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 DECEMBER 31, 2000
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[ITEC LOGO]
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 February
1, 2001 was 132,635,582.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 2000 (unaudited) and June 30, 2000 (audited)................ 3
Consolidated Statements of Operations - 3 months ended December 31, 2000 and 1999 (unaudited)......... 4
Consolidated Statements of Operations - 6 months ended December 31, 2000 and 1999 (unaudited)......... 5
Consolidated Statements of Cash Flows - 6 months ended December 31, 2000 and 1999 (unaudited).......... 6
Notes to Consolidated Financial Statements............................................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................................ 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 17
ITEM 5. OTHER INFORMATION.................................................................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 18
SIGNATURES 19
2
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, JUNE 30,
2000 2000
Current assets
Cash $ 397 $ 291
Accounts receivable 609 175
Inventories 158 203
Prepaid expenses and other 370 333
---------- ----------
Total current assets 1,534 1,002
Property and equipment, net 706 531
Goodwill 686 -
Other - 150
---------- ----------
$ 2,926 $ 1,683
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank note payable $ 4,865 $ 5,765
Short-term debt 2,563 2,563
Accounts payable 6,887 5,378
Accrued expenses 1,581 1,828
---------- ----------
Total current liabilities 15,896 15,534
Long-term debt 850 -
---------- ----------
Stockholders' equity (deficit)
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, 118,513,745 shares issued and
outstanding 592 507
Paid-in capital 62,549 58,641
Shareholder loans (105) (105)
Accumulated deficit (77,276) (73,314)
---------- ----------
Total shareholders' equity (deficit) (13,820) (13,851)
---------- ----------
$ 2,926 $ 1,683
========== ===========
See Notes to Consolidated Financial Statements.
3
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2000 1999
Revenues
Sales of products $ 556 $ 61
Licenses and royalties 455 248
------------ ------------
1,011 309
------------ ------------
Costs and expenses
Cost of products sold 481 904
Selling, general, and administrative 1,721 1,549
Cost of engineering fees, research, and development 217 979
------------ ------------
2,419 3,432
------------ ------------
Income (loss) from operations (1,408) (3,123)
------------ ------------
Other income (expense):
Interest, net (177) (103)
Restructuring - (18)
Other - 82
------------ ------------
(177) (39)
------------ ------------
Income (loss) before income taxes (1,585) (3,162)
Income tax expense
Net income (loss) $ (1,585) $ (3,162)
============ ============
Earnings (loss) per common share
Basic $ (0.01) $ (0.13)
============ ============
Diluted $ (0.01) $ (0.13)
============ ============
Weighted average common shares 112,709 55,556
============ ============
Weighted average common shares - assuming dilution 112,709 55,556
============ ============
See Notes to Consolidated Financial Statements.
4
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2000 1999
Revenues
Sales of products $ 1,216 $ 1,001
Engineering fees - 25
Licenses and royalties 632 336
----------- -----------
1,848 1,362
----------- -----------
Costs and expenses
Cost of products sold 924 1,597
Selling, general, and administrative 4,072 4,927
Cost of engineering fees, research, and development 456 1,628
----------- -----------
5,452 8,152
----------- -----------
Income (loss) from operations (3,604) (6,790)
----------- -----------
Other income (expense):
Interest, net (358) (241)
Restructuring, ITEC Europe - (18)
Other 62
----------- -----------
-
(358) (197)
----------- -----------
Income (loss) before income taxes (3,962) (6,987)
Income tax expense
Net income (loss) $ (3,962) $ (6,987)
=========== ===========
Earnings (loss) per common share
Basic $ (0.04) $ (0.13)
============ ============
Diluted $ (0.04) $ (0.13)
============ ============
Weighted average common shares 107,997 55,566
============ ============
Weighted average common shares - assuming dilution 107,997 55,566
============ ============
See Notes to Consolidated Financial Statements.
5
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2000 1999
Cash flows from operating activities
Net income (loss) $ (3,962) $ (6,987)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 143 234
Amortization of capitalized software - 354
Stock issued for services 618 -
Changes in operating assets and liabilities
Accounts receivable (355) 1,691
Inventories 45 495
Prepaid expenses and other (37) 623
Accounts payable and accrued expenses 767 (985)
-------- --------
Net cash from operating activities (2,781) (4,575)
Cash flows from investing activities
Capital expenditures (90) -
Other 150 -
-------- --------
Net cash from investing activities 60 -
-------- --------
Cash flows from financing activities
Net borrowings under bank lines of credit (900) 784
Net borrowings under short-term notes payable - (2,048)
Net borrowings under long-term notes payable 850
Net proceeds from issuance of common stock 2,877 5,880
-------- --------
Net cash from financing activities 2,827 4,616
-------- --------
Net increase (decrease) in cash 106 41
Cash, beginning of period 291 75
-------- --------
Cash, end of period $ 397 $ 116
======== ========
See Notes to Consolidated Financial Statements.
6
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 December 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 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.
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. The Company has engaged a financial advisor to assist with
additional fund raising efforts and
7
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.
NOTE 4. INVENTORIES
DECEMBER 31, JUNE 30,
2000 2000
Inventories
Materials and supplies $ 50 $ 87
Finished goods 108 116
------- ---------
$ 158 $ 203
======= ========
NOTE 5. CONVERTIBLE NOTES PAYABLE
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the registrant sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850,000
bearing interest at the rate of eight percent (8%) per annum, due December 12,
2003, each convertible into shares of the registrant's common stock. Interest
shall be payable, at the option of the purchasers, in cash or shares of common
stock. At any time after the issuance of the notes, each note is convertible
into such number of shares of common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note as of the date of
conversion by (b) the lesser of (x) an amount equal to seventy percent (70%) of
the average closing bid prices for the three (3) trading days prior to December
12, 2000 and (y) an amount equal to seventy percent (70%) of the average closing
bid prices for the three (3) trading days having the lowest closing bid prices
during the thirty (30) trading days prior to the conversion date.
Additionally, the registrant issued a warrant to each of the purchasers to
purchase a number of shares of the registrant's common stock at an exercise
price equal to $.0887 per share. The purchasers may exercise the warrants
through December 12, 2005.
8
NOTE 6. BUSINESS ACQUISITION
Effective December 1, 2000, the Company acquired all of the outstanding shares
of Eduadvantage.com in exchange for 3,500,000 of the Company's common stock.
Eduadvantage.com is a California corporation that is primarily engaged in a
web-based business. The acquisition has been accounted for as a purchase
transaction. The following summarized the net assets acquired:
Assets
Receivables $ 79
Equipment 3
Goodwill 686
-----
768
Less assumption of liabilities (495)
-----
Net assets acquired $273
====
During the quarter ended December 31, 2000, the Company also acquired the rights
to certain software in exchange for 1,200,000 shares of its common stock.
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.
Additionally, the Company has been pursuing certain strategic
acquisitions in order to grow its revenues and to pursue new opportunities for
revenues and profits.
In December, 2000, the Company acquired all of the outstanding shares
of Eduadvantage.com in exchange for shares of the Company's common stock (See
Note 6 of the Notes to the Consolidated Financial Statements). Eduadvantage.com
is primarily engaged in an Internet business selling educations software to
institutions,
9
businesses, and end-users. As part of this transaction, the Company also
acquired the rights to certain proprietary software. This acquisition furthers
the Company's objective to develop and support e-commerce strategies, which also
includes the Company's Dealseekers.com unit, which the Company hopes to
re-launch later this year. Eduadvantage provides ITEC a vehicle to distribute
ITEC products, along with EduAdvantage.com's current products for accounting,
desktop publishing, tax software, and virus detection. The acquisition is
expected to provide ITEC with incremental revenues.
In November, 2000, ITEC entered into an agreement to acquire a majority
interest in Quality Photographic Imaging (formerly known as Quick Pix, Inc.)
("QPI") (OTC: QPIX). QPI was established in 1982 and is a leading visual
marketing support firm, located in Southern California. The company provides a
spectrum of services to produce final color visuals, both digital and
photographic. QPI is a total visual marketing support company servicing a wide
range of varied clientele. The acquisition requires QPI shareholder approval,
which is pending.
In December, 2000, ITEC signed a definitive agreement to purchase 75
percent of the stock of Pen Interconnect, Inc. (OTC Bulletin Board: PENC -
news), Irvine, Calif. Two ITEC business units, EduAdvantage.com and
Dealseekers.com, will be combined into Pen Interconnect to create a publicly
traded e-commerce company. The agreement is contingent on Pen Interconnect
resolving certain judgments, liens and vendor debts and obtaining shareholder
approval, prior to the closing, which is anticipated in the next 60 days.
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 December 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 help
address these needs, on December 12, 2000, ITEC entered into a Convertible Note
Purchase Agreement with several investors for $850,000. Additionally, the
Company issued a warrant to each of the purchasers to purchase a number of
shares of the registrant's common stock at an exercise price equal to $.0887 per
share.
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
obtain 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 $1 million and $309 thousand for the three month period
ended December 31, 2000 and 1999, respectively, as increase of 227%. Sales of
products were $556 thousand and $61 thousand for the three month period ended
December 31, 2000 and 1999, respectively, an increase of 811%. Revenues were
$1.8 million and $1.4 million for the six month period ended December 31, 2000
and 1999, respectively, an increase of 36%. Sales of products were $1.2 million
and $1 million for the six month period ended December 31, 2000 and 1999,
respectively, and increase of 21%. The increase in product sales from the
reported periods of 1999 to 2000 was due to an overall increase in the sales
activities of the Company since the court-appointed operational receiver was
relieved in July, 2000. However, the Company's lack of sufficient working
capital has had, and may continue to have a negative adverse effect on printer
product sales in particular, and overall revenues in general.
Licensing fees and royalties were $455 thousand and $248 thousand for
the three month period ended December 31, 2000 and 1999 respectively, an
increase of 79%. For the six month period ended December 31, 2000 and 1999,
respectively, licensing fees and royalties were $632 thousand and $336 thousand,
respectively, an increase of 88%. Royalties and licensing fees vary from quarter
to quarter and are dependent on the sales of products sold by OEM customers
using ITEC technologies. These revenues, however, are expected to decline in the
future due to the Company's focus on product sales and the operations of the
Company's e-commerce businesses as opposed to technology licensing activities.
10
COST OF PRODUCTS SOLD
Cost of products sold were $481 thousand (87% of product sales) and
$904 thousand (1,481% of product sales) for the period ended December 31, 2000
and 1999, respectively. The increase in margins is primarily due to the absence
of the liquidation policies of the court-appointed operational receiver, who was
relieved in July, 1999. While the Company expects to improve its margins moving
forward, there remain certain challenges related to profitability of its printer
products, for which the Company typically outsources its manufacturing.
Management hopes to increase margins through more efficient outsourcing for
parts and manufacturing, and improving the Company's product mix in favor of
higher margin software products.
For the six month period ended December 31, 2000 and 1999, cost of
products sold were $924 thousand (76% of product sales) and $1.6 million, or
160% of product sales, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month period
ended December 31, 2000 and 1999, respectively, were $1.7 million and $1.5
million. Selling, general and administrative expenses for the six month period
ended December 31, 2000 and 1999, respectively, were $4 million and $4.9
million. Selling, general and administrative expenses have consisted primarily
of 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. For the three month period ended December 31, the
selling, general, and administrative expenses have increased $172 thousand (11%)
due primarily to reserves for certain account receivable. However, for the six
month period ended December 31, 2000 and 1999, the Company has reduced selling,
general, and administrative expenses $855 thousand (17%) due primarily to the
elimination of costs associated with the court-appointed operational receiver,
who was relieved in July 2000.
COST OF ENGINEERING
Engineering costs, including costs of research and development, were
$217 thousand and $979 thousand for the quarters ended December 31, 2000 and
1999, respectively; a decrease of $762 thousand (78%). For the six month period
ended December 31, 2000 and 1999, respectively, engineering costs were $456
thousand and $1.6 million; a decrease of $1.1 million (72%). The Company had
been reducing its engineering and licensing activities and has re-directed
engineering costs toward the development and support of the Company's branded
products, including printers and associated digital imaging products.
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.
As a result of some of the Company's financing activities, there has
been a significant increase in the number of issued and outstanding shares.
During the three months period ended December 31 2000, the Company issued an
additional 13 million shares. During the six month period ended December 31,
2000, the Company issued an additional 17 million shares. These shares of common
stock were issued for raising capital due to private placements and for
corporate expenses in lieu of cash.
As of December 31, 2000, the Company had negative working capital of
$14.4 million, an increase of approximately $100 thousand (1%) in working
capital as compared to June 30, 1999.
Net cash used in operating activities decreased 39% to $2.8 million
during the six month period ended December 31, 2000, from $4.6 million during
the year-earlier period, due primarily to a 43% decrease in the Company's net
loss during the period.
Net cash from investing activities was $60 thousand during the six
month period ended December 31, 2000. There was no such activity in the
corresponding six month period in the prior year. The difference was due
primarily to prepaid expenses and capital expenditures in the period.
Net cash from financing activities was $2.8 million for the six month
period ended December 31, 2000, a decrease of $1.8 million or 39%. The decrease
is due primarily to a reduction in proceeds from the sale of common stock,
because the trading price of the Company's common stock fell substantially
during the period.
The Company has no material commitments for capital expenditures. The
Company's 5% convertible
11
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 December 31, 2000,
was approximately $646 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, 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.
(Also see Note 2 to the Consolidate Financial Statements.)
RISKS AND UNCERTAINTIES
NEED FOR FUTURE CAPITAL
ITEC's business has not been profitable in the recent 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 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.
12
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 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."
13
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 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
14
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 December 31, 2000, the Company directly employed fifteen 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.
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
15
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.
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
Not applicable.
16
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. A motion to dismiss the
lawsuit has been filed on behalf of the Company and those individual defendants
that have been served. The Court will consider the motion at a hearing scheduled
for February 12, 2001. 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
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
10(a) Agreement to Acquire Shares, dated December 1, 2000, between ITEC
and Quik Pix, Inc.
10(b) Agreement to Acquire Shares, dated December 17, 2000, between
ITEC and Pen Interconnect, Inc.
10(c) Share Purchase Agreement, dated December 1, 2000, between ITEC
and EdAdvantage.com, Inc.
27 Financial Data Schedule
Reports on Form 8-K
The Company filed a report on Form 8-K dated December 13, 2000, related
to the placement of a Convertible Note Purchase Agreement with Amro
International, S.A., Balmore Funds, S.A., and Celeste Trust Reg.
17
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: February 2, 2001
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/ BRIAN BONAR
--------------------
Brian Bonar
Chief Executive Officer
and Chairman of the Board of Directors
By: /s/ SCOTT KIEFER
---------------------
Scott Kiefer
Principal Financial and Accounting Officer
18