal year and for the period ended September 30, 1999, the Company was under the control of a court-appointed operational receiver. Management resumed control of the Company on June 21, 2000. COST OF PRODUCTS SOLD Cost of products sold were $443 thousand or 53% of product sales and $693 thousand or 74% of product sales for the quarters ended September 30, 2000 and 1999, respectively. The percentage decrease in 2000 as compared to 1999 was primarily due to improved margins on product sales. During the prior year period, when the Company was being operated by the court-appointed operational receiver, products were sold at smaller profit margins; in some cases, at a loss. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $2.4 million or 281% of total revenue and $3.4 million or 321% of total revenues for the quarters ended September 30, 2000 and 1999, respectively. Selling, general and administrative expenses consisted primarily of general corporation functions, salaries, facilities, and fees for professional services, including legal expenses. The decrease in selling, general and administrative expenses in the period ended September 30, 2000 as compared to the year-earlier period was due primarily to management's reduction of associated activities, including reductions in personnel, marketing expenses, and facilities, due to a lack of working capital. COST OF ENGINEERING AND RESEARCH AND DEVELOPMENT Engineering and research and development expenses were $239 thousand or 29% of total revenue and $649 thousand or 62% of total revenues for the quarters ended September 30, 2000 and September 30, 1999. The decrease in expenses 2000 compared to 1999 resulted primarily from reductions in engineering and research and development activity during the period that the Company was under the control of the court-appointed operational receiver and the associated reduction in engineering personnel to support such activities, including the sale of engineering development contracts with OEM customers. 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. The Company has received and anticipates that it will continue to receive cash from collections of accounts receivable from its customers, distributors, and OEMs. These groups generally have a history of timely payments; however, an increasing amount of international sales can increase accounts receivable balances due to traditionally slower payments by international customers. Any failure of the Company's customers, distributors or OEMs to pay, or any significant delay in the payment of, a material portion of the amounts owing to the Company could have a material adverse effect on the Company. In the near-term, however, the Company must rely on generating the majority of its cash from the sale of equity securities. To address these needs, on July 12, 2000, the Company announced an agreement for a financing facility providing commitments, under specific conditions, to purchase up to $36 million of its common shares over the two years after September 27, 2000, the effective date of a registration statement filed with the SEC. As of September 30, 2000, the Company had negative working capital of approximately $15.2 million, a decrease of approximately $0.7 million as compared to June 30, 1999. The decrease is primarily due to an increase in accrued expenses. 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 the creditors of the Company, as well as providing working capital for the Company, the 8 Company will cease to operate. The Company continues to actively work with entities capable of providing such funding. Net cash used in operating activities decreased to $1.05 million during the quarter ended September 30, 2000, from $1.6 million during the quarter ended September 30, 1999, due primarily to a decrease in available cash. Net cash used in investing activities decreased to $55 thousand during the quarter ended September 30, 2000, from $358 thousand during the quarter ended September 30, 1999, due primarily to decreases in capitalized software. Net cash from financing activities decreased to $1.2 million during the quarter ended September 30, 2000, from $1.9 million during the year-earlier quarter, due to a decrease in proceeds on the issuance of common stock, which has been the Company's primary source of liquidity. 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 September 30, 2000, was approximately $500 thousand. The Company has no material commitments for capital expenditures. 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 Company anticipates that its capital requirements will increase in future periods as it continues to develop new products and increases its sales and marketing efforts. The report of the Company's independent auditors accompanying the Company's June 30, 2000 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. If adequate funds are not available, the Company may 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 "Risks and Uncertainties--Future Capital Needs." RISKS AND UNCERTAINTIES FUTURE CAPITAL NEEDS Need for Future Capital ITEC's business has not been profitable in the past and it may not be profitable in the future. The Company may incur losses on a quarterly or annual basis for a number of reasons, some within and others outside its control. See "Potential Fluctuation in Our 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. ITEC 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. Even if funds are available, the terms under which the funds are available may not be acceptable to the Company. Insufficient funds may require the delay, reduction, or elimination of some or all of the Company's planned activities. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Potential Fluctuation in Quarterly Performance Quarterly operating results can fluctuate significantly depending on a number of factors, any one of which could have a material adverse effect on the Company's results of operations. The factors include: the timing of product announcements and subsequent introductions of new or enhanced products by the Company and by its competitors, the availability and cost of components, the timing and mix of shipments of the Company's products, the market acceptance of new products, seasonality, currency fluctuations, changes in the Company's prices and in the Company's competitors' prices, price protection offered to distributors and OEMs for product price reductions, the timing of expenditures for staffing and related support costs, the extent and success of advertising, research and development expenditures, and changes in general economic conditions. The Company may experience significant quarterly fluctuations in revenues and operating expenses as it introduces new products. In addition, component purchases, production and spending levels are based upon management's forecast of future demand for the Company's products. Accordingly, any inaccuracy in the Company's forecasts could adversely affect its financial condition and results of operations. Demand for the 9 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 its results of operations for that quarter. Quarterly results are not necessarily indicative of future performance for any particular period. Highly Competitive Industry The markets for ITEC products are highly competitive and rapidly changing. Some of the Company's current and prospective competitors have significantly greater financial, technical, manufacturing and marketing resources than ITEC. The Company's ability to compete in its markets depends on a number of factors, some within and others outside its control. These factors include: the frequency and success of product introductions by the Company and by its competitors, the selling prices of ITEC products and of its competitors' products, the performance of ITEC products and of its competitors' products, product distribution by ITEC and by its competitors, ITEC's marketing ability and the marketing ability of its competitors, and the quality of customer support offered by ITEC and by its competitors. A key element of ITEC's strategy is to provide competitively priced, quality products. The Company cannot be certain that its products will continue to be competitively priced. The Company has reduced prices on certain 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 reduce gross margins and may adversely affect the Company's financial condition and results of operations. Short Product Lives and Technological Change The markets for ITEC's products are characterized by rapidly evolving technology, frequent new product introductions and significant price competition. Consequently, short product life cycles and reductions in product selling prices due to competitive pressures over the life of a product are common. The future success of the Company will depend on its ability to continue to develop and manufacture competitive products and achieve cost reductions for existing products. In addition, the Company monitors new technology developments and coordinates with suppliers, distributors and dealers to enhance its existing products and to lower costs. Advances in technology will require increased investment in product development to maintain the Company's market position. If the Company is unable to develop and manufacture new, competitive products in a timely manner, its financial condition and results of operations will be adversely affected. Developing Markets and Applications The markets for ITEC products are relatively new and are still developing. Management believes that there has been growing market acceptance for color printers, color management software and supplies. The Company cannot be certain, however, that these markets will continue to grow. Other technologies are constantly evolving and improving. The Company cannot be certain that products based on these other technologies will not have a material adverse effect on the demand for its products. Dependence Upon Suppliers At present, many of ITEC's products use technology licensed from outside suppliers. The Company relies heavily on these suppliers for upgrades and support. In the case of ITEC font products, the Company licenses the fonts from outside suppliers, who also own the intellectual property rights to the fonts. The Company's reliance on third-party suppliers involves many risks, including limited control over potential hardware and software incompatibilities with ITEC products. Furthermore, the Company cannot be certain that all of the suppliers of products it markets will continue to license their products to ITEC, or that these suppliers will not license their products to other companies simultaneously. Risks Related to Acquisitions In order to grow the business, the Company may acquire businesses that management believes are complementary. To successfully implement this strategy, the Company must identify suitable acquisition candidates, acquire these candidates on acceptable terms, integrate their operations and technology successfully with the Company, retain existing customers and maintain the goodwill of the acquired business. The Company may fail in its efforts to implement one or more of these tasks. Moreover, in pursuing acquisition opportunities, the Company may compete for acquisition targets with other companies with similar growth strategies. Some of these competitors may be larger and have greater financial and other resources than those of the Company. Competition for these 10 acquisition targets likely could also result in increased prices of acquisition targets and a diminished pool of companies available for acquisition. Overall financial performance will be materially and adversely affected if the Company is unable to manage internal or acquisition-based growth effectively. Acquisitions involve a number of risks, including: integrating acquired products and technologies in a timely manner; integrating businesses and employees with the Company's business; managing geographically-dispersed operations; reductions in the Company's reported operating results from acquisition-related charges and amortization of goodwill; potential increases in stock compensation expense and increased compensation expense resulting from newly-hired employees; the diversion of management attention; the assumption of unknown liabilities; potential disputes with the sellers of one or more acquired entities; the Company's inability to maintain customers or goodwill of an acquired business; the need to divest unwanted assets or products; and the possible failure to retain key acquired personnel. Client satisfaction or performance problems with an acquired business could also have a material adverse effect on the Company's reputation, and any acquired business could significantly under perform relative to expectations. The Company is currently facing all of these challenges and its ability to meet them over the long term has not been established. As a result, the Company cannot be certain that it will be able to integrate acquired businesses, products or technologies successfully or in a timely manner in accordance with its strategic objectives, which could have a material adverse effect on overall financial performance. In addition, if the Company issues equity securities as consideration for any future acquisitions, existing stockholders will experience ownership dilution and these equity securities may have rights, preferences or privileges superior to those of ITEC common stock. See "Future Capital Needs." Dependence on Key Personnel The success of the Company is dependent, in part, upon its ability to attract and retain qualified management and technical personnel. Competition for these personnel is intense, and the Company will be adversely affected if it is unable to attract additional key employees or if it loses one or more key employees. The Company may not be able to retain its key personnel. Component Availability and Cost; Dependence on Single Sources The Company presently out-sources the production of some of its manufactured products through a number of vendors located in California. These vendors assemble products, using components purchased by the Company from other sources or from their own inventory. The terms of supply contracts are negotiated separately in each instance. Although the Company has not experienced any difficulty over the past several years in engaging contractors or in purchasing components, present vendors may not have sufficient capacity to meet projected market demand for ITEC products and alternative production sources may not be available without undue disruption. Contract vendors generally perform multi-step quality control testing prior to shipping their products to the Company. The Company, in turn, includes appropriate software, performs additional tests on the products, then packages and ships products into the distribution channels. In addition to buying such items as printed circuit boards and other components from outside vendors, the Company purchases and/or licenses software programs, including operating systems and intellectual property modules (pre-written software code to execute a specifically defined operation). The Company purchases these products from vendors who have licenses to sell the software to the Company from the originators of the software, and have, from time to time, directly licensed system software that is either embedded or otherwise incorporated in certain ITEC products. While most components are available locally from multiple vendors, certain components used in ITEC products are only available from single sources. Although alternative suppliers are readily available for many components, for some components the process of qualifying replacement suppliers, replacing tooling or ordering and receiving replacement components could take several months and cause substantial disruption to operations. Any significant increase in component prices or decrease in component availability could have a material adverse effect on the Company's business and overall financial performance. Possibility of Challenge to Products or Intellectual Property Rights The Company currently holds no patents. 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 its software, hardware designs or the integration of the two. The Company protects 11 its software source code as trade secrets and makes its 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 application-specific integrated circuits (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 that a competitor will be unable to replicate a feature or the benefit in a similar product. Competitors may assert that the Company infringes their patent rights. If the Company fails to establish that it has not violated the asserted rights, it could be prohibited from marketing the products that incorporate the technology and it could be liable for damages. The Company could also incur substantial costs to redesign its products or to defend any legal action taken against it. The Company has obtained U.S. registration for several of its trade names or trademarks, including: PCPI, NewGen, ColorBlind, LaserImage, ColorImage, ImageScript and ImageFont. These trade names are used to distinguish the Company's products in the marketplace. Risks Associated with International Operations The Company conducts business globally. Accordingly, future results could be adversely affected by a variety of uncontrollable and changing factors including: foreign currency exchange fluctuations; regulatory, political or economic conditions in a specific country or region; the imposition of governmental controls; export license requirements; restrictions on the export of critical technology; trade restrictions; changes in tariffs; government spending patterns; natural disasters; difficulties in staffing and managing international operations; and difficulties in collecting accounts receivable. In addition, the laws of certain countries do not protect ITEC products and intellectual property rights to the same extent as the laws of the United States. Dependence on Export Sales The Company intends to pursue international markets as key avenues for growth and to increase the percentage of sales generated in international markets. In the Company's past few fiscal years, sales outside the United States represented over half of its net sales. The Company expects sales outside the United States to continue to represent a significant portion of its sales. As the Company continues to expand its international sales and operations, the business and overall financial performance may be adversely affected by factors such as those described under "Risks Associated with International Operations." Reliance on Indirect Distribution ITEC products are marketed and sold through an established distribution channel of value added resellers, manufacturers' representatives, retail vendors, and systems integrators. The Company has a network of dealers and distributors in the United States and Canada, in the European Community and on the European Continent, as well as a growing number of resellers in Africa, Asia, the Middle East, Latin America, and Australia. The Company supports its worldwide distribution network and end-user customers through centralized manufacturing, distribution, and repair operations headquartered in San Diego. As of October 6, 2000, the Company directly employed nine individuals involved in marketing and sales activities. Sales are principally made through distributors, which may carry competing product lines. These distributors could reduce or discontinue sales of ITEC products, which could materially and adversely affect the Company. These independent distributors may not devote the resources necessary to provide effective sales and marketing support of ITEC products. In addition, the Company is dependent upon the continued viability and financial stability of these distributors, many of which are small organizations with limited capital. These distributors, in turn, are substantially dependent on general economic conditions and other unique factors affecting the Company's markets. Management believes that the future growth and success of the Company will continue to depend in large part upon its distribution channels. The business could be materially and adversely affected if the Company's distributors fail to pay amounts to the Company that exceed reserves it has 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. To prevent inventory write-downs in the event that OEM customers do not purchase products as anticipated, the Company may need to convert such products to make them salable to other customers. 12 Volatility of Stock Price The market price of ITEC's common stock historically has fluctuated significantly. The Company's stock price could fluctuate significantly in the future based upon any number of factors such as: general stock market trends; announcements of developments related to ITEC's business; fluctuations in the Company's operating results; a shortfall in revenues or earnings compared to the estimates of securities analysts; announcements of technological innovations, new products or enhancements by the Company or its competitors, general conditions in the computer peripheral market and the imaging markets served by the Company; general conditions in the worldwide economy; developments in patents or other intellectual property rights; and developments in the Company's relationships with its customers and suppliers. In addition, 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. Similarly, the market price of ITEC common stock may fluctuate significantly based upon factors unrelated to the Company's operating performance. Absence of Dividends The Company has not paid any cash dividends on its common stock to date and it does not anticipate paying cash dividends in the foreseeable future. Appointment and Removal of Operational Receiver On August 20, 1999, at the request of Imperial Bank, the Company's primary lender, the Superior Court, San Diego appointed an operational receiver. On August 23, 1999, the operational receiver took control of ITEC's day-to-day operations. Through further equity infusion, primarily in the form of the exercise of warrants to purchase ITEC common stock, operations have continued, and on June 21, 2000, the Superior Court, San Diego issued an order dismissing the operational receiver. However, in the future, without additional funding sufficient to satisfy Imperial Bank and other creditors, as well as providing for working capital, there can be no assurances that such operations can continue. In addition, the Company may not be able to satisfy all conditions required to sell shares under the Private Equity Line of Credit Agreement. In that case, the Company would likely need to raise money from other sources in order to continue to fund operations. Such alternative funding may not be available. If such funding is not obtained, the Company will need to reduce or suspend operations. Nasdaq Listing and Liquidity of Common Stock The Nasdaq(R) SmallCap(R) Market and Nasdaq Marketplace Rules require an issuer to evidence a minimum of $2,000,000 in net tangible assets, a $35,000,000 market capitalization or $500,000 in net income in the latest fiscal year or in two of the last three fiscal years, and a $1.00 per share bid price, respectively. On October 21, 1999, Nasdaq notified the Company that it no longer complied with the bid price and net tangible assets/market capitalization/net income requirements for continued listing on The Nasdaq SmallCap Market. At a hearing on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public interest concerns relating to the Company's financial viability. While the Panel acknowledged that ITEC was in technical compliance with the bid price and market capitalization requirements, the Panel was of the opinion that the continued listing of ITEC common stock on The Nasdaq Stock Market was no longer appropriate. This conclusion was based on the Panel's concerns regarding the future viability of the Company. ITEC common stock was delisted from The Nasdaq Stock Market effective with the close of business on March 1, 2000. As a result of being delisted from The Nasdaq SmallCap Market, stockholders may find it more difficult to sell ITEC common stock. This lack of liquidity also may make it more difficult for the Company to raise capital in the future. Trading of ITEC common stock is now being conducted over-the-counter through the NASD Electronic Bulletin Board and 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. 13 The Securities and Exchange Commission adopted regulations that generally define a "penny stock" as any equity security that has a market price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange or the Nasdaq and the issuer has net tangible assets under $2,000,000, the equity security also would constitute a "penny stock." Our common stock does constitute a penny stock because our common stock has a market price less than $5.00 per share, our common stock is no longer quoted on Nasdaq, and our net tangible assets do not exceed $2,000,000. As ITEC common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving ITEC common stock, of a disclosure schedule explaining the penny stock market and the risks associated with it. Furthermore, the ability of broker/dealers to sell ITEC common stock and the ability of shareholders to sell ITEC common stock in the secondary market would be limited. As a result, the market liquidity for ITEC common stock would be severely and adversely affected. The Company can provide no assurance that trading in ITEC common stock will not be subject to these or other regulations in the future, which would negatively affect the market for ITEC common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS 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 On July 5, 2000, the Company entered into a Private Equity Line of Credit Agreement with Impany Investment Limited ("Impany"). Pursuant to this agreement, the Company has the right, subject to certain conditions, to sell up to $36,000,000 of common stock over the next two years to Impany, which Impany may resell to the public under a registration statement filed with the SEC in September 2000. Additionally, the Company issued a warrant to Impany to purchase up to 2,000,000 shares of its common stock at an exercise price equal to $.57 per share. Shares issuable upon exercise of Impany's warrant may also be resold to the public under this registration statement. Beginning on September 27, 2000, the date the registration statement was declared effective by the SEC, and continuing for two years thereafter, the Company may in its sole discretion sell, or put, shares of our common stock to Impany. From time to time during the two-year term, the Company may make 18 monthly draw downs, by giving notice and requiring Impany to purchase shares of our common stock, for the draw down amount. Impany's purchase price will be based upon the average of the three lowest closing bid prices of the common stock over the period of five (5) trading days during which the purchase price of the common stock is determined with respect to 14 the put date, which period shall begin two (2) trading days prior to the put date and end two (2) trading days following the put date. The maximum put amount that we may sell is as set forth in the table below:
- ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ Bid Average Daily Average Daily Average Daily Average Daily Average Daily Price Trading Volume Trading Volume Trading Volume of Trading Volume Trading Volume of up to 75,000 of 75,001-150,000 150,001-250,000 of 250,001- of 400,001 and 400,000 above - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 0.25-0.49 $ 200,000 $ 300,000 $ 500,000 $ 650,000 $ 750,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 0.50-0.74 $ 300,000 $ 500,000 $ 650,000 $ 750,000 $ 1,000,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 0.75-0.99 $ 350,000 $ 550,000 $ 600,000 $ 800,000 $ 1,250,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 1.00-1.24 $ 400,000 $ 600,000 $ 750,000 $ 850,000 $ 1,500,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 1.25-1.49 $ 500,000 $ 675,000 $ 800,000 $ 925,000 $ 1,750,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 1.50-1.99 $ 600,000 $ 750,000 $ 850,000 $ 1,000,000 $ 2,000,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 2.00-2.24 $ 675,000 $ 825,000 $ 925,000 $ 1,000,000 $ 2,250,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 2.25-2.49 $ 700,000 $ 850,000 $ 950,000 $ 1,000,000 $ 2,500,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ 2.50-3.50 $ 750,000 $ 900,000 $ 1,000,000 $ 1,000,000 $ 2,750,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------ Above 3.50 $ 800,000 $ 1,000,000 $ 1,250,000 $ 1,500,000 $ 3,000,000 - ----------------- ------------------ ------------------ ------------------- ------------------ ------------------
The Company's ability to cause Impany to purchase shares of its common stock under the Private Equity Line of Credit Agreement is subject to certain conditions, including, but not limited to: o The number of shares the Company may sell to Impany on any put date, when aggregated with all other shares then owned by Impany, cannot exceed 9.9% of the total common stock then outstanding. o If we are listed on The Nasdaq SmallCap Market, the total number of shares that the Company may sell to Impany under the agreement and warrant cannot exceed 19.9% of its common stock, unless it has obtained shareholder approval as required by the rules of the Nasdaq Stock Market Inc. o The registration statement must remain effective so that Impany may publicly resell the shares that it acquires from the Company under the agreement. o There has not been an effect on the business, operations, properties, prospects or financial condition of the Company that is material and adverse to the Company and such other entities controlling or controlled by the Company, taken as a whole, and/or any condition, circumstance or situation that would prohibit or otherwise interfere with the ability of the company to enter into and perform its obligations under the agreement. The Company may not be able to satisfy all conditions required to put shares to Impany at any given time. If this occurs, the Company would likely need to raise money from other sources in order to continue to fund its operations. Such alternative funding may not be available. Also, we cannot put shares to Impany at a time when we have not publicly disclosed material information about our company. In connection with the Private Equity Line of Credit Agreement, the Company issued a warrant on July 5, 2000 to Impany to purchase up to 2,000,000 shares of its common stock at an exercise price equal to $.57 per share. Impany may exercise the warrant through January 5, 2003. Impany is an "underwriter" within the meaning of the Securities Act in connection with its resale of shares of the Company's common stock. To date, the Company has received $750,000 from a draw-down against the equity line of credit, issuing 3,225,808 shares of common stock to Impany. In August 2000, the Company issued "retention" warrants to employees that allow the purchase of up to 2,821,000 shares of common stock at a purchase price of $.01 per share. These warrants become exercisable in January 2001 for those employees who have remained employed by the Company through that period. In addition, subsequent to June 30, 2000, the Company issued warrants to officers and key employees that allow the purchase of 2,136,000 shares of common stock at a purchase price of $0.30 per share. These warrants are exercisable immediately. 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K The Company filed a report on Form 8-K dated July 28, 2000 related to its Private Equity Line of Credit Agreement with Impany Investment Limited. (Also see, Item 2.) 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: November 1, 2000 IMAGING TECHNOLOGIES CORPORATION (Registrant) By: /s/ Brian Bonar - ------------------- Brian Bonar Chairman and Chief Executive Officer By: /s/ Scott Kiefer - -------------------- Scott Kiefer Chief Accounting Officer 17 -----END PRIVACY-ENHANCED MESSAGE-----