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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
XANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMMISSION FILE NO. 0-12641
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ITEC
IMAGING TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0021693
(State or Other Jurisdiction of Inco (IRS Employer ID No.)
15175 Innovation Drive
San Diego, California 92128
(858) 613-1300
(Address of Principal Executive Offices and Registrant's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the
Exchange Act: NONE Securities registered
under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.005 PAR VALUE
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 |_|
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No |_|
At October 11, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $11,694,266 based on the last
trade price as reported by The Nasdaq SmallCap(R) Market. For purposes of this
calculation, shares owned by officers, directors, and 10% stockholders known to
the registrant have been excluded. Such exclusion is not intended, nor shall it
be deemed, to be an admission that such persons are affiliates of the
registrant.
At October 11, 1999, there were 43,823,672 shares of the registrant's Common
Stock, $0.005 par value, issued and outstanding.
Information required by Part III of this Form 10-K is incorporated therein by
reference to the Company's definitive Proxy Statement with respect to its 1999
Annual Meeting of Stockholders to be filed pursuant toRegulation 14A or to an
amendment to the Form 10-K within 120 days after June 30, 1999.
FORWARD LOOKInG STATEMENTS
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In addition to historical information, this Annual Report on Form 10-K may
contain 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 judgement on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested below.
Readers are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual Report. The Company
undertakes no obligation to publicly release any revisions to forward-looking
statements to reflect events or circumstances arising after the date of this
document. See "Risks and Uncertainties." References in this Annual Report on
Form 10-K to "ITEC" and the "Company" are to Imaging Technologies Corporation
and its wholly-owned direct and indirect subsidiaries, Personal Computer
Products, Incorporated, a California corporation (PCPI), NewGen Imaging Systems,
Incorporated, a California corporation (NewGen), Color Solutions, Inc, a
California corporation (CSI), ITEC Europe, Ltd., formed under the laws of the
United Kingdom, (ITEC Europe), AMT Accel UK Ltd., formed under the laws of the
United Kingdom (AMT) and DealSeekers.com, Incorporated, a Delaware corporation
(DealSeekers.com).
PART I
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ITEM 1.
BUSINESS
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Imaging Technologies Corporation ("ITEC") develops, manufactures, and
distributes high-quality digital imaging solutions. The Company produces a wide
range of printer and imaging products for use in graphics, publishing, and other
business and technical markets. In the 1980's, ITEC began the development of
core technologies related to the design and development of controllers for
non-impact printers. During the past few years, the Company has expanded its
product offerings to include monochrome and color printers, external print
servers, multifunction peripheral devices, such as copiers, scanners, and
facsimile machines, and software to improve the accuracy of color reproduction.
ITEC manufactures advanced digital color and monochrome output devices for a
number of specialized publishing applications, including electronic pre-press,
graphic design, on-demand printing, and business and technical office markets.
The Company's new generation of products incorporate advanced printer and
imaging controller technologies to produce faster, output of enhanced images at
competitive prices. All of ITEC's color laser printers, and digital proofing
systems that incorporate the Company's proprietary ColorBlind(R) Color
Management software.
ITEC's ColorBlind Color Management software is a suite of applications,
utilities and tools designed to create, edit, and apply industry standard
International Color Consortium ("ICC") profiles that produce accurate color
rendering across a wide range of peripheral devices. The moniker "ColorBlind
Aware" is growing to be recognized as an industry standard for color accuracy as
manufacturers integrate ColorBlind's Color Management resources into their
product designs.
The Company benefits from technology alliances with industry leaders such as
Adobe Systems Inc. ("Adobe") and NEC Electronics, to develop embedded printer
controller and digital imaging technology. As one of only a handful of
authorized Adobe PostScript(R) Development Partners, ITEC produces printer
controllers that provide performance advantages for its OEM customers in a
modular form. ITEC's customers also benefit by outsourcing their engineering
development and manufacturing to ITEC, thus achieving faster time-to-market.
Imaging Technologies Corporation (NASDAQ: ITEC) was incorporated in March, 1982
under the laws of the State of California, and reincorporated in May, 1983 under
the laws of the State of Delaware. The Company's principal executive offices are
located at 15175 Innovation Drive, San Diego, CA 92128. The Company's main phone
number is (858) 613- 1300.
MARKET OVERVIEW
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ITEC's principal markets encompass desktop digital imaging and printing. The
Company's primary market segments include image management to control the
function of printers and/or digital copiers, and digital printers and proofing
devices that take an image to the plate making stage prior to lithographic
reproduction. Color integrity is an important underlying requirement in the
imaging process. The widespread use of color applications at the desktop, demand
for higher quality color reproduction, expanded use of the internet for document
dissemination, growth of office networks, and the increased acceptance and use
of digital photography are some of the factors that influence these markets.
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The desktop color laser printer market is a rapidly-growing segment of the
computer printing industry. International Data Corporation ("IDC") estimates
shipments of desktop color laser printers will grow at a compound annual rate of
56% through the year 2002. ITEC believes this is largely due to increased user
education on the benefits of color in office documents and the availability of
higher-quality, easy-to-use, lower-priced desktop color laser printers. IDC
estimates that, by 2002, desktopcolor laser printer shipments will increase to
91% of the total printer market (projected to reach 22 million units in the
United States).
Changes in the technology of document creation, management, production, and
transmittal have been transforming the imaging market. The growth of networks,
the increased availability and dissemination of documents on the internet, and
the rapid adoption of color at the desktop have significantly changed printing
and document management. In the last few years, the market has been reshaped
from one dominated by dedicated printers and scanners at the workstation, to an
emphasis on document workflow using network-shared imaging products than enable
remote document delivery and distribution. "Print-and-Distribute" has given way
to "Distribute-and-Print".
Imaging professionals have been forced to deal with ever more complex documents
that must be distributed throughout the business enterprise. Powerful authoring
applications enable the creation of documents, the components of which originate
from multiple locations around the world. Adobe Systems' Acrobat(R) Portable
Document Format (PDF(R)) and PostScript printing technologies have become more
important elements in the document imaging workflow due to their ability to
improve the efficiency of digital master document transmission and the
reliability of printing at remote locations. As large corporations master the
challenges of image and document management, the resulting solutions are
expected to migrate to small business and the home office.
ITEC is working to deliver solutions that meet the current and future demands of
the imaging market: increased internet usage, better print quality, faster
printed output, easier and more consistent color rendering, and reduced
dependence on device-specific applications. Imaging productivity is expected to
drive ITEC's markets as customers shift from the print and distribute mode to an
on-demand global distribute and print environment.
BUSINESS STRATEGY
- - -----------------
The Company's objective is to be a global market leader in digital imaging by
delivering higher-quality, easy-to-use products and technology. ITEC is focused
on the continued development and manufacturing of advanced integrated digital
imaging solutions. The Company's principal target markets include: (1) embedded
printer controller technology for non-impact printers (laser, copier, duplicator
and ink jet); (2) digital print controllers and print servers for
printing-on-demand; (3) specialized printers and digital proofing devices for
graphics and publishing, and a number of niche business applications; and (4)
color management software products.
PRINTER CONTROLLER PRODUCTS
- - ---------------------------
ITEC's core competence is in the design, development, and integration of digital
printing controller technology. A printer controller manages the intelligent
functions of a modern laser or other non-impact printer. The controller is a
powerful image management microcomputer that directs the output functions of the
printer, including the layout, form, font, and function of the printed image.
ITEC develops and manufactures embedded imaging controllers for original
equipment manufacturers (OEMs). The Company's customers benefit by outsourcing
their engineering development and manufacturing, thus achieving faster
time-to-market. In an age of rapid and persistent technology change, the ability
to achieve faster time-to-market is critical to product success.
ITEC has established relationships with leading printer manufacturers and
marketers throughout the world and with Adobe Systems, Inc. As one of only three
independent authorized Adobe PostScript Development Partners, ITEC has the
ability to embed the core technology of PostScript into every image management
product. Adobe PostScript is the most widely accepted printing and imaging
technology for retail printing service companies, corporations, publishers, and
government agencies. Of all commercial publications printed, 75% are imaged on
PostScript devices. These include monochrome and color printers, imagesetters
and plate making devices, and direct digital printing systems.
The newest release, Adobe PostScript 3(TM), broadens the PostScript standard
beyond its use as a page description language into a fully optimized printing
system that addresses a broad range of new requirements. By incorporating
PostScript technology, ITEC's controllers deliver advanced features and a
universal operating environment for digital documents.
ITEC produces a range of integrated controller solutions for printers and
multifunction peripherals. The Company's new embedded imaging controllers are
sold to OEM customers for integration into digital color and monochrome
printers. ITEC's ImageScript(TM) controller accommodates a wide range of new
printer designs. Features include: true Adobe PostScript 3 compatibility, a
powerful reduced-instruction-set-computer ("RISC") processor, image enhancement
co-processors, and printing resolution up to 1200 dots-
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per-inch ("dpi"). The modular architecture of ITEC controllers allows OEM
customers to select from a range of options including processor speed, color
management, resolution and communication/networking connectivity.
DIGITAL PRINT CONTROLLERS; PRINTING-ON-DEMAND
- - ---------------------------------------------
Digital color copiers and powerful external controllers comprise the foundation
for the print-on-demand movement. Modern digital copy machines bypass the
desktop printer in the digital workflow and go directly to reproducing
quantities of collated and bound documents. This market fits ITEC's technical
strengths in embedded print controllers and color management technology.
For the monochrome digital duplicator market, ITEC produces an Adobe PostScript
3 raster image processing ("RIP") controller. Unlike a copier, a digital
duplicator creates a print master that is placed on a drum within the unit. The
drum then transfers the image to the paper as with traditional lithography.
Digital duplicators are used for short run printing and provide significant cost
savings over conventional copy machines. Primary users of digital duplicators
include quick-print shops, churches, schools, and government offices. ITEC's
digital duplicator controller has a universal architecture that allows it to
manage the output functions of a wide range of duplicator products produced by
most major manufacturers.
DIGITAL PRINTERS
- - ----------------
ITEC's new printer product line features network compatibility and Adobe
PostScript 3 technology. The products provide higher performance, enhanced image
quality, and advanced page processing. Under the ITEC brand, the Company sells a
range of products in both monochrome and color. The Company's product strategy
is to produce value-added printers that meet the more exacting requirements of
specialized segments of the market.
The LaserImage(TM) 1100, with Adobe PostScript 3 features 20 page-per-minute
outputs at a print resolution of 1200x1200 dpi. The Company's image enhancement
technology delivers outstanding quality and page processing enhancements.
Additional features add flexibility and convenience, including: expandable paper
trays, page size support up to ledger/A3; and duplexing (2-sided printing). The
LaserImage(TM) 1100 is provided as a solution for general office, finance,
marketing, and desktop publishing.
The LaserImage 1200 series of laser printers are designed to quickly produce
full-bleed proofs for pre-press and graphic arts applications. These printers
are a workgroup solution for printing complex documents or high volume printing.
The 1200 series printers feature Adobe PostScript 3 with a RISC-based controller
designed and engineered by ITEC. Models are available in a number of
configurations that provide network connectivity.
The Company's new ColorImage(R) 2500 combines ITEC's award-winning ColorBlind
Matchbox color management system with Adobe PostScript 3. ITEC's custom designed
controller technology is built around the ultra-fast 64-bit 167 MHz NEC Vr4310
RISC processor to provide the performance necessary for complex color pages. The
2500 model features: up to 1200 x 1200 dpi resolution, a powerful RISC
processor, a special image enhancement co-processor, and a precision toning
system to deliver crisp, high quality, color-correct images. Print speed is 4
color pages per minute and 16 monochrome pages per minute.
The ITEC ColorImage 6000 Digital Color Proofing System meets the needs of print
production users, graphic artists, photography studios, and pre-press
departments. A 6-color inkjet print engine delivers a wide color spectrum to
ensure smooth gradations and highlights. The 6000 model is delivered with the
Company's award-winning ColorBlind color management software and a powerful
external 333 MHz, Windows NT server/controller for simultaneous spooling,
processing, and printing.
COLOR MANAGEMENT
- - ----------------
Color reproduction is one of the largest single challenges facing the imaging
industry. Customers demand systems that are easy to use, predictable and
consistent. The problems associated with color reproduction relate to "color
space." The color space for printed materials is different from the color space
for devices such as cameras, scanners and computer monitors. A color management
system is needed so users can convert their files for use with different
devices. The varying characteristics of each device are captured in a device
profile. The ICC has established a standard for the format for these profiles.
ITEC's ColorBlind(R) Color Management software is a suite of applications,
utilities, and tools that allow users to precisely create ICC profiles for each
device in the color workflow including scanners, monitors, digital cameras,
printers, and other specialized digital color input and output devices. Once
profiled, ColorBlind balances these profiles to produce accurate, consistent,
and reliable color rendering from input to output.
-4-
ColorBlind ProveIt! allows a user to calibrate and build an ICC Profile of a
monitor visually or with the use of an instrument. This System provides the
capability of calibrating Monitors over the Network or Internet to assure
accurate and consistent color viewing.
ColorBlind MatchBox is an all in one color matching system. MatchBox provides
all the tools to match from scan to print automatically including ICC profiling
software, measuring instrument, software for fine tuning and an enabled utility
for precise spot calibration.
ColorBlind ColorMatic creates custom quality profiles for image capture, display
and output devices. ColorMatic creates profiles for scanners and digital cameras
with its own custom target that is designed for ease of use.
ColorBlind CheckMate is a system designed for OEM's that automatically provides
monitor to printer color matching. CheckMate allows the user to view the true
colors of an image prior to it being printed.
ColorBlind Professional is an ICC profiling application on all color devices for
color professionals. It includes adjustment tools for printer black generation
(UCR, GCR, etc.), highlight and shadow clipping and limiting, variable amounts
of color measurements up to 1400 patches, Hi-Fi profiling, and utilities for
fine tuning profiles and matching spot and Pantone
colors.
ColorBlind Edit/Edit Server is a professional profile editing application. It
allows the user to fine-tune any ICC profile with a full range of editing tools
such as Tone, Tone in Gray, Brightness/Contrast/Saturation, Global Color
Correction, Selective Color Correction and Gradation. It includes a batch
processing module (Edit Server) for applying profiles or attaching profiles to
images in a batch mode either on the host, or across a network.
ColorBlind Parachute is a Postscript ICC color server application. It allows the
user to build print queues for digital proofing and multiple printer matching.
Parachute applies ICC profiles to any color element in a Postscript file, then
creates a new color-correct Postscript file and automatically sends it to the
desired printer, to create a fully-automated ICC-compatible Postscript workflow.
"ColorBlind Aware" is being recognized as an industry standard for color
accuracy, as printer, scanner, and monitor manufacturers integrate ColorBlind's
Color Management into product designs. ColorBlind is sold as a standalone
application or licensed by OEM's for resale bundled with peripherals.
OPERATIONS
- - ----------
INTERNATIONAL
- - -------------
The Company intends to pursue international markets as avenues for growth. ITEC
Europe provides both sales and support functions to customers within the UK,
European Community (EC) and Eastern European Block for ITEC's printer and
imaging products. The Company expects export sales to continue to represent a
portion of its sales. For the years ended June 30, 1999, 1998, and 1997,
international sales represented 16%, 56%, and 57% of total revenues,
respectively.
International sales and operations, however, are subject to risks such as the
imposition of governmental controls, export license requirements, restrictions
on the export of critical technology, currency exchange fluctuations, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and managing international operations and collecting accounts receivable. In
addition, the laws of certain countries do not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. As the Company continues to expand its international business, there can
be no assurance that these factors will not have an adverse effect on the
Company.
CONSOLIDATED OPERATIONS AND COMPANY HEADQUARTERS
- - ------------------------------------------------
During fiscal 1999, the Company has worked at consolidating staff and
facilities. Staff consolidation resulted in a 23% decrease in staff worldwide
due to outsourcing and the elimination of redundant positions.
The Company consolidated its corporate headquarters facility, which houses all
of ITEC's U.S. operations previously located in seven separate locations in
Northern and Southern California. The Company occupies 45,000 square feet of a
60,000 square foot building, with an option to expand. Consolidating to a single
facility has reduced the amount of space the Company occupies by 35%. Assuming
the Company can sublease some of its existing space, it will benefit from
additional savings in lease payments. The Company's headquarters facilities
house all of the Company's engineering, sales and marketing, customer support,
accounting, production, and warehousing departments.
INTERNET OPERATIONS
- - -------------------
The Company launched an E-Commerce web site designed to offer computer and
imaging hardware, software, and consumables. DEALSEEKERS.COM is an interactive
internet catalog showroom featuring thousands of computer and digital imaging
products. The internet address is www.dealseekers.com.
-5-
ITEC developed the site to create new channels for a growing family of products.
The site was developed internally and management is exploring strategic
partnering relationships to further enhance the value of the division. The
Company plans to use DealSeekers.com as a tool to promote and build its dealer
network and expand distribution of the Company's digital imaging and software
products.
ITEC's board of directors approved a private placement for investment in the
company's DealSeekers.com web site. The Company believes there is a substantial
opportunity to transform DealSeekers.com into a brand name shopping site that
will provide retail consumers and businesses with the ability to quickly source
computer products, evaluate value alternatives and securely execute a
transaction. The company formed a dedicated board of directors to oversee the
continued development of DealSeekers.com and will look at additional funding,
including the possibility of an initial public offering during 2000.
During fiscal 1999, ITEC launched an additional web site, COLOR.COM, as a
resource center to provide information on the highest quality correct color.
This new site allows consumers to purchase ITEC products including ColorBlind
software. Another, unique software product offered by ITEC is ProveIt!, which
provides internet users the ability to view and print colorimages correctly
across the Web. The new ITEC web site also serves as a resource center for color
imaging, with information including white papers on color imaging and
management, links to color consultants and experts, and products. The internet
address is www.color.com.
SALE OF THE COMPANY'S MEMORY PRODUCTS BUSINESS
- - ----------------------------------------------
During fiscal 1999, ITEC sold its memory business operations, which consisted of
Prima International and McMican Memory. Prima International, a distributor of
memory modules, was acquired by PCPI Technologies in 1993. McMican is a
manufacturer of digital memory products for data storage and exchange between
digital cameras and imaging systems and was acquired by ITEC 1998. The
businesses sold and/or discontinued were characterized by low margins and price
instability, which were incompatible with the strategic direction of the
Company.
MARKETING AND DISTRIBUTION CHANNELS
- - -----------------------------------
ITEC's products are marketed and sold through an established distribution
channel of value-added resellers (VARS), manufacturer's representatives, retail
vendors, and systems integrators. ITEC has a network of dealers and distributors
in the United States, Canada, and Europe. The Company is expanding with
additional resellers in Africa, Asia, the Middle East, Latin America, and
Australia.
ITEC supports its worldwide distribution network and end-user customers through
centralized manufacturing, distribution, and repair operations. The Company's
San Diego headquarters serve distribution in North America, South America, the
Pacific Rim, and Asia. ITEC Europe, located in a suburb of London, manages
distribution and services for customers in Europe, Africa, and the Middle East.
MANUFACTURING, PRODUCTION, AND SOURCES OF SUPPLY
- - ------------------------------------------------
During fiscal 1999, ITEC formed a strategic relationship to outsource the
majority of its manufacturing. This arrangement gives ITEC the latitude to
expand its business base without the cash drain of maintaining a
state-of-the-art- manufacturing center. The Company's primary manufacturing and
product fulfillment is outsourced to Pen Interconnect's ISO9000 manufacturing
facility "InCirT Technologies" division in Irvine, California. InCirT
Technologies manufactures and fulfills orders for the Company's software, color
and monochrome printers, and controller products. InCirT performs multi-step
quality control testing prior to shipping products; and packages and ships
products to ITEC customers.
In addition to buying such items as printed circuit boards and other components
from outside vendors, ITEC purchases and/or licenses software programs,
including operating systems and intellectual property modules (pre-written
software code to execute a specifically defined operation). ITEC purchases these
products from vendors who have licenses to sell such software to the Company
from the originators of such software. The Company has, from time to time,
directly licensed system software that is either embedded or otherwise
incorporated in certain ITEC products.
RESEARCH AND DEVELOPMENT
- - -------------------------
The Company monitors new technology developments and coordinates with suppliers,
distributors and dealers to enhance existing products and lower costs. Advances
in technology require investment to maintain the Company's market position.
COMPETITION
- - -----------
The markets for the Company's products are highly competitive and rapidly
changing. The Company's ability to compete in its markets depends on a number of
factors, including the success and timing of product introductions, selling
prices, product performance, product distribution, marketing ability, and
customer support. A key element of the Company's strategy is to provide
competitively-priced, quality
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products. The Company has reduced prices on certain of its products in the past
and will likely continue to do so in the future. See "Risks and
Uncertainties--Short Product Lives and Technological Change."
INTELLECTUAL PROPERTY
- - ----------------------
ITEC's software products, hardware designs, and circuit layouts are copyrighted.
However, copyright protection does not prevent other companies from emulating
the features and benefits provided by the Company's software, hardware designs
or the integration of the two. The Company protects its software source code as
trade secrets and makes its Company proprietary source code available to OEM
customers only under limited circumstances and specific security and
confidentiality constraints. The Company currently holds no patents. Computer
and printer imaging technology is a rapidly changing business environment.
Consequently, the Company believes the effectiveness of patents, trade secrets,
and copyright protection are less important in influencing long term success
than the experience of the Company's technical team, contractual relationships,
and a continuous focus on technical advancement.
The Company has obtained U.S. registration for several of its trade names or
trademarks, including PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, and ImageNet. These trade names are used to distinguish
the Company's products in the marketplace. Pending trademarks for which
registration is currently being sought include NewGen, Xtinguisher, and
DealSeekers.
PERSONNEL
- - ---------
ITEC employed a total of 93 individuals worldwide as of June 30, 1999. Of this
number, 30 are involved in sales, marketing, corporate administration and
finance, 55 are in engineering, research and development, and technical support.
Of that number, ITEC's European Headquarters employed 8 individuals. None of
ITEC's employees are represented by any union.
RISKS AND UNCERTAINTIES
- - -----------------------
CAPITAL REQUIREMENTS
- - --------------------
There can be no assurance with respect to the Company's future profitability or
revenue growth. Losses may occur on a quarterly or annual basis for a number of
reasons outside the Company's control. See "Potential Fluctuation in Quarterly
Performance." The growth of the Company's business will require the commitment
of substantial capital resources. If funds are not available from operations,
the Company will need additional funds. The Company may seek such additional
funding through public and private financing, including debt or equity
financing. Adequate funds for these purposes, whether through financial markets
or from other sources, may not be available when needed or, if available, not on
terms acceptable to the Company. Insufficient funds may require the Company to
delay, reduce or eliminate some or all of its planned activities.
ITEC's ability to continue operations will depend on positive cash flow, if any,
from future operations and on the Company's ability to raise additional funds
through equity or debt financing. The Company could be required to cut back or
stop operations if it is unable to raise or obtain needed funding.
As of June 30, 1999, the Company had accumulated losses of approximately $59.1
million. Management anticipates incurring additional losses until the Company
can successfully market and distribute its products and develop new technologies
and commercially viable future products. If it is unable to do so, ITEC will
continue to have losses and might not be able to continue operations.
The report of the Company's independent accountants on the consolidated
financial statements contains an explanatory paragraph regarding ITEC's ability
to continue as an ongoing business. The independent accountants cited a
significant decline in working capital and net worth that has raised substantial
doubt as to the Company's ability to continue as an ongoing business. The "going
concern" qualification may reduce the Company's ability to obtain necessary
financing in the future to run its business.
APPOINTMENT OF OPERATIONAL RECEIVER
- - -----------------------------------
On August 20, 1999, at the request of Imperial Bank, the primary lender to the
Company, the Superior Court, San Diego appointed an operational receiver for the
Company. On August 23, 1999, the operational receiver took control of the
day-to-day operations of the Company. To date, through further equity infusion
into the Company, primarily in the form of the exercise of warrants to purchase
the common stock of the Company, operations have continued. Without additional
funding, sufficient to satisfy Imperial Bank and the other creditors of the
Company, as well as providing working capital for the Company, there can be no
assurances that such operations can continue. The Company continues to actively
work with entities capable of providing such funding. If such funding is not
obtained, the Company will need to reduce or suspend operations.
FLUCTUATION OF QUARTERLY PERFORMANCE
- - ------------------------------------
The Company's quarterly operating results tend to fluctuate depending on a
number of factors. These include: (1) the timing of product announcements and
introductions of products by the Company and its
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competitors; (2) availability and cost of components; (3) timing of shipments of
the Company's products; (4) product mix; (5) market acceptance of new products;
(6) seasonality; (7) currency fluctuations; (8) changes in prices by the Company
and its competitors; and (9) price protection for selling price reductions
offered to distributors and OEM customers. Accordingly, the timing of
expenditures for staffing and related support costs, advertising, trade show
attendance, promotion, research and development expenditures, and, changes in
general economic conditions impact quarterly performance. Any one of these
factors could have a material adverse effect on the Company's results of
operations.
The Company may experience significant quarterly fluctuations in total revenues
as well as operating expenses with respect to future new product introductions.
In addition, the Company's component purchases, production, and spending levels
are based upon forecast demand for the Company's products. Accordingly, any
inaccuracy in forecasting could adversely affect the Company's financial
condition and results of operations. Demand for the Company's products could be
adversely affected by a slowdown in the overall demand for computer systems,
printer products, or digitally printed images. The Company's failure to complete
shipments during a quarter could have a material adverse effect on the Company's
results of operations for that quarter. Quarterly results are not necessarily
indicative of future performance for any particular period.
COMPETITIVE INDUSTRY
- - --------------------
The markets for the Company's products are highly competitive and tend to change
rapidly. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The Company's ability to compete in its markets
depends on a number of factors within and outside its control, including the
success and timing of product introductions by the Company and its competitors,
selling prices, product performance, product distribution, marketing ability,
and customer support. A key element of the Company's strategy is to provide
competitively priced, quality products. There can be no assurance that the
Company's products will continue to be competitively priced. The Company has
reduced prices on certain of its products in the past and will likely continue
to do so in the future. Price reductions, if not offset by similar reductions in
product costs, will affect gross margins and may adversely affect the Company's
financial condition and results of operations.
The success of the Company will depend on its ability to market current
products, including digital printers and hardware and software products used in
digital imaging, and to rapidly introduce and market additional products. The
Company does not have control over the demand for digital imaging products,
including the preferences of users and the capability of personal computers to
run the Company's digital imaging software and hardware products and to use ITEC
printers. There can be no assurance that the products introduced by the Company
will achieve acceptance, or that other digital imaging products companies will
not develop and market products which render ITEC products obsolete or less
competitive. Failure to obtain significant customer satisfaction or market share
for ITEC products will significantly and negatively affect the Company's
revenues. Also see "Short Product Lives and Technological Change."
SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE
- - --------------------------------------------
The markets for the Company's products are characterized by rapidly evolving
technology, frequent new product introductions, and significant price
competition. Consequently, short product life cycles and reductions in unit
selling prices due to competitive pressures over the life of a product are
common. The Company's future success will depend on its ability to continue to
develop and manufacture competitive products and achieve cost reductions for its
existing products.
In addition, the Company monitors new technology developments and coordinates
with suppliers, distributors and dealers to enhance existing products and lower
costs. Advances in technology will require increased investment to maintain the
Company's market position. The Company's financial condition and results of
operations could be adversely affected if the Company is unable to develop and
manufacture new, competitive products in a timely manner.
DEVELOPING MARKETS AND APPLICATIONS
- - ----------------------------------
The markets for the Company's products are relatively new and are still
developing. The Company believes that there has been growing market acceptance
for color printers and related technologies and supplies. There can be no
assurance, however, that such markets will continue to grow. Other technologies
are constantly evolving and improving. There can be no assurance that products
based on these other technologies will not have a material adverse effect on the
demand for the Company's products.
The success of ITEC products in the marketplace depends on many factors,
including product performance, price, ease of use, support of industry
standards, and customer support and service. There can be no assurance that the
Company will be able to compete successfully given these factors. Competitors
may develop products comparable or superior to those of the Company and may
adapt more quickly than ITEC to new technologies, evolving industry trends, and
customer requirements. Therefore, the Company may have to spend more money to
effectively compete for market share, including funds to expand its
-8-
infrastructure, which is a capital- and time-intensive process. In addition, if
other companies aggressively compete against ITEC, the Company may have to spend
more money on advertising, promotion, trade shows, product development,
marketing and overhead expenses, hiring and retaining personnel, and developing
new technologies. These higher expenses may have a negative effect on net income
and profits.
The development of sophisticated digital imaging products is a lengthy and
intensive process and is subject to unforeseen risks, delays, problems and
costs. Unanticipated technical or other problems may occur which would result in
delays in our development program. If we fail to complete development of new
products or enhance existing products, we could suffer complete loss of the
funds committed by us to those products or enhancements. The losses could be
substantial.
DEPENDENCE ON ADOBE RELATIONSHIP
- - --------------------------------
The Company's relationship with Adobe as an authorized "Co-development Partner"
to implement the inclusion of Adobe's PostScript language on printer controllers
and in software products is an integral part of its business strategy. There can
be no assurance that this relationship will be successful or that it will remain
in force for some time to come. Loss of the Adobe relationship could have a
substantial negative effect on future revenues.
DEPENDENCE UPON SUPPLIERS
- - -------------------------
At present, many of the Company's products use technology licensed from outside
suppliers. The Company relies heavily on Adobe for upgrades and support of the
PostScript language. In the case of its font products, the Company licenses such
fonts from outside suppliers, including Adobe, who also own the intellectual
property rights to such fonts. The reliance on third-party suppliers involves
risk, including limited control over potential hardware and software
incompatibilities with the Company's products. There can be no assurance that
all of the suppliers of products marketed by the Company will continue to
license their products to the Company indefinitely, or that these suppliers will
not license to other companies simultaneously.
The Company presently out-sources the production of most of its manufactured
products through one vendor located in California. This vendor assembles
products, using components purchased by the Company from other sources or from
its own inventory. If this manufacturer does not have sufficient capacity to
meet projected market demand for ITEC products, production will stop and
replacement of the manufacturer could take several months and cause substantial
disruption to Company operations.
While most components are available locally from multiple vendors, certain
components used in the Company's products are only available from single
sources. Although alternate suppliers are available for many of these
components, the process of qualifying replacement suppliers, replacing tooling
or ordering and receiving replacement some components could take several months
and cause substantial disruption to the Company's operations. Any significant
increase in component prices or decrease in component availability could have a
material adverse effect on the Company.
ACQUISITIONS
- - ------------
In order to grow its business, the Company may continue to acquire businesses
that it believes are complementary. The successful implementation of this
strategy depends on the Company's ability to identify suitable acquisition
candidates, acquire such companies on acceptable terms, integrate their
operations and technology successfully with those of the Company, retain
existing customers, and maintain the goodwill of the acquired business. There
can be no assurance that the Company will be able to identify suitable
acquisition candidates, acquire any such candidates on acceptable terms,
integrate their operations or technology successfully, retain customers, or
maintain the goodwill of the acquired business. 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 the Company.
Competition for these acquisition targets could also result in increased prices
of acquisition targets and a diminished pool of companies available for
acquisition. If the Company is unable to manage internal or acquisition-based
growth effectively, the Company will be materially and adversely affected.
Acquisitions involve a number of risks, including: (1) the integration of
acquired products and technologies in a timely manner; (2) the integration of
businesses and employees with the Company's business; (3) the management of
geographically- dispersed operations; (4) adverse effects on the Company's
reported operating results from acquisition-related charges and amortization of
goodwill; (5) potential increases in stock compensation expense and increased
compensation expense resulting from newly-hired employees; (6) the diversion of
management attention; (7) the assumption of unknown liabilities; (8) potential
disputes with the sellers of one or more acquired entities; (9) the inability of
the Company to maintain customers or goodwill of an acquired business; (10) the
need to divest unwanted assets or products; and (11) the possible failure to
retain key acquired personnel. Client satisfaction or performance problems with
an
-9-
acquired business could also have a material adverse effect on the reputation of
the Company as a whole, and any acquired business could significantly under
perform relative to the Company's 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, there can be no assurance that the Company 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 the Company.
Due to all of the foregoing, the Company's execution of an acquisition strategy
or any individual completed or future acquisition may have a material adverse
effect on the Company. In addition, if the Company issues equity securities as
consideration for any future acquisitions, existing stockholders will experience
further ownership dilution and such equity securities could have rights,
preferences, privileges, or other rights superior to those of the Common Stock.
See "Future Capital Needs," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
- - ---------------------------
The success of the Company is dependent, in part, on its ability to attract and
retain qualified management and technical personnel. Competition for such
personnel is intense, and the inability to attract additional key employees or
the loss of one or more key employees could adversely affect the Company. There
can be no assurance that the Company will retain its key personnel.
COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES OF SUPPLY
- - -----------------------------------------------------------------------
ITEC presently out-sources the manufacturing and production of most of its
manufactured products to InCirT Technologies ("InCirT"). InCirT utilizes
components that it purchases from other sources or from its own internal
inventory; and assembles and packages ITEC products. The terms of supply
contracts are negotiated separately in each instance. The Company believes that
this vendor has sufficient capacity to meet projected market demand for the
Company's products or that alternate production sources are available without
undue disruption. ITEC has not experienced any difficulty over the past several
years in engaging contractors or in purchasing components. InCirT will perform
multi-step quality control testing prior to shipping the Company's products into
the Company's distribution channels.
In addition to buying such items as printed circuit boards and other components
from outside vendors, ITEC purchases and/or licenses software programs,
including operating systems and intellectual property modules (pre-written
software code to execute a specifically defined operation). ITEC purchases these
products from vendors who have licenses to sell such software to the Company
from the originators of such software, and has, 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 the Company's products are only available from single
sources. Although alternate suppliers are readily available for many of these
components, for some selected components, the process of qualifying replacement
suppliers, replacing tooling, or ordering and receiving replacement components
could take several months and cause substantial disruption to the Company's
operations. Any significant increase in component prices or decrease in
component availability could have a material adverse effect on the Company.
POTENTIAL CHALLENGE TO PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS
- - ------------------------------------------------------------------
The Company's software products, hardware designs, and circuit layouts are
copyrighted. However, copyright protection does not prevent other companies from
emulating the features and benefits provided by the Company's software, hardware
designs or the integration of the two. The Company protects its software source
code as trade secrets and makes its Company proprietary source code available to
OEM customers only under limited circumstances and specific security and
confidentiality constraints. In many product hardware designs, the Company
develops ASICs, which encapsulate proprietary technology and are installed on
the circuit board. This can serve to significantly reduce the risk of
duplication by competitors, but in no way ensures the complete lack of potential
for a competitor to replicate a feature or the benefit in a similar product. The
Company currently holds no patents. Because computer and printer imaging
technology is such a rapidly changing business environment, the Company believes
the effectiveness of patents, trade secrets, and copyright protection are less
important in influencing long term success than the experience of the Company's
technical team, contractual relationships, and a continuous focus on technical
advancement.
The Company has obtained U.S. registration for several of its trade names or
trademarks, including PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, and ImageNet. These trade names are used to distinguish
the Company's products in the marketplace. Pending trademarks for which
registration is currently being sought include NewGen, Xtinguisher, and
DealSeekers.
From time-to-time, certain competitors have asserted patent rights relevant to
the Company's business. The Company expects that this will continue. The Company
carefully evaluates each assertion relating to its
-10-
products. If the Company is not successful in establishing that asserted rights
have not been violated, the Company could be prohibited from marketing the
products that incorporate such technology. The Company could also incur
substantial costs to redesign its products or to defend any legal action taken
against the Company. If the Company's products should be found to infringe upon
the intellectual property rights of others, the Company could be enjoined from
further infringement and be liable for any damages. The Company relies on a
combination of trade secret, copyright and trademark protection and
non-disclosure agreements to protect its proprietary rights. There can be no
assurance, however, that the measures adopted by the Company for the protection
of its intellectual property will be adequate to protect its interests, or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies.
INTERNATIONAL OPERATIONS
- - -------------------------
The Company conducts business globally. Accordingly, the Company's future
results could be adversely affected by a variety of uncontrollable and changing
factors including foreign currency exchange rates; regulatory, political or
economic conditions in a specific country or region; trade protection measures
and other regulatory requirements; government spending patterns; and natural
disasters, among other factors. Any or all of these factors could have a
material adverse impact on the Company's future international business in these
or other countries and on the Company's financial condition and results of
operations.
DEPENDENCE ON EXPORT SALES
- - ----------------------------
The Company intends to pursue international markets for growth. The Company
expects export sales to continue to represent a portion of its sales.
International sales and operations are subject to risks such as the imposition
of governmental controls, export license requirements, restrictions on the
export of critical technology, currency exchange fluctuations, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and managing international operations, and collecting accounts receivable. In
addition, the laws of certain countries do not protect the Company's products
and intellectual property rights to the same extent as do the laws of the United
States. As the Company continues to expand its international business, there can
be no assurance that these factors will not have an adverse effect on the
Company.
RELIANCE UPON INDIRECT, INDEPENDENT DISTRIBUTION CHANNELS
- - -----------------------------------------------------------
ITEC products are marketed and sold through established relationships with
original equipment manufacturers ("OEM"), distributors, value-added resellers,
manufacturers' representatives, retail vendors, and systems integrators. The
Company has a network of dealers and distributors in the United States, Canada,
and Europe. Additionally, the Company has a growing number of resellers in
Africa, Asia, the Middle East, Latin America, and Australia, which we support
through centralized manufacturing, distribution and repair operations in San
Diego and London. The sales of the Company's products are principally made
through distributors who may carry competing product lines. These distributors
could reduce or discontinue sales of ITEC products, and they may not devote the
resources necessary to provide effective sales and marketing support, which
could materially and adversely affect the Company's sales. The Company believes
that its future growth and success will continue to depend in large part upon
its distribution channels
The Company is dependent upon the continued viability and financial stability of
its distributors, many of which are small organizations with limited capital who
are substantially dependent on general economic conditions and specific factors
affecting digital imaging markets. ITEC's business could be materially adversely
affected if its distributors fail to pay amounts to the Company that exceed
reserves that have been established. To expand its distribution channels, the
Company has entered into select OEM arrangements that allow it to address
specific market segments or geographic areas. In order to prevent inventory
write-downs, to the extent that OEM customers do not purchase products as
anticipated the Company may need to convert such products to make them salable
to other customers.
IMPACT OF ASIAN FINANCIAL CRISIS
- - ---------------------------------
The financial crisis in Asia resulted in the cancellation of orders and
substantial losses, and ITEC's other international operations and export sales
may be effected by future trends and foreign restrictions.
The Company conducts business globally and intends to continue its pursuit of
international markets. In the past, the Company experienced contract
cancellations and write-offs of significant accounts receivable related to the
economic crisis in Asia. There can be no assurance that the Company's overall
financial performance will not be further negatively affected by this situation.
VOLATILITY OF STOCK PRICE
- - -------------------------
The market price of the Company's Common Stock has historically fluctuated
significantly. The Company believes that a number of factors could cause further
significant fluctuations in the price of the Company's Common Stock. These
factors include: (1) general stock market trends; (2) announcements of
developments related to the Company's business; (3) fluctuations in the
Company's operating results; (4)
-11-
general conditions in the computer peripheral market and the markets served by
the Company or in the worldwide economy; (5) a shortfall in revenue or earnings
from securities analysts' expectations; (6) announcements of technological
innovations or new products or enhancements by the Company or its competitors;
(7) developments in patents or other intellectual property rights; and (8)
developments in the Company's relationships with its customers and suppliers.
In recent years, the stock market in general, and the market for shares of
technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. There can be no assurance that the market price of the Company's
Common Stock will not experience significant fluctuations that are unrelated to
the Company's operating performance.
DILUTION OF STOCKHOLDER INTERESTS
- - -----------------------------------
The issuance of the Company's reserved shares would dilute the equity interest
of existing stockholders and could have a significant adverse effect on the
market price of ITEC common stock. As of October 11, 1999, the Company had
41,583,418 shares of common stock reserved for possible future issuances upon,
among other things, conversion of preferred stock and exercise of outstanding
options and warrants.
The Company expects to seek additional financing, which would result in the
issuance of additional shares of our capital stock and/or rights to acquire
additional shares of the Company's capital stock. Additional issuances of
capital stock would result in a reduction of current shareholders' percentage
interest in the Company. Furthermore, if the exercise price of any outstanding
or issuable options or warrants or the conversion ratio of any preferred stock
is lower than the dollar value per share of common stock at the time of the
exercise or conversion, then the dollar value per share of common stock would
decrease because the number of shares of common stock outstanding would increase
without a corresponding increase in the dollar amount assigned to shareholders'
equity.
The addition of a substantial number of shares of common stock into the market
or by the registration of any other of our securities under the Securities Act
may significantly and negatively affect the prevailing market price for the
Company's common stock. Furthermore, future sales of shares of common stock
issuable upon the exercise of outstanding warrants and options may have a
depressive effect on the market price of the common stock, as these warrants and
options would be more likely to be exercised at a time when the price of the
common stock is in excess of the applicable exercise price.
The sale or issuance of any shares of preferred stock having rights superior to
those of the common stock may result in a decrease in the value or market price
of the common stock. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change of ownership without further vote or
action by the stockholders and may adversely affect the voting and other rights
of the holders of common stock.
The Company's board of directors currently is authorized to issue up to 100,000
shares of preferred stock. The board has the power to establish the dividend
rates, preferential payments on our liquidation, voting rights, redemption and
conversion terms and privileges for any series of preferred stock.
NASDAQ LISTING AND LIQUIDITY OF COMMON STOCK
- - ---------------------------------------------
The Company may not be able to meet the listing maintenance requirements of the
Nasdaq SmallCap Market and Nasdaq rules, which require, among other things,
minimum net tangible assets of $2 million, a minimum bid price for our common
stock of $1.00, and shareholder approval prior to the issuance of securities in
connection with a transaction involving the sale or issuance of common stock
equal to 20 percent or more of a company's outstanding common stock before the
issuance for less than the greater of book or market value of the stock. The
Company may not meet these requirements in the future as, in the past, we have
not always been in compliance and are presently subject to a six month review
period with Nasdaq. If the Company were no longer in compliance with Nasdaq
rules and was unable to receive a waiver or to achieve compliance, and if the
Company's common stock were to be de-listed from the SmallCap market,
shareholders may find it more difficult to sell their ITEC common stock. This
lack of liquidity also may make it more difficult for the Company to raise
capital in the future.
In the event that ITEC securities are not listed on Nasdaq SmallCap, trading of
the Company's common stock would likely be 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.
Although 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, ITEC common stock, albeit currently less than
$5.00 per share, does not constitute a penny stock when our common stock is
quoted on Nasdaq and our net tangible assets exceed $2.0 million. If, in the
future, ITEC common stock
-12-
falls within the definition of penny stock, these regulations would 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 the common stock and the
ability of shareholders to sell their securities in the secondary market would
be limited. As a result, the market liquidity for ITEC common stock would be
severely and adversely affected. We can provide no assurance that trading in
ITEC securities will not be subject to these or other regulations in the future,
which would negatively affect the market for the Company's securities.
YEAR 2000 COMPLIANCE (Y2K)
- - -------------------------
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
Although the Company has not procured a year 2000 upgrade package to its
existing business software, management does not anticipate that the Company will
incur significant operating expenses or be required to invest heavily in other
computer systems improvements to be year 2000 compliant. If the Company, its
customers, vendors, or others with whom it does significant business are unable
to resolve external processing issues in a timely manner, it could result in
material adverse effect on the Company.
The Company has performed an analysis of all of its products manufactured after
January 1, 1997 and has determined that all such products are year 2000
compliant. This analysis covered the Company's printer controller technology,
laser and dye- sublimation printers, as well as software products and computer
and digital camera memory modules. The Company's printers do not currently
contain any internal clock devises that monitor or recognize the change of the
date and therefore the change of year from 1999 to 2000 should not effect their
operation. However, software drivers are used to modify and direct the output
and performance of these printers. While these drivers do not generate
time-specific codes, they mirror time codes resident in the applicable operating
system. In the event a modification is required to a software driver to
accommodate year 2000 modifications instituted by a manufacturer of a software
package, computer platform or operating system that the Company is currently
supporting, the Company currently plans to update that driver free-of-charge and
make it available to customers for down-loading from the internet.
ABSENCE OF DIVIDENDS
- - --------------------
No cash dividends have been paid on the Company's Common Stock to date and the
Company does not anticipate paying cash dividends in the foreseeable future.
ITEM 2.
PROPERTIES
- - ----------
ITEC owns no real property. The Company leases approximately 60,000 square feet
of space in a facility located at 15175 Innovation Drive, San Diego, California
92128, at a monthly lease rate of approximately $41,500. This facility houses
corporate management, marketing, sales, engineering, and support offices. The
lease expires on March 31, 2006. The Company has the option to extend the lease
for seven additional years.
ITEC's European headquarters, ITEC Europe Ltd., currently leases approximately
2,000 square feet in a facility located outside London, England. The address is
Ritz Plaza House, Denton Road, Milbanke Way, Wokingham, Berks. This facility
houses sales, distribution and technical support personnel. The monthly lease
rate is U.S. $2,500 and the lease expires in September 2000, and has two
one-year renewal options.
ITEM 3.
LEGAL PROCEEDINGS
- - ------------------
On or about February 2, 1999, American Industries, Inc., Ellison Carl Morgan and
entities related to Ellison Carl Morgan (the "Plaintiffs") served the Company
and certain officers and directors of the Company (the "Defendants") with a
lawsuit filed in the Circuit Court of the State of Oregon for the County of
Multnomah, alleging that the Defendants violated certain Oregon Securities Laws
in connection with the Plaintiffs' investments in the Company, breached the
contracts with the Plaintiffs and committed fraud in connection with such
contracts. In this action, the plaintiffs are seeking reimbursement for their
investments and lost profits in an amount to be determined at trial. On or about
February 22, 1999, the Plaintiffs served Defendants with an Amended Complaint
seeking approximately $1.3 million for added allegations regarding alleged
breaches of agreements between the Company and American Industries providing the
Company with letters of credit. On or about September 1, 1999 American
Industries obtained a judgment on the
-13-
issues in the case relating to the letters of credit. Trial on the remaining
securities law claims is currently scheduled for late November, 1999. 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.
On or about July 9, 1999, Imperial Bank (the "Plaintiff") served The Company and
its various operating units with a lawsuit filed in the Superior Court of the
State of California for the County of San Diego, alleging breach of credit
agreements and seeking foreclosure of personal property security interest,
appointment of a receiver, and injunctive relief. At the same time, the
Plaintiff filed a motion asking the Court for the appointment of an operational
receiver. On August 20, 1999, the Court granted the Plaintiff's request and, on
August 23, 1999, an operational receiver assumed control of the day-to-day
operations of the Company (see discussion, supra, under Management's Discussion
and Analysis). The Company had filed an answer to the complaint and the case is
progressing through normal procedures.
Throughout Fiscal Year 1999, 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 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ---------------------------------------------------
On May 27, 1999, and the adjournments on June 11, 1999 and June 25, 1999
thereto, the Company held an Annual Meeting of Stockholders to consider and vote
upon the following proposals:
1. The election of five persons to serve as directors of the Company until the
next annual meeting of stockholders and until their successors are duly
elected and qualified.
2. To amend the Company's certificate of incorporation to increase the number
of the Company's preferred stock authorized to be issued from 10,000 shares
to 100,000 shares.
3. To approve the Company's 1998 Stock Option Plan (the "1998 Stock Option
Plan"), pursuant to which 1,500,000 shares of the Company's common stock
will be reserved for issuance over the term of the 1998 Stock Option Plan.
4. To approve the issuance of all shares of Company common stock, which the
Company would be entitled to issue upon conversion of the Company's Series
D Convertible Preferred Stock.
5. To approve the issuance of all shares of the Company common stock, which
the Company would be entitled to issue upon conversion of the Company's
Series E Convertible Preferred Stock.
6. To ratify the appointment of Boros & Farrington APC as the Company's
independent auditors for the fiscal year ending June 30, 1999.
The proposals were approved based upon the favorable votes of a majority of the
votes cast for each proposal, except Proposal Number 2, which was approved by
the favorable votes of a majority of the shares eligible to vote at the meeting.
Proxies for the meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. There was no solicitation in
opposition to the management nominees as listed in the proxy statement and all
of such nominees were elected.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- - ---------------------------------------------------------------------
The Company's Common Stock is traded in the over-the-counter market, and quoted
on the Nasdaq SmallCap(R) Market under the symbol: "ITEC."
The following table sets forth the high and low bid quotations of the Company's
Common Stock for the periods indicated as reported by the Nasdaq SmallCap Market
or the NASD Electronic Bulletin Board. Prices shown in the table represent
inter-dealer quotations, without adjustment for retail markup, markdown, or
commission, and do not necessarily represent actual transactions and reflect the
1-for-5 reverse stock split effectuated by the Company on February 24, 1997.
-14-
High Low
- - ----------------------------------------------------------
Year ended June 30, 1997
First quarter $ 11.88 $ 7.50
Second quarter 10.00 4.69
Third quarter 5.94 4.37
Fourth quarter 7.13 3.25
Year ended June 30, 1998
First quarter $ 7.19 $ 5.50
Second quarter 6.69 4.25
Third quarter 4.63 2.75
Fourth quarter 4.19 2.25
Year ended June 30, 1999
First quarter $ 3.63 $ 1.75
Second quarter 1.88 0.25
Third quarter 4.13 0.28
Fourth quarter 1.97 0.66
- - ----------------------------------------------------------
The number of record holders, not including brokers, of the Company's Common
Stock, $.005 par value, was approximately 522 at October 11, 1999.
DIVIDENDS
- - ---------
The Company has never declared nor paid any cash dividends on its Common Stock.
ITEC currently intends to retain earnings, if any, after any payment of
dividends on its 5% Convertible Preferred Stock, for use in its business and
therefore, does not anticipate paying any cash dividends on its Common Stock.
Holders of the 5% Convertible Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, but only out of amounts legally available
for the payment thereof, cumulative cash dividends at the annual rate of $50.00
per share, payable semi-annually, commencing on October 15, 1986. ITEC has never
declared nor paid any cash dividends on the 5% Convertible Preferred Stock.
Dividends in arrears at June 30, 1999 were $518,000.
ITEM 6.
SELECTED FINANCIAL DATA
- - -----------------------
The consolidated statement of operations data with respect to the years ended
June 30, 1999, 1998 and 1997 and the consolidated balance sheet data at June 30,
1999, and 1998, set forth below are derived from the consolidated financial
statements of the Company included in Item 8 below, which have been audited by
Boros & Farrington APC, independent accountants. The selected consolidated
financial data set forth (in thousands, except per share data) should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in Item 7 below, and the Company's
consolidated financial statements and the notes thereto contained in Item 8
below. Historical results are not necessarily indicative of future results of
operations.
Statement of Operations Data:
- - ----------------------------
In thousands (except per share data)
1999 1998 1997
------------ ------------ ---------
NET REVENUES
Sales of product $ 16,417 $ 30,740 $ 26,081
Engineering Fees 150 2,327 5,860
License fees and royalties 730 1,350 296
---------- ----------- ---------
Net total revenues 17,297 34,417 32,237
---------- ----------- ---------
COSTS AND EXPENSES
Cost of products sold 14,064 22,536 17,022
Selling, general, and administrative 13,707 10,269 10,460
Cost of engineering and purchased R&D 2,183 2,475 4,243
Amortization of capitalized software 3,951 - -
Special charges 6,268 8,941 -
---------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS (22,876) (9,804) 512
---------- ----------- ---------
NET INCOME (LOSS) (25,129) (10,163) 723
========== =========== =========
EARNINGS (LOSS) PER COMMON SHARE
Basic $ (1.62) $ (0.90) $ 0.07
Diluted $ (1.62) $ (0.90) $ 0.06
---------- ----------- ---------
-15-
Balance Sheet Data:
In thousands
1999 1998
----- ----
Cash $ 75 $ 3,023
Working Capital (16,519) 315
Total assets 7,250 20,961
Long-term obligations - 1,828
Preferred stock 6,875 2,780
Total shareholders' equity (deficit) (12,432) 4,604
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - -------------------------------------------------
Imaging Technologies Corporation develops, manufactures, and distributes
high-quality digital imaging solutions. The Company produces a range of printer
and imaging products for use in graphics and publishing, digital photography,
and other niche business and technical markets. The Company's core technologies
are related to 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.
ITEC acquired two businesses during the past two years. The Company has altered
its focus away from some of its traditional revenue sources (i.e. engineering
services and technology licensing) and has been required to make expenditures to
support these changes. As of the end of Fiscal 1999, the Company's business
continues to be in a significant transitional phase and there are important
short-term operational and liquidity challenges. Accordingly, year-to-year
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 has been derived from
non-recurring engineering fees and royalty income from a relatively small number
of OEM customers. Over the past three years, the Company has experienced
shortfalls in income as a result of engineering contracts with OEM manufacturers
for products that were not completed by the customer, were never introduced into
the market and shipped, or were cancelled by the customer before ITEC completed
its portion of the contract. The timing and amount of income from these
customers has ultimately depended upon sales levels and shipping schedules for
the OEM products into which the Company's products were incorporated. The
Company has not had control over the shipping date nor volumes of products
shipped by its OEM customers, and there have been no assurances that any OEM
would continue to ship products that incorporate the Company's technology. The
Company's current strategy is to develop and commercialize its own technology.
The Company intends to increase penetration of its current target markets and to
continue pursuing clearly defined commercial market opportunities that enable it
to leverage its core technologies. The Company has established a number of
strategic partnerships with industry leaders, such as Adobe Systems and NEC
Electronics for product development, marketing and sales. Through these
strategic partnerships, ITEC seeks to obtain specific market knowledge and
enhanced understanding of market demands and needs, access to funding for
continued product development, product and customer validation and a channel for
market penetration. Due to these strategic changes, the Company has elected to
charge off approximately $3.95 million in capitalized software costs in fiscal
1999.
To successfully execute its current strategy, the Company will need to improve
its working capital position. The report of the Company's independent auditors
accompanying the Company's June 30, 1999 financial statements includes an
explanatory paragraph indicating there is a substantial doubt about the
Company's ability to continue as a going concern, due primarily to the decreases
in the Company's working capital and net worth. To address the Company's working
capital needs, in September 1998, the Company raised an aggregate of $4.38
million through the issuance of shares of its Common Stock and subordinated
notes to several private investors; and, in the spring of 1999, the Company
issued shares of Series D and Series E preferred stock and raised an aggregate
of $5.3 million, and retired $2.4 million of outstanding debt.
Nevertheless, the Company's needs to raise additional funds to operate its
business effectively. The Company has engaged financial advisors to assist with
additional fund raising efforts and the Company intends to attempt to raise
additional funds in the near future. There can be no assurance, however, that
the Company will be able to 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
-16-
stockholders. 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 "--Liquidity and Capital Resources" and "Item
1. Business--Risks and Uncertainties--Future Capital Needs."
Restructuring and New Business Units
- - ------------------------------------
In fiscal 1999, the Company began implementation of a plan to realign its
management and create a divisional structure within the organization. The
Company consolidated all of its independent operating subsidiaries under a
single financial and operational structure in order to improve the effectiveness
of its established sales channels and to enhance cross-selling opportunities. In
addition to the structural realignment, ITEC closed its 27,000 square-foot
printer manufacturing and distribution facility in Costa Mesa, California, and
relocated those operations to the Company's headquarters facilities in San
Diego. The Company also relocated its marketing and sales activities. While
these efforts have contributed some savings due to workforce reductions,
decreased space, and elimination of redundant operations, the Company has
reported restructuring charges of approximately $3 million for fiscal 1999. In
addition, the Company charged off approximately $1.1 million in connection with
the disposal of its memory products businesses.
The Company's 1998 restructuring plan to streamline operations and reduce costs
resulted in a net charge of approximately $3.8 million including $1.7 million
relating to redundant compensation costs, $1.5 million relating to the
write-down of inventory, licenses, and other assets that are not central to the
Company's core business, and $0.3 million relating to the consolidation of
facilities.
During fiscal 1999, the Company launched an E-commerce web site designed to
offer computer and imaging hardware, software, and consumables. DealSeekers.com
is an interactive internet catalog showroom featuring thousands of computer and
digital imaging products.
The Company's board of directors approved a private placement for investment in
DealSeekers.com and formed a dedicated Board of Directors to oversee the
continued development of the business. Management continues to investigate
additional funding, including the possibility of an initial public offering
during 2000.
Also during fiscal 1999, ITEC launched an additional web site, Color.com, as a
resource center to provide information on the highest quality correct color.
This new site allows consumers to purchase ITEC products including ColorBlind
Software.
Acquisition and Sale of Business Units
- - --------------------------------------
In fiscal 1999, the Company made several strategic acquisitions to reinforce its
technology position and expand sales channels. ITEC purchased privately-held
McMican Corporation to operate as the Storage Products Division of ITEC,
producing specialized memory modules. However, during fiscal 1999, the Company
sold its memory business operations, which consisted of McMican Memory and Prima
International, a distributor of memory modules that was acquired by PCPI
Technologies in fiscal 1993. Included in the restructuring charges reported by
the Company was approximately $1.1 million related to the McMican and Prima
operations.
In fiscal 1999 ITEC merged with Color Solutions, Inc., a software development
firm. Color Solutions' ColorBlind software allows users to accurately profile
peripherals such as scanners, monitors, digital cameras, printers and other
specialized color digital devices, all based on internationally-accepted ICC
color standards.
Also in fiscal 1998, ITEC acquired the assets of AMT, the European sales and
distribution subsidiary of Singapore-based Lam Soon, a manufacturer of dot
matrix, inkjet and specialized laser printers. AMT had been ITEC's master
stocking distributor of printers and supplies in Europe. AMT's European
operations have being integrated into ITEC's recently established European
Headquarters operation, ITEC Europe, located near London.
Special and Restructuring Charges
- - ---------------------------------
In fiscal 1998, the Company wrote-off contract and license receivables of
approximately $5.2 million that were due from OEM customers and co-developers
who have been adversely affected by the downturn in the technology segment of
the market and the economic crisis in Asia. In fiscal 1999, the Company charged
off $2.2 million in uncollectable receivables. This condition was caused by the
Company's need to accept orders from customers with higher credit risk in order
to replace lost distribution channels due to the Company's working capital
deficiencies.
Additionally, due to its working capital shortage, the Company wrote-off costs
associated with developed products that could not be deployed.
-17-
RESULTS OF OPERATIONS
- - ---------------------
Net Revenues
- - ------------
Revenues were $17.3 million, $34.4 million, and $32.2 million for the fiscal
years ended June 30, 1999, 1998 and 1997, respectively. Sales of product were
$16.4 million, $30.7 million, $26.1 million for the fiscal years ended June 30,
1999, 1998 and 1997, respectively. The decrease in product sales in fiscal 1999
from 1998 was due primarily to the sale and discontinuation of operations of the
Company's memory products business units, which had contributed approximately
$12 million in revenues in prior fiscal years. The increase in product sales
from 1997 to 1998 was due primarily to an increase in sales of printer products,
especially those associated with the Company's merger with NewGen, in fiscal
1997. Engineering fees were $150,000, $2.3 million, and $5.9 million for the
fiscal years ended June 30, 1999, 1998 and 1997, respectively. The decrease in
fiscal 1999 compared to fiscal 1998 and the decrease in 1998 compared to 1997
was primarily the result of the Company's ongoing change in strategic direction,
focusing more on internal product development and sales and less on engineering
for third parties. License fees and royalties also decreased due to these
changes in strategic business practice. They were $730,000, $1.4 million, and
$.3 million for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. The increase in license fees and royalties from fiscal 1997 to
fiscal 1998 was due primarily to the sales of a license to AMT of $1.3 million.
Cost of Products Sold
- - ---------------------
Cost of products sold were $14.1 million or 86% of sales, $22.5 million or 73%
of product sales, and $17.0 million or 65% of product sales for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively. The relative increase in
fiscal 1999 as compared to fiscal 1998 is attributable to competitive pressures
to reduce selling prices on the Company's end-of-life products. The increase in
1998 as compared to 1997 was primarily due to price reductions on older printer
products and increased sales of lower margin memory products.
Selling, General, and Administrative Expenses
- - ---------------------------------------------
Selling, general and administrative expenses were $13.7 million or 79% of total
revenues, $10.3 million or 30% of total revenues, and $10.5 million or 32% of
total revenues for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Selling, general and administrative expenses consisted primarily
of salaries and commissions of sales and marketing personnel, salaries and
related costs for general corporate functions, including finance, accounting,
facilities, advertising, and other marketing related expenses. The increase in
fiscal 1999 as compared to fiscal 1998 is attributable primarily to increases in
marketing costs associated with the Company's increased product sales
activities. The Company also had a substantial increase in fees for professional
services, including legal fees and interest costs of approximately $2 million.
Selling, general, and administrative costs in the previous two fiscal years were
relatively similar.
Cost of Engineering and Purchased R&D
- - -------------------------------------
Cost of engineering and purchased R&D was $2.2 million or 1455% of engineering
revenues, $2.5 million or 106% of engineering revenues, and $4.2 million or 72%
of engineering revenues for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. The changes relate primarily to the change in corporate strategy
from a focus on engineering fees and royalties to that of product sales. The
Company's engineering resources were refocused during fiscal 1998 on proprietary
product development rather than contract engineering. New products from these
activities are expected to being shipping to customers in fiscal 2000. The
increase as a percentage of engineering revenues in fiscal 1998 over 1997
results from cost overruns on contracts that were terminated.
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.
In August 1997, the Company completed a private placement of 500 shares of
Series C Convertible Preferred Stock providing aggregate proceeds of $5.0
million. A portion of the shares were converted by the holders and on September
18, 1998, the Company redeemed all 237 outstanding shares of the Series C
Convertible Preferred Stock. The Company paid $2.23 million in cash, issued $1.0
million in subordinated promissory notes and warrants to purchase 300,000 shares
of Common Stock to the holders of the Series C Convertible Preferred Stock in
connection with the redemption.
The Company has received and anticipates that it will continue to receive the
majority of its 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.
-18-
As of June 30, 1999, the Company had negative working capital of approximately
$16.5 million a decrease of approximately $17 million as compared to June 30,
1998. The decrease is primarily due the ongoing restructuring of the Company,
including charges for discontinued operations, charge-offs of receivables and
Inventory, and other costs associated with the changes in the Company's
strategic direction.
On August 20, 1999, at the request of Imperial Bank, the primary lender to the
Company, the Court appointed an operational receiver for the Company. On August
23, 1999, the operational receiver took control of the day-to-day operations of
the Company. To date, through further equity infusion into the Company,
primarily in the form of the exercise of warrants to purchase the common stock
of the Company, operations have continued. Without additional funding,
sufficient to satisfy Imperial Bank and the other creditors of the Company, as
well as providing working capital for the Company, there can be no assurances
that such operations can continue. The Company continues to actively work with
entities capable of providing such funding.
Net cash used in operating activities was $7.1 million during fiscal 1999,
approximately equivalent to net cash used during the year ended June 30, 1998.
Net cash used in operating activities was $4.0 million during the year ended
June 30, 1997. The increase from 1998 as compared to 1997 resulted primarily
from the operating loss and special charges.
Net cash used in investing activities decreased to $3.4 million during fiscal
1999 from $3.8 million during the year ended June 30, 1998; and, in fiscal 1998
had increased from $2.2 million during the years ended June 30, 1997. The
decrease as compared to 1998 is primarily attributable to the Company's
investment in capitalized software. The increase from 1998 as compared to 1997
resulted primarily from changes in capitalized software.
The Company has no material commitments for capital expenditures. The Company's
5% convertible preferred stock (which ranks prior to the Company's common
stock), carries cumulative dividends, when and as declared, at an annual rate of
$50.00 per share. The aggregate amount of such dividends in arrears at June 30,
1999, was approximately $518,000.
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, 1999
financial statements includes an explanatory paragraph indicating there is a
substantial doubt about the Company's ability to continue as a going concern,
due primarily to the decreases in the Company's working capital and net worth.
To address the Company's working capital needs, on September 17, 1998, the
Company raised an aggregate of $4.38 million through the issuance of shares of
its Common Stock and subordinated notes to several private investors.
In January 1999, the Company completed a private placement of 1,200 units, each
unit consisting of one share of series D convertible preferred stock and 2,000
warrants exercisable into shares of the Company's common stock. The Company
raised $1.8 million, less fees and expenses incurred in connection with the
private placement.
In February 1999, the Company completed a private placement of 1,250 units, each
unit consisting of one share of series E preferred stock and 5,000 warrants into
shares of common stock. The terms of the series E preferred stock were identical
to the terms of the series D preferred stock. In connection with this private
placement, the Company raised $3.7 million in cash and retired $1 million of
debt, which was exchanged for series E preferred stock.
While these financings have served to improve the Company's working capital
position, the Company needs to raise additional funds to operate its business
effectively. The Company has engaged a financial advisor to assist with
additional fund raising efforts and the Company intends to attempt to raise
additional funds in the near future. There can be no assurance, however, that
the Company will be able to 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
-19-
planned activities. The Company's inability to fund its capital requirements
would have a material adverse effect on the Company. See "Item 1.
Business--Risks and Uncertainties--Future Capital Needs."
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - ----------------------------------------------------------
Not applicable.
-20-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - -------------------------------------------
Index to Consolidated Financial Statements
- - ------------------------------------------
Page
Report of independent accountants 22
Consolidated balance sheets as of June 30, 1999 and 1998 23
Consolidated statements of operations for the years ended
June 30, 1999, 1998, and 1997 24
Consolidated statements of shareholders' equity for the years ended
June 30, 1999, 1998, and 1997 25
Consolidated statements of cash flows for the years ended
June 30, 1999, 1998, and 1997 26
Notes to consolidated financial statements 27
-21-
REPORT OF INDEPENDENT ACCOUNTANTS
- - ---------------------------------
To the Board of Directors and Shareholders of Imaging Technologies Corporation
We have audited the consolidated balance sheets of Imaging Technologies
Corporation and its subsidiaries as of June 30, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Imaging
Technologies Corporation and its subsidiaries as of June 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Note 1 to the financial statements
describes various factors that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BOROS & FARRINGTON APC
- - -----------------------------
BOROS & FARRINGTON APC
San Diego, California
October 11, 1999
-22-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(in thousands, except share data)
ASSETS
1999 1998
--------- ---------
Current assets
Cash $ 75 $ 3,023
Accounts receivable 1,959 4,133
Inventories 552 6,287
Prepaid expenses and other 577 1,401
--------- --------
Total current assets 3,163 14,844
Property and equipment, net 986 1,525
Capitalized software, net 2,851 3,655
Other 250 937
--------- --------
$ 7,250 $ 20,961
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank note payable $ 6,469 $ 5,203
Short-term debt 5,010 1,998
Current portion of long-term debt - 903
Accounts payable 5,532 5,027
Accrued expenses 2,671 1,398
--------- --------
Total current liabilities 19,682 14,529
Long-term debt, less current portion - 1,828
--------- --------
Total liabilities 19,682 16,357
--------- --------
Commitments and contingencies (Note 11)
Stockholders' equity (deficit)
Series A preferred stock, $1,000 par value,
7,500 shares authorized, 420.5 shares
issued and outstanding 420 420
Series C preferred stock, $1,000 par value,
1,200 shares authorized, 236 shares issued
and outstanding - 2,360
Series D preferred stock, $2,000 stated value,
1,200 shares authorized, 900 shares issued
and outstanding 1,800 -
Series E preferred stock, $5,000 stated value,
1,250 shares authorized, 931 shares issued
and outstanding 4,655 -
Common stock, $0.005 par value, 100,000,000 shares
Authorized; 21,946,216 shares issued and
outstanding 110 62
Paid-in capital 39,804 35,859
Shareholder loans (105) (110)
Accumulated deficit (59,116) (33,987)
------- -------
Total shareholders' equity (deficit) (12,432) 4,604
------- -------
$ 7,250 $ 20,961
======= =======
See Notes to Consolidated Financial Statements.
-23-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(in thousands, except share data)
1999 1998 1997
---- ----- ----
Revenues
Sales of products $ 16,417 $ 30,740 $ 26,081
Engineering fees 150 2,327 5,860
Licenses and royalties 730 1,350 296
---------- ---------- ----------
17,297 34,417 32,237
---------- ---------- ----------
Costs and expenses
Cost of products sold 14,064 22,536 17,022
Selling, general, and administrative 13,707 10,269 10,460
Cost of engineering fees, research, and development 2,183 2,475 4,243
Amortization of capitalized software costs 3,951 - -
Special charges
Charge for uncollectable receivables 2,233 5,157 -
Disposal of subsidiaries 1,087 - -
Restructuring costs 2,948 3,784 -
---------- ---------- ----------
40,173 44,221 31,725
---------- ---------- ----------
Income (loss) from operations (22,876) (9,804) 512
---------- ---------- ----------
Other income (expense):
Interest, net (1,989) (341) (87)
---------- ---------- ----------
Other - - 64
---------- ---------- ----------
(1,989) (341) (23)
---------- ---------- ----------
Income (loss) before income taxes (24,865) (10,145) 489
Income tax benefit (expense) (264) (18) 234
---------- ----------- ----------
Net income (loss) $ (25,129) $ (10,163) $ 723
========== ========== ==========
Earnings (loss) per common share
Basic $ (1.62) $ (0.90) $ 0.07
========== ========== ==========
Diluted $ (1.62) $ (0.90) $ 0.06
========== ========== ==========
Weighted average common shares 15,498 11,295 8,698
========== ========== ==========
Weighted average common shares - assuming dilution 15,498 11,295 10,623
========== ========== ==========
See Notes to Consolidated Financial Statements.
-24-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(in thousands, except share data)
Series A Series B Series C Series D Series E
Preferred Preferred Preferred Preferred Preferred Common Paid-In Accum
Stock Stock Stock Stock Stock Stock Capital Loans Deficit Total
-------- -------- ------ ----- ------ ----- ------- ----- ------- ------
Balance, July 1, 1996 $ 2,318 $ 1,162 $ - $ - $ - 38 $25,009 $ (8) (24,547) $ 3,972
Issuance of common stock
Conversion of preferred stock
(556,601 shares) (1,898) (1,162) - - - 3 3,056 - - (1)
Business combinations
(2,150,000 shares) - - - - - 11 2,547 (82) - 2,476
Exercise of options and warrants
(162,993 shares) - - - - - 1 256 (50) - 207
Private Sale
(100,000 shares) - - - - - - 500 - - 500
Net income - - - - - - - - 723 723
------ ------ ------ ----- ------ ----- ------ ----- ------- --------
Balance, June 30, 1997 420 - - - - 53 31,368 (140) (23,824) 7,877
Issuance of preferred stock
(500 shares) - - 5,000 - - - (211) - - 4,789
Issuance of common stock
Conversion of preferred stock
(958,598 shares) - - (2,640) - - 5 2,617 - - (18)
Conversion of note payable
(64,516 shares) - - - - - - 100 - - 100
Business acquisitions
(240,000 shares) - - - - - 1 349 - - 350
Exercise of options and warrants
(554,530 shares) - - - - - 3 1,636 (53) - 1,586
Collection of shareholder loans - - - - - - - 83 83
Net loss - - - - - - - (10,163) (10,163)
------ ------ ------ ----- ------ ----- ------ ----- ------- --------
Balance, June 30, 1998 420 - 2,360 - - 62 35,859 (110) (33,987) 4,604
Redemption of preferred stock - - (2,360) - - - (870) - - (3,230)
Issuance of preferred stock
(900 shares) - - - 1,800 - - - - - 1,800
Issuance of preferred stock
(931 shares) - - - - 4,655 - - - - 4,655
Issuance of common stock
Cash (4,105,800) - - - - - 21 1,922 - - 1,943
Services (3,167,500 shares) - - - - - 16 1,854 - - 1,870
Conversion of note payable
(2,000,000 shares) - - - - - 10 940 - - 950
Exercise of options and warrants
(270,660 shares) - - - - - 1 269 - - 270
Stock issuance costs - - - - - - (170) - - (170)
Collection of shareholder loans - - - - - - - 5 - 5
Net loss - - - - - - - - (25,129) (25,129)
------ ------ ------ ----- ------ ----- ------ ----- ------- --------
Balance, June 30, 1999 $ 420 $ - $ - $1,800 $ 4,655 $ 110 $39,804 $ (105) $(59,116) $(12,432)
====== ====== ====== ===== ====== ===== ====== ====== ======= ========
See Notes to Consolidated Financial Statements.
-25-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(in thousands, except share data)
1999 1998 1997
---- ---- ----
Cash flows from operating activities
Net income (loss) $(25,129) $ (10,163) $ 723
Adjustments to reconcile net income (loss) to net
cash from operating activities
Non-cash special charges 3,440 7,073 -
Depreciation and amortization 761 657 909
Amortization of capitalized software 3,951 - -
Stock issued for services 1,870 - -
Provision for income taxes 250 - -
Changes in operating assets and liabilities
Accounts receivable (59) (973) (3,893)
Inventories 5,197 (3,263) (202)
Prepaid expenses and other 626 (413) 61
Accounts payable and accrued expenses 2,043 338 (1,602)
Deferred revenue - (356) (32)
------- ------- -----------
Net cash from operating activities (7,050) (7,100) (4,036)
------- ------- -----------
Cash flows from investing activities
Prepaid licenses (34) (274) (641)
Capitalized software (3,147) (3,106) (526)
Capital expenditures (222) (413) (1,009)
Other - - (36)
------- ------- -----------
Net cash from investing activities (3,403) (3,793) (2,212)
------- ------- -----------
Cash flows from financing activities
Capital contributions (NewGen) - - 1,002
Cash acquired from business acquisitions - 40 -
Net borrowings under bank notes payable (1,234) 6,415 340
Issuance of other notes payable 5,860 1,000 143
Net proceeds from issuance of common stock 2,213 1,586 707
Net proceeds from issuance of preferred stock 5,190 5,000 -
Stock issuance costs (170) (229) -
Redemption of preferred stock (3,230) - -
Collection of shareholder loans 5 83 -
Repayment of notes payable (1,129) (234) (83)
------- ------- -----------
Net cash from financing activities 7,505 13,661 2,109
------- ------- -----------
Net increase (decrease) in cash (2,948) 2,768 (4,139)
Cash, beginning of year 3,023 255 4,394
------- ------- -----------
Cash, end of year $ 75 $ 3,023 $ 255
======= ======= ===========
See Notes to Consolidated Financial Statements.
-26-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts expressed in thousands, except share data)
Note 1. Operations and Significant Accounting Policies
- - ------------------------------------------------------
Operations
- - ----------
Imaging Technologies Corporation, formerly Personal Computer Products, Inc., a
Delaware corporation, and its subsidiaries ("ITEC" or the "Company") (1) develop
and license laser printer technology; (2) manufacture, market, and distribute
laser printer controllers and accessories; (3) market and distribute
internationally a variety of personal computer accessory products; and (4)
market and distribute high resolution imaging and color digital proofing
products.
Accounting Principles
- - ---------------------
The financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles.
Principles of Consolidation
- - ---------------------------
The financial statements include the accounts of ITEC and its subsidiaries.
Significant intercompany transactions and balances have been eliminated.
Going Concern Considerations
- - ----------------------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At June 30, 1999, and for the year
then ended, the Company experienced a net loss of $25 million and it has a
working capital deficiency of $16.5 million and a net capital deficiency of
$12.4 million which raise substantial doubt about its ability to continue as a
going concern. ITEC's ability to continue operations will depend on positive
cash flow, if any, from future operations and on the Company's ability to raise
additional funds through equity or debt financing. The Company could be required
to cut back or stop operations if it is unable to raise or obtain needed
funding. On August 20, 1999, at the request of Imperial Bank, the primary lender
to the Company, the Court appointed an operational receiver for the Company. On
August 23, 1999, the operational receiver took control of the day-to-day
operations of the Company. To date, through further equity infusion into the
Company, primarily in the form of the exercise of warrants to purchase the
common stock of the Company, operations have continued. Without additional
funding, sufficient to satisfy Imperial Bank and the other creditors of the
Company, as well as providing working capital for the Company, there can be no
assurances that such operations can continue. The Company continues to actively
work with entities capable of providing such funding. Management has continued
to implement its restructuring plan including reductions of personnel,
consolidation of facilities, disposal of subsidiaries, and the elimination of
product lines. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Accounting Estimates
- - ---------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Inventories
- - -----------
Inventories are valued at the lower of cost or market; cost being determined by
the first-in, first-out method.
Property and Equipment
- - ----------------------
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally computed
on a straight-line basis over the estimated useful lives of assets ranging from
three to seven years. Amortization of leasehold improvements is provided over
the initial term of the lease, on a straight-line basis. Maintenance, repairs,
and minor renewals and betterments are charged to expense.
Revenue Recognition
- - -------------------
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged
-27-
product sales to and through distributors and resellers is recorded when related
products are shipped. Maintenance and subscription revenue is recognized ratably
over the contract period. When the revenue recognition criteria required for
distributor and reseller arrangements are not met, revenue is recognized as
payments are received. Provisions are recorded for returns and bad debts.
Contract revenues, including the guaranteed portion of license fees, are
recognized based on the percentage-of-completion method, measured by the
percentage of costs incurred to date to estimated total costs for each contract.
Upon cancellation or termination of a contract, the OEM is billed for the entire
guaranteed amount of contract revenue, and a provision for loss is established
based on management's estimate of collectability. The Company provides for any
anticipated losses on such contracts in the period in which such losses are
first determinable. Unbilled receivables arise when the revenue recognized on a
contract exceeds billing due to timing differences related to billing milestones
as specified in the contracts. Deferred revenue represents billings in excess of
costs and earned revenues on such contracts.
Advertising Costs
- - ------------------
The Company expenses advertising and promotion costs as incurred. During fiscal
1999, 1998 and 1997, the Company incurred advertising and promotion costs of
approximately $1,440, $660, and $1,056 thousand, respectively.
Research and Development
- - ------------------------
Research and development costs are charged to expense as incurred.
- - ------------------------------------------------------------------
Capitalized Software and Development Costs
- - ------------------------------------------
The Company has developed software technology and capitalized certain qualifying
costs pursuant to the provisions of Statement of Financial Accounting Standards
No. 86 "Accounting for Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed". Costs incurred prior to the establishment of technological
feasibility, or subsequent to the release to customers, are expensed as
incurred. Capitalized software costs are amortized on a straight-line basis over
the estimated economic life of the product, generally three years. Amortization
begins when the product is available for general release to customers. While the
Company believes its products will be accepted in the marketplace and that it
will recover its investment in capitalized software, the ultimate realization of
this investment is dependent on such acceptance and the abilities of the Company
and/or OEM's to successfully market these new products.
Reverse Stock Split
- - -------------------
Effective February 24, 1997, the Company effected a 1 for 5 reverse stock split.
Accordingly, all historical share and per share data have been restated to give
effect for the reverse stock split.
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
--------------- ----------- ---------
June 30, 1997
Net income $ 723
Preferred dividends (126)
-----------
Basic EPS 597 8,698 $ 0.07
Effect of options and warrants - 1,837
Effect of convertible notes payable 7 64
Effect of convertible preferred stock 68 24
----------- ------- -------
Diluted EPS $ 672 10,623 $ 0.06
=========== ======= =======
June 30, 1998
Net loss $ (10,163)
Preferred dividends (21)
------------ ------- --------
Basic and diluted EPS $ (10,184) 11,295 $ (0.90)
-28-
Earnings (loss) Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ----------- ---------
June 30, 1999
Net loss $ (25,129)
Preferred dividends (21)
------------
Basic and diluted EPS $ (25,150) 15,498 $ (1.62)
============ ====== ========
Stock Issuance Costs
- - --------------------
Stock issuance costs including distribution fees, due diligence fees,
wholesaling costs, legal and accounting fees, and printing are capitalized
before the sale of the related stock and then charged against gross proceeds
when the stock is sold.
Debt Issuance Costs
- - -------------------
Debt issuance costs are capitalized and amortization is provided over the life
of the related debt using the straight-line method.
Stock-Based Compensation
- - ------------------------
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation (FAS 123"), which the Company
adopted in fiscal 1997, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock option plans. Under
APB 25, if the exercise price of the Company's employee stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation is recognized. Information regarding the Company's pro forma
disclosure of stock-based compensation pursuant to FAS 123 may be found in Note
8.
Income Taxes
- - ------------
The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements. These temporary differences will
result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. The deferred tax
assets are reviewed for recoverability and valuation allowances are provided, as
necessary.
Fair Value of Financial Instruments
- - -----------------------------------
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" requires the disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The carrying
value of the financial instruments on the consolidated balance sheets are
considered reasonable estimates of the fair value.
Reclassifications
- - -----------------
Certain prior year financial statement classifications have been reclassified to
conform with the current year's presentation.
Note 2. Special Charges
- - -----------------------
Charge for Uncollectible Receivables
- - ------------------------------------
In fiscal 1999, the Company took a charge for uncollectible receivables of
$2,233 thousand. The charge results primarily because certain distribution
channels have been closed to the Company due to its poor financial condition and
the Company has assumed higher credit risks. In addition, management believes
that the appointment of the operational receiver has had a negative impact on
the Company's ability to collect its receivables.
In the fourth quarter of fiscal 1998, the Company wrote-off contract and license
receivables of $5,157 thousand that are due from OEMs and co-developers who have
been adversely affected by the downturn in the technology segment of the market
and the economic crisis in Asia. The following summarizes the nature and effect
of these write-offs.
AMT ACCEL UK, LTD. AMT is a European sales subsidiary formerly owned by
Singapore-based Lam Soon, manufacturer of dot matrix, laser and inkjet printer
and plotters for specialized application, printer manufacturer headquartered in
Singapore. The Company sold to AMT an exclusive license to distribute in the
United Kingdom and Europe certain Company products in return for guaranteed
payments of $1.25 million. AMT and its parent company began experiencing
financial difficulties and were unable to meet their obligations to the Company
under the licensing agreement. Effective May 31, 1998, the Company reached a
settlement with the parent whereby the Company acquired the net assets of AMT
totaling $359 thousand and released AMT's parent from its contract obligations,
resulting in a write-off of $891 thousand.
-29-
Software Technology, Inc. STI is a Korean corporation who manufactures and
distributes computer related products in Asia. STI has been a longstanding
customer of the Company and has acted as co-developer and representative on
various projects. STI owes the Company $954 thousand, but it is unable to pay at
this time due to the sharp decline in the Korean economy, which has had a
significant adverse impact on its operations and financial condition. As a
result, the Company wrote-off in the fourth quarter the amounts due from STI.
Mita Digital Design, Inc. and Nippo Ltd. The Company developed for Mita a
controller board that was to be used by Mita in a new multifunctional product.
Mita has refused to pay amounts totaling $954 thousand under the agreement.
According to a recent press release, Mita's parent company in Japan has filed
for protection under bankruptcy laws. Based on this announcement, the Company
believes that Mita does not currently have sufficient resources to complete and
market the new product and is therefor seeking to avoid its contract
obligations. The company has entered into a settlement agreement with Mita which
the Company currently values at $328 thousand. As a result, the remaining
balance of $626 was written-off in the fourth quarter. Nippo is a Japanese
corporation who acted as a co-developer on the Mita project in exchange for a
share of product royalties and distribution rights. Nippo owes the Company $964
thousand under the co-development agreement, but it has refused to pay and has
abandoned the laser printer business altogether. As a result, the Company
wrote-off the receivable in the fourth quarter.
Minolta Company Ltd. The Company had a contract with Minolta, a Japanese
corporation, to develop a controller for a color laser printer product to be
manufactured and sold by Minolta. Minolta terminated the contract and is
disputing contract receivables of $260 thousand. In the fourth quarter, the
Company wrote-off the amount due from Minolta.
Tohoku Ricoh Co., Ltd. Tohoku Ricoh is a Japanese corporation that entered into
a technology development agreement with the Company providing for guaranteed
payments of $674 thousand. Tohoku Ricoh has cancelled the contract and is
disputing the amount of the guarantee. The Company believes that it is owed the
full guaranteed contract amount and is pursuing collection. However, as a result
of this dispute, the Company wrote-off in the fourth quarter the amount due from
Tohoku Ricoh.
Other Contract Receivables. In the fourth quarter, the Company wrote-off
additional contract receivables totaling $788 thousand that are past due.
Restructuring of Operations
- - ---------------------------
In fiscal 1999, the Company incurred additional charges relating to its
restructuring plan including $1,367 thousand relating to personnel reduction
costs, $1,207 thousand relating to the write-down of inventory, licenses, and
other assets that are not central to the Company's core business; and $374
thousand relating to the consolidation of facilities.
In the fourth quarter of fiscal 1998, the Company began to implement a
restructuring plan aimed at streamlining operations and reducing costs. The
restructuring plan seeks to combine and coordinate the efforts of the Company's
subsidiaries, eliminate redundant functions, promote operating efficiencies, and
focus resources on the new product lines. These actions resulted in a net charge
of $3,784 thousand including $1,692 thousand relating to redundant compensation
costs; $1,480 thousand relating to the write-down of inventory, licenses, and
other assets that are not central to the Company's core business; and $296
thousand relating to the consolidation of facilities.
Note 3. Operational Transactions
- - --------------------------------
During fiscal 1999, ITEC disposed of its memory business operations and recorded
a loss of $1,087 thousand. These businesses were characterized by low margins
and price instability, which were incompatible with the strategic direction of
the Company.
Effective May 31, 1998, the Company purchased the net assets of AMT as
consideration for the settlement of a license fee receivable (see Note 2). AMT,
as a foreign sales subsidiary located in the United Kingdom, markets the
Company's products in the European market.
Effective November 24, 1997, the Company purchased the total outstanding shares
of the privately-held McMican Corporation, doing business as ITEC Memory
("McMican") for 200 thousand shares of unregistered ITEC common stock. McMican
produces specialized memory modules for handheld personal computers, digital
cameras, and printers. This business was disposed of in fiscal 1999 (see above).
Effective November 30, 1997, Color Solutions, Inc. ("CSI") was merged into a
newly created, wholly-owned subsidiary of the Company. Under the terms of the
Merger Agreement, 850 thousand shares of unregistered ITEC common stock were
exchanged for all of the outstanding shares of CSI. On November 30, 1997, CSI
began operating as a wholly-owned subsidiary of the Company.
Effective February 14, 1997, the Company issued 2,150 thousand shares of
unregistered ITEC common stock in exchange for all of the outstanding shares of
NewGen Systems Acquisition Corporation ("NSAC").
-30-
NSAC was then merged into a newly created, wholly-owned subsidiary of the
Company, NewGen Imaging Systems, Inc. ("NewGen") and was accounted for as a
pooling of interests. NewGen commenced operations in July 1996 and, accordingly,
no restatement of prior financial statements is required. NewGen's net loss of
$1,550 thousand during fiscal 1997 included non-recurring charges of $1,157
thousand including purchased research and development of $780 thousand and the
write-down of prepaid licenses and royalties totaling $349 thousand.
Note 4. Composition of Certain Financial Statement Captions
- - -----------------------------------------------------------
The following summarizes certain financial statement captions at June 30:
1999 1998
---- -----
Accounts receivable
Trade $ 4,211 $ 5,068
Contract - 458
-------- -------
4,211 5,526
Less allowance for doubtful accounts (2,252) (1,393)
-------- -------
$ 1,959 $ 4,133
======== =======
Inventories
Materials and supplies $ 50 $ 2,081
Finished goods 502 4,206
-------- -------
$ 552 $ 6,287
-------- -------
Property and equipment
Computers and other equipment $ 2,416 $ 2,529
Office furniture and fixtures 496 516
Leasehold improvements 141 103
-------- -------
3,053 3,148
Less accumulated depreciation and amortization (2,067) (1,623)
-------- -------
$ 986 $ 1,525
======== =======
Accrued liabilities
Compensation and vacation $ 791 $ 694
Interest 618 -
Severance pay 650 -
Other 612 704
-------- -------
$ 2,671 $ 1,398
======== ========
Note 5. Supplemental Disclosures of Cash Flows
- - ----------------------------------------------
1999 1998 1997
---- ---- ----
Non-cash financing activities
Conversion of preferred stock into common stock $ - $ 2,640 $ 3,060
Conversion of notes payable into preferred stock 1,000
Conversion of notes payable into common stock 950 100 1,582
Conversion of accounts payable and accrued
liabilities into preferred stock 265 - -
Conversion of accounts payable and accrued
liabilities into notes payable - 987 227
Stock issued for loans - 53 50
Fixed assets acquired in business combinations
Accounts receivable - 1,489 -
Inventories - 1,923 -
Prepaid and other - 51 -
Property and equipment - 97 -
Borrowings under bank line of credit - (333) -
Accounts payable and accrued liabilities - (2,639) -
Supplemental disclosure of cash flow information
Cash paid during the year for interest 1,371 370 111
Cash paid during the year for income taxes 23 5 9
Note 6. Short-Term Debt
- - -----------------------
Notes Payable to Bank
- - ---------------------
The Company is in default under its credit agreements with Imperial Bank. The
bank is demanding immediate payment of all outstanding loan balances, including
the term loan which has been reclassified as a current liability. Borrowings
bear interest at the bank's prime interest rate plus 0.75% plus 5% penalty
default interest and are collateralized by substantially all assets of the
Company.
-31-
Notes Payable
- - -------------
The following summarizes short-term notes payable at June 30:
1999 1998
---- ----
Payable to suppliers, 7-8% $ 448 $ 998
Advances from stockholders, non interest bearing 1,387 -
Payable to stockholders, 16%, convertible into common stock at a price
of $2.025 per share 675 -
Payable to stockholders, 16% 1,000 -
Payable to a director, 16% 1,500 -
Payable to a director, 10%, convertible on or after December 31, 1998 into
common stock at the lesser of $2.36 per share or 85% of the volume weighted
trade price on the date of conversion - 1,000
-------- ---------
$ 5,010 $ 1,998
======== ========
Note 7. Long-Term Debt
- - ----------------------
The following summarizes long-term debt at June 30:
1999 1998
Note payable to bank in monthly installments of $80 through June 2001 including
interest at prime plus 0.75%; secured by substantially all assets of the Company $ - $ 2,500
Notes payable to suppliers in monthly installments through September 2001
including interest at 7-12%; secured by accounts receivable and equipment - 214
Capital lease obligations, 9-20% - 17
-------- --------
- 2,731
Less current portion - 903
-------- ---------
$ - $ 1,828
======== =========
The Company is in default on its long-term debt obligations and, accordingly,
all outstanding balances have been classified as current obligations.
Note 8. Shareholders' Equity
- - ----------------------------
5% Series A Convertible Preferred Stock
- - ---------------------------------------
Holders of the 5% convertible preferred stock ("Series A") are entitled to
receive, when and as declared by the Board of Directors, but only out of amounts
legally available for the payment thereof, cumulative cash dividends at the
annual rate of $50.00 per share, payable semi-annually.
The 5% convertible preferred stock is convertible, at any time, into shares of
the Company's common stock, at a price of $17.50 per common share. This
conversion price is subject to certain anti-dilution adjustments, in the event
of certain future stock splits or dividends, mergers, consolidations or other
similar events. In addition, the Company shall reserve, and keep reserved, out
of its authorized but un-issued shares of common stock, sufficient shares to
effect the conversion of all shares of the 5% convertible preferred stock.
In the event of any involuntary or voluntary liquidation, dissolution, or
winding up of the affairs of the Company, the 5% convertible preferred
stockholders shall be entitled to receive $1,000 per share, together with
accrued dividends, to the date of distribution or payment, whether or not earned
or declared.
The 5% convertible preferred stock is callable, at the Company's option, at call
prices ranging from $1,050 to $1,100 per share. No call on the 5% convertible
preferred stock was made during fiscal 1999, 1998, or 1997.
5% Series B Convertible Preferred Stock
- - ---------------------------------------
In January, 1995, the Company designated 117 shares of previously undesignated
Preferred Stock as 5% Series B Convertible Preferred Stock, par value $1,000 per
share with a face value of $10,000 per share ("Series B"). Each share may be
converted into 1,905 shares of the Company's common stock at the conversion rate
of $5.25. The holders of the Series B have a liquidation preference of $10,000
per Series B share over the common shareholders but are junior to the
liquidation preference of the existing 5% Convertible Preferred Stock
shareholders. Holders of the Series B are entitled to receive, when and as
declared by the Board of Directors, but only out of amounts legally available
for the payment thereof, cumulative cash dividends at the annual rate of $500
per share, payable annually.
-32-
Series C Redeemable Convertible Preferred Stock
- - -----------------------------------------------
On August 21, 1997, the Company closed a private placement of its newly
designated Series C Redeemable Convertible Preferred Stock ("Series C Shares")
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act"). In the initial closing of $5 million, ITEC issued 500 Series C
Shares and warrants to purchase up to 200,000 shares of the Company's common
stock. After satisfying certain holding periods, each of the newly issued Series
C Shares is convertible, at the option of its holder, into shares of Common
Stock of the Company based upon a conversion price equal to $9.00 or if lower,
the lowest closing market price of the Company's Common Stock during the 7
trading days prior to the conversion date. The warrants have an exercise price
of $7.50 per share. Subject to certain additional conditions, the Company had
the right to call for a second round of financing up to an aggregate amount of
$5 million, beginning on and including January 1, 1998 and ending June 30, 1998.
This additional round of financing would have involved the issuance of up to an
additional 500 Series C Shares and warrants for the purchase of up to 200,000
shares of Common Stock. Additionally, purchasers of the Series C Shares were
entitled to purchase additional Series C Shares up to 40% of the number of
Series C Shares held by each investor on December 31, 1997.
During fiscal 1998, 264 shares of Series C Shares were converted into 958,598
shares of common stock. On September 25, 1998, the Company redeemed all
outstanding shares of the Series C Convertible Preferred Stock. See Note 13.
As of January 13, 1999, the Company entered into a Securities Purchase Agreement
(the "Series D Agreement") with certain investors, which provided a funding of
$2.4 million (the "Series D Funding"). The Series D Funding provided for the
private placement by the Company of 1,200 units (the "Units"), each Unit
consisting of (i) one share of Series D Convertible Preferred Stock (the "Series
D Stock") and (ii) 2,000 warrants (the "Series D Warrants" and, collectively,
with the Series D Stock, the "Series D Securities") exercisable for shares of
Common Stock. The Series D Stock is convertible into shares of the Company's
Common Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of
the closing bid price per share of Common Stock on the Nasdaq SmallCap Market
(the "Series D Closing Price") for the three trading days having the lowest
closing price during the 30 trading days prior to the date on which the investor
gives to the Company a notice of conversion of Series D Stock; except that all
Series D Stock converted prior to February 26, 1999 would be converted at $.50.
However, each of the investors agreed that in no event shall it be permitted to
convert any shares of Series D Stock in excess of the number of such shares upon
the conversion of which, the sum of (i) the number of shares of Common Stock
owned by such investor (other than shares of Common Stock issuable upon
conversion of Series D Stock or upon exercise of Series D Warrants) plus (ii)
the number of shares of Common Stock issuable upon conversion of such shares of
Series D Preferred Stock or exercise of Series D Warrants, would be equal to or
exceed 9.999 percent of the number of shares of Common Stock then issued and
outstanding, including the shares that would be issuable upon conversion of the
Series D Stock or exercise of Series D Warrants held by such investor. Each
investor in Series D Stock has the right to vote, except as otherwise required
by Delaware law, on all matters on which holders of Common Stock have the right
to vote on with each such investor having the right to cast one vote for each
whole share of Common Stock into which each share of the Series D Preferred
Stock held by such investor is convertible immediately prior to the record date
for the determination of stockholders entitled to vote; provided, however, that
in no event is a holder entitled to vote more than 9.999 percent of the number
of shares entitled to be voted on any matter. The Series D Warrants are
immediately exercisable upon issuance at an exercise price of $.875 per share
and expire five years after the date of their issuance.
As of February 2, 1999, the Company entered into a Securities Purchase Agreement
(the "Series E Agreement") with certain investors (including one of whom is a
director of the Company), which provided funding and exchange of indebtedness of
$4,155,000 and, as of February 18, 1999, the Company entered into an Exchange
Agreement (the "Exchange Agreement") with certain investors for an exchange of
indebtedness of approximately $1,150,000 (the Series E Agreement and the
Exchange Agreement being together the " Series E Funding"). The Series E Funding
provided for the private placement by the Company of 1,250 units (the "Units"),
each Unit consisting of (i) one share of Series E Convertible Preferred Stock
(the "Series E Stock") and (ii) 5,000 warrants (the "Series E Warrants" and,
collectively, with the Series E Stock, the "Series E Securities") exercisable
for shares of Common Stock. The Series E Stock is convertible into shares of the
Company's Common Stock at the lesser of (A) $.50 and (B) an amount equal to 70
percent of the closing bid price per share of Common Stock on the Nasdaq
SmallCap Market (the "Series E Closing Price") for the three trading days having
the lowest closing price during the 30 trading days prior to the date on which
the applicable investor gives to the Company notice of conversion of Series E
Stock; except that all Series E Stock converted prior to February 26, 1999 would
be converted at $.50. Each investor in Series E Stock has the right to vote,
except as otherwise required by Delaware law, on all
-33-
matters on which holders of Common Stock have the right to vote on with each
such investor having the right to cast one vote for each whole share of Common
Stock into which each share of the Series E Preferred Stock held by such
investor is convertible immediately prior to the record date for the
determination of stockholders entitled to vote. The Series E Warrants are
immediately exercisable upon issuance at an exercise price of $.875 per share
and expire five years after their date of issuance.
On October 1, 1999, the Company requested a reduction in the exercise of the
Series D and E Warrants for a limited period of time in an effort to induce such
exercise by the holders of Series D and E Warrants at the reduced exercise price
and, as a result, the Company would receive additional capital from the proceeds
of such exercise.
The offers and sales to the Series D and E investors were made pursuant to a
claim of exemption under Section 4(2) of the Securities Act, as amended (the
"Securities Act"). The Company did not use any general advertisement or
solicitation in connection with the offer or sale of the Series D and E
Securities to the Series D and E investors. Each of the Series D and E investors
represented and warranted, among other things, that he or it was purchasing the
Series D and E Securities, as applicable, for investment purposes and not with a
view to distribution and that he or it was an "accredited investor" (as defined
in Regulation D promulgated by the SEC). Appropriate legends were affixed to the
certificates for each of the Series.
Conversion of Preferred Stock
- - -----------------------------
During fiscal 1997, the Company extended an offer to holders of the Company's
Series A and Series B to convert the accumulated dividends of approximately
$1,789 thousand and $116 thousand, respectively, into unregistered shares of the
Company's common stock at a conversion rate of $7.50. Under the terms of the
offer, Series A shareholders converted 1,897.5 shares and approximately $1,381
thousand of the accumulated dividend and Series B shareholders converted 116.2
shares and approximately $116 thousand of the accumulated dividend into
unregistered shares of the Company's common stock. As of June 30, 1998, the
accumulated dividend in arrears was approximately $518 thousand on the Series A.
Common Stock Warrants
- - ---------------------
The Company, from time-to-time, grants warrants to employees, directors, outside
consultants and other key persons, to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of such
stock on the date of grant. The terms and vesting of these warrants are
determined by the Board of Directors on a case-by-case basis. The following is a
summary of the warrant activity:
Underlying
Price Per Share Common Shares
June 30, 1996 $1.00 - $7.50 2,469
Granted $5.00 - $6.25 845
Exercised $1.00 - $3.75 (91)
-----
June 30, 1997 $1.00 - $7.50 3,223
Granted $2.25 - $7.50 1,930
Exercised $1.00 - $5.50 (524)
Canceled $4.00 - $6.25 (145)
-----
June 30, 1998 $1.00 - $7.50 4,484
Granted $1.13 - $4.00 2,185
Exercised $1.00 - $1.00 (271)
Canceled $1.90 - $7.50 (658)
-----
June 30, 1999 $1.00 - $7.50 5,740
=====
Exercisable at June 30, 1999 $1.00 - $7.50 3,659
=====
Common Stock Option Plans
- - -------------------------
In July 1984 ("1984 Plan"), November 1987 ("1988 Plan") and September, 1996
("1997 Plan"), the Company adopted stock option plans, under which incentive
stock options and non-qualified stock options may be granted to employees,
directors, and other key persons, to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of such
stock on the date of grant, with such options exercisable in installments at
dates typically ranging from one to not more than ten years after the date of
grant.
Under the terms of the 1988 and 1997 Plans, loans may be made to option holders
which permit the option holders to pay the option price, upon exercise, in
installments. A total of 212,000 and 1,000,000 shares of common stock are
authorized for issuance under the 1988 and 1997 Plans, respectively.
-34-
No shares are available for future issuance under the 1984 Plan due to the
expiration of the plan during 1994. As of June 30, 1999, options to acquire
2,000 shares were outstanding under the 1984 Plan and options to acquire 670,000
shares remained available for grant under the 1988 and 1997 Plans.
In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans
("Outside Plan"), granted to employees, directors and other key persons of ITEC
or its subsidiaries options to purchase shares of the Company's common stock, at
an exercise price equal to no less than the fair market value of such stock on
the date of grant.
Options are exercisable in installments at dates typically ranging from one to
not more than ten years after the date of grant. In October 1995, the Board of
Directors authorized the exercise price for employee options and warrants to be
reduced to the current market value. Accordingly, the exercise price on an
aggregate of 18,220 and 275,000 options under the 1988 and Outside Plans,
respectively, were canceled and reissued at an exercise price of $1.00 per
share.
Common Stock Purchase Plan
- - --------------------------
The 1997 Employee Stock Purchase Plan ("Purchase Plan") was approved by the
Company's shareholders in September 1996. The Purchase Plan permits employees to
purchase the Company's common stock at a 15% discounted price. The Purchase Plan
is designed to encourage and assist a broad spectrum of employees of the Company
to acquire an equity interest in the Company through the purchase of its common
stock. It is also intended to provide participating employees the tax benefits
under Section 421 of the Code. The Purchase Plan covers an aggregate of 500,000
shares of the Company's common stock.
All employees, including executive officers and directors who are employees,
customarily employed more than 20 hours per week and more than five months per
year by the Company are eligible to participate in the Purchase Plan on the
first enrollment date following employment. However, employees who hold,
directly or through options, five percent or more of the stock of the Company
are not eligible to participate.
Participants may elect to participate in the Purchase Plan by contributing up to
a maximum of 15 percent of their compensation, or such lesser percentage as the
Board may establish from time to time. Enrollment dates are the first trading
day of January, April, July and October or such other dates as may be
established by the Board from time to time. On the last trading day of each
December, March, June and September, or such other dates as may be established
by the Board from time to time, the Company will apply the funds then in each
participant's account to the purchase of shares. The cost of each share
purchased is 85 percent of the lower of the fair market value of common stock on
(i) the enrollment date or (ii) the purchase date. The length of the enrollment
period may not exceed a maximum of 24 months. No participant's right to acquire
shares may accrue at a rate exceeding $25,000 of fair market value of common
stock (determined as of the first trading day in an enrollment period) in any
calendar year. No shares have been issued under the Purchase Plan.
Stock Option Activity
- - ---------------------
The following is a summary of the stock option activity:
1994, 1988 and 1997 Plans Other Options
Price Underlying Pricece Underlying
Per Common Per Common
Share Shares Share Shares
------------ ---------- ------ ---------
June 30, 1996 $1.00 - $5.10 36 $1.00 313
Granted $3.60 - $8.45 104 -
Exercised $1.00 - $2.10 (5) $1.00 (78)
Canceled $1.00 - $7.95 (13) -
----- -----
June 30, 1997 $1.00 - $8.45 122 $1.00 235
Granted $1.95 - $4.88 373 -
Exercised $1.00 - $3.45 (5) $1.00 (37)
Canceled $1.00 - $8.45 (94) $1.00 (3)
----- -----
June 30, 1998 $1.00 - $8.45 396 $1.00 195
Granted $0.91 - $1.90 619
Exercised -
Canceled $1.06 - $6.90 (195) $1.00 (2)
----- -----
June 30, 1999 $0.91 - $8.45 820 $1.00 193
-----
Exercisable at June 30, 1999 $0.91 - $8.45 157 $1.00 193
==== ====
-35-
Accounting for Stock-Based Compensation
- - ---------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. The Company has opted
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") to disclose its stock-based compensation
with no financial effect. The pro forma effects of applying SFAS 123 in this
initial phase-in period are not necessarily representative of the effects on
reported net income or loss for future years. Had compensation expense for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS 123, the Company's pro forma net income (loss) and net
income (loss) per share would have been as follows for the years ended June 30:
1999 1998 1997
---- ---- ----
Net income (loss)
As reported $ (25,129) $ (10,163) $ 723
Pro forma (26,500) (11,154) 518
Basic earnings (loss) per share
As reported $ (1.62) $ (0.90) $0.07
Pro forma (1.71) (0.99) 0.05
The weighted average fair value of the options granted during fiscal years 1998,
1997, and 1996 is estimated on the date of grant using the Black-Scholes option
pricing model. The weighted average fair values and weighted average assumptions
used in calculating the fair values were as follows for the years ended June 30:
1999 1998 1997
---- ---- ----
Fair Value of options granted $ 2.50 $ 2.37 $ 5.45
Risk free interest rate 6% 6% 7%
Expected life (years) 3 3 5
Expected volatility 95% 95% 95%
Expected dividends - - -
Note 9. Significant Customers, Revenue Data, and Concentration of Credit Risk
- - -----------------------------------------------------------------------------
As of and during the years ended June 30, 1999, 1998, and 1997 no customer
accounted for more than 10% of consolidated accounts receivable or total
consolidated revenues.
The majority of the Company's product sales in fiscal 1999, 1998, and 1997 were
to European distributors (denominated in U.S. dollars) in the computer
peripherals and accessories market, including imaging and data storage devices
and printers, through its wholly-owned subsidiaries. A significant portion of
contract revenue is derived from OEMs and co-developers who are headquartered in
the Asia. Revenues from foreign customers as a percentage of total consolidated
revenues were 16% in 1999, 56% in fiscal 1998, and 57% in fiscal 1997, as
reflected in the following table for the years ended June 30:
1999 1998 1997
---- ---- ----
Europe $ 981 $ 13,912 $ 12,221
Asia 1,530 4,189 4,438
Others 326 1,223 1,764
-------- -------- -------
$ 2,837 $ 19,324 $ 18,423
======== ======== =======
Note 10. Income Taxes
- - ---------------------
The Company's provision for income taxes is accounted for in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under the SFAS 109 asset
and liability method, deferred tax assets and liabilities are determined based
upon the difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is then provided for
deferred tax assets which are more likely than not to not be realized.
-36-
The benefit (provision) for income taxes is as follows for the years ended June
30:
1999 1998 1997
---- ---- ----
Current - State $ (23) $ (18) $ (5)
Deferred benefit (expense) (241) - 241
------ ------ -------
$ (264) $ (18) $ 236
====== ====== =======
The components of deferred income taxes are as follows at June 30:
1999 1998 1997
---- ---- ----
Deferred tax assets
Net operating loss carryforwards $ 20,000 $ 9,627 $ 4,953
Book reserves and accrued liabilities 750 490 349
Federal general business credits and other tax credits 517 517 517
State R&D and other credits 102 102 102
------ ------ -----
21,369 10,736 5,921
Valuation allowance (21,369) (10,495) (5,680)
------- ------ ------
$ - $ 241 $ 241
======= ====== ======
The Company's federal and state net operating loss carryforwards expire in
various years through 2013. Additionally, the Company's federal and state
research and development credits expire in various years through 2009. During
1991 the Company sustained a change in ownership as defined in Section 382 of
the Internal Revenue Code; as a result, an annual limitation of approximately
$350 thousand was imposed on the utilization of the net operating loss
carryforwards generated prior to the date of change. In addition, Section 383
places a limitation on the usage of tax credits generated prior to such a
change. Subsequent to the date of the ownership change in 1991, there have been
numerous additional equity issuances; as a result, the Company may have
experienced, or could experience in the future, similar ownership changes, which
could result in additional limitations on the annual utilization of the
Company's net operating loss carryforwards and tax credits generated prior to
the new change in ownership.
The provision for income taxes results in an effective rate which differs from
the federal statutory rate. A reconciliation between the actual tax provision
and taxes computed at the statutory rate is as follows for the years ended June
30:
1999 1998 1997
---- ---- ----
Benefit (provision) at federal statutory income tax rate $ 8,544 $ 3,449 $ (246)
Utilization of federal net operating loss carryforward - - 485
Losses for which no current benefit is available (8,544) (3,449) -
State income taxes (23) (18) (5)
------- ------- -----
$ (23) $ (18) $ 234
======== ======= =====
Note 11. Commitments and Contingencies
- - --------------------------------------
Lease Commitments
- - -----------------
The Company leases certain equipment under non-cancelable capital leases, which
are included in property and equipment. At June 30, 1999, 1998 and 1997, the
cost of such equipment was $56, $56 and $117 thousand and the related
accumulated amortization was $56, $37 and $54 thousand, respectively. Future
commitments under capital lease obligations are included with long-term debt in
Note 7.
The Company and its subsidiaries lease operating facilities under lease
agreements that expire at various dates through March 2006. Total rental expense
was approximately $579 in fiscal 1999, $574 thousand in fiscal 1998, and $509 in
fiscal 1997.
Future minimum lease payments under these long-term non-cancelable operating
leases are as follows: Year ending June 30,
2000 $ 606
2001 707
2002 734
2003 678
2004 705
Thereafter 1,298
--------
$ 4,728
========
Legal Matters
- - -------------
On or about February 2, 1999, American Industries, Inc., Ellison Carl Morgan and
entities related to Ellison Carl Morgan (the "Plaintiffs") served the Company
and certain officers and directors of the Company (the "Defendants") with a
lawsuit filed in the Circuit Court of the State of Oregon for the County of
Multnomah, alleging that the Defendants violated certain Oregon Securities Laws
in connection with the Plaintiffs'
-37-
investments in the Company, breached the contracts with the Plaintiffs and
committed fraud in connection with such contracts. In this action, the
plaintiffs are seeking reimbursement for their investments and lost profits in
an amount to be determined by trial. On or about February 22, 1999, the
Plaintiffs served Defendants with an Amended Complaint seeking approximately
$1.3 million for added allegations regarding alleged breaches of agreements
between the Company and American Industries providing the Company with letters
of credit. On or about September 1, 1999 American Industries obtained a judgment
on the issues in the case relating to the letters of credit. Trial on the
remaining securities law claims is currently scheduled for late November, 1999.
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.
On or about July 9, 1999, Imperial Bank (the "Plaintiff") served The Company and
its various operating units with a lawsuit filed in the Superior Court of the
State of California for the County of San Diego, alleging breach of credit
agreements and seeking foreclosure of personal property security interest,
appointment of a receiver, and injunctive relief. At the same time, the
Plaintiff filed a motion asking the Court for the appointment of an operational
receiver. On August 20, 1999, the Court granted the Plaintiff's request and on
August 23, 1999, an operational receiver assumed control of the day-to-day
operations of the Company (see discussion, supra, under Management's Discussion
and Analysis). The Company had filed an answer to the complaint and the case is
progressing through normal procedures.
Throughout Fiscal Year 1999, 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.
Note 12. Related Party Transactions
- - -----------------------------------
A former director receives compensation as a consultant to the Company on
corporate matters and investment banking issues under an agreement expiring in
June 2002. These consulting fees amounted to $56 thousand in fiscal 1999, $120
thousand in fiscal 1998, and $120 thousand in 1997. Effective July 1, 1998, the
annual consulting fee under the agreement has been reduced to $56 thousand.
During fiscal 1996, approximately $81 thousand of accrued consulting fees and
$27 thousand of accrued directors fees owed to this former director were
converted into unregistered shares of the Company's common stock. During fiscal
1998, as consideration for services provided relating to the private placement
of the Series C Preferred Stock, this former director received commissions and
expense reimbursement totaling $200 thousand of which $100 thousand was paid in
cash and $100 thousand was used to exercise warrants for 100,000 shares at a
price of $1.00 per share.
In June 1998, one of the Company's former directors converted a loan of $100
thousand into 64,516 shares of the Company's common stock.
In June 1998, a director of the Company loaned $1 million to the Company under a
10% note payable due on or after December 31, 1998 and convertible into the
Company's common stock at the lesser of $2.36 per share or 85% of the volume
weighted trade price on the date of conversion. In fiscal 1999, this loan plus
accrued interest and directors fees totaling $265 thousand were converted into
253 shares of Series E Preferred Stock.
Note 13. Events Subsequent to June 30, 1999
- - -------------------------------------------
Subsequent to June 30, 1999, notes payable of $1,000 thousand were converted
into 230 shares of Series E Preferred Stock; Series D Preferred Stock totaling
$740 thousand was converted into 2,348,089 shares of common stock; and, Series E
Preferred Stock totaling $3,620 thousand was converted into 8,838,479 shares of
common stock. In addition, the Company issued 10,690,888 shares of its common
stock at prices ranging from $0.30 to $1.00 per share to fund operations and to
settle certain claims, judgements, and other obligations.
ITEM 9.
Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure
- - ------------------------------------------------
None
-38-
Part III
Pursuant to General Instruction G(3) to Form 10-K, the information required by
Items 10, 11, 12, and 13 of Part III is incorporated by reference to the
Company's definitive Proxy Statement with respect to its 1999 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A or to an amendment to the
Form 10-K within 120 days after June 30, 1999.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- - ------------------------------------------------------------------
(a) Documents filed as part of this Form 10-K:
(1) FINANCIAL STATEMENTS:
The financial statements of the Company are included herein as required
under Item 8 of this Annual Report on Form 10-K. See Index to Financial
Statement.
(2) FINANCIAL STATEMENT SCHEDULES:
Financial Statement Schedules have been omitted because they are not
applicable or not required or the information required to be set forth
therein is included in the financial statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended June 30,1999.
(c) Exhibits.
The following exhibits are filed as part of, or
incorporated by reference into, this Form 10-K:
- - ------------------------------------------------
3(a) Certificate of Incorporation of the Company, as amended, and currently
in effect. See also below. (Incorporated by reference to Exhibit 3(a)
to 1988 Form 10-K.) *
3(b) Certificate of Amendment of Certificate of Incorporation of the
Company, filed February 8, 1995, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1995 Form 10-K.) *
3(c) Certificate of Amendment of Certificate of Incorporation of the
Company, filed May 23, 1997, as amended, and currently in effect.
(Incorporated by reference to 1997 Form 10-K.) *
3(d) Certificate of Amendment of Certificate of Incorporation, filed
January 12, 1999, as amended and currently in effect. (Incorporated by
reference to Form 10-Q for the period ended December 31, 1998.) *
3(e) Certificate Eliminating Reference to Certain Series of Shares of Stock
from the Certificate of Incorporation, filed January 12, 1999, as
amended and currently in effect. (Incorporated by reference to Form
10-Q for the period ended December 31, 1998.) *
3(f) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1997 Form 10-K.) *
4(a) Amended Certificate of Designation of Imaging Technologies Corporation
with respect to the 5% Convertible Preferred Stock. (Incorporated by
reference to Exhibit 4(d) to 1987 Form 10-K.) *
4(b) Amended Certificate of Designation of Imaging Technologies Corporation
with respect to the 5% Series B Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4(b) to 1988 Form 10-K.) *
4(c) Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of Imaging Technologies Corporation.
(Incorporated by reference to Exhibit 4(c) to 1998 Form 10-K.) *
4(d) Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series D Convertible
Preferred Stock, filed January 13, 1999. (Incorporated by reference to
Form 10-Q for the period ended December 31, 1998.) *
4(e) Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series E Convertible
Preferred Stock, filed January 28, 1999. (Incorporated by reference to
Form 10-Q for the period ended December 31, 1998.) *
10(a.1) 1984 Stock Option Plan for the Company. (Incorporated by reference to
Form S-8, filed October 26, 1984, File No. 2-93993.) *
10(a.2) Forms of Standard Non-Qualified and Incentive Stock Option Agreement
for 1984 Stock Option Plan. (Incorporated by reference to Form S-8,
filed October 26, 1984, File No. 2-93993.) *
10(b.1) 1988 Stock Option Plan for the Company. (Incorporated by reference to
Exhibit 10(g) to 1989 Form 10-K.) *
-39-
10(b.2) Amendment and Restatement of 1988 Stock Option Plan. (Incorporated by
reference to Exhibit 10(d) to 1991 Form 10-K.) *
10(b.3) Forms of Standard Non-Qualified and Incentive Stock Option Agreement
for 1988 Stock Option Plan. (Incorporated by reference to Exhibit
10(e) to 1991 Form 10-K.) *
10(c) Standard Industrial Lease Multi-Tenant-Modified Net dated January 24,
1996 between the Company and Bernardo View, Ltd.; addendum I and
addendum II to lease; addendum Ill to lease. (Incorporated by
reference to Exhibit 10(c) to 1996 Form 10-KSB.) *
10(d) Reference is made to the various stock options and warrants granted in
1996 to directors and executive officers of the Company as described
in Notes 6 and 7 to the 1996 Financial Statements. (Incorporated by
reference to Forms S-8 dated February 12, 1996, File Nos. 333-00871,
333-00873 and 333-00879.) *
10(e.1) Executive Employment Agreement, as amended, between the Company and
Edward W. Savarese, dated July 1, 1990, and amended as of February 25,
1994. (Incorporated by reference to Exhibit 10(k) to 1994 Form
10-KSB.) *
10(e.2) Compensation Agreement between the Company and Edward W. Savarese,
dated November 16, 1992. (Incorporated by reference to Exhibit 10(af)
to 1993 Form 10-KSB.) *
10(e.3) Amendment to Employment Agreement between the Company and Edward W.
Savarese dated April 1, 1998. (incorporated by reference to Exhibit
10(e.3) to 1998 Form 10-K.) *
10(e.4) Amendment to Executive Employment Agreement between the Company and
Edward W. Savarese dated June 12, 1998. (Incorporated by reference to
Exhibit 10(e.4) to 1998 Form 10-K.) *
10(f) Compensation Agreement between the Company and Harry J. Saal dated
November 16, 1992. (Incorporated by reference to Exhibit 10(ad) to
1993 Form 10-KSB.) *
10(g.1) Compensation Agreement between the Company and Irwin Roth dated
November 16, 1992. (Incorporated by reference to Exhibit 10(ag) to
1993 Form 10-KSB.) *
10(g.2) Consulting Agreement, dated April I, 1994, between the Company and
Irwin Roth. (Incorporated by reference to Exhibit 10(az) to 1994 Form
10-KSB.) *
10(g.3) Amendment to Consulting Agreement dated June 12, 1998 between the
Company and Irwin Roth. (Incorporated by reference to Exhibit 10(g.3)
to 1998 Form 10-K.) *
10(h) Acquisition Agreement for acquisition of Prima International
subsidiary on October 1, 1993. (Incorporated by reference to Exhibit
2.1 to Amendment No. 1 to Form 8K/A dated October 14. 1993.) *
10(i.1) Third Party Development Partner License Agreement, effective October
22, 1993, between the Company and Adobe Systems Incorporated.
(Incorporated by reference to Exhibit 10(ai) to 1994 Form 10-KSB.) *
10(i.2) Reference Port Appendix No. I dated October 22, 1993, to the
Postscript Support Source and Object Code Distribution License
Agreement between Adobe Systems Incorporated and the Company.
(Incorporated by reference to Exhibit 10(aj) to 1994 Form 10-KSB.) *
10(j) ITEC/APS License Agreement dated March 28. 1994, between the Company
and Integrated Device Technology, Inc. (Incorporated by reference to
Exhibit 10(ak) to 1994 Form 10-KSB.) *
10(k) International Sales Representative Agreement dated October 15, 1993,
between the Company and Nippo Ltd. (Incorporated by reference to
Exhibit 10(ao) to 1994 Form 10KSB.) *
10(l) Consulting Agreement dated September 17, 1993 between the Company and
Marius A. Robinson. (Incorporated by reference to Exhibit 10(aq) to
1994 Form 10-KSB.) *
10(m.1) Warrant Purchase Agreement, dated September 17. 1993, between the
Company and Robinson International Ltd. (Incorporated by reference to
Exhibit 10(ar) to 1994 Form 10-KSB.) *
10(m.2) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common
Stock of the Company at $1.50 per share dated September 17, 1993,
between the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(as) to 1994 Form 10-KSB.) *
10(m.3) Warrant Certificate for 250,000 Warrants to Purchase Shares of Common
Stock of the Company at $1.00 per share dated September 17, 1993,
between the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(at) to 1994 Form 10KSB.) *
10(n) ITEC/MEl License Agreement dated September 30, 1994 between the
Company and Matsushita Electric Industrial Co., Ltd. (Incorporated by
reference to Exhibit 10(aac) to 1994 Form 10-KSB.) *
10(o) Form of Standard Warrant Agreement dated January 3, 1996 issued to
Harry J. Saal as described in Note 6 to the 1996 Financial Statements.
(Incorporated by reference to Exhibit 10(o) to 1996 Form 10-KSB.) *
10(p) Form of Standard Warrant and Consulting Agreement issued to
consultants as described in Note 6 to the 1996 Financial Statements.
(Incorporated by reference to Form S-8 dated May 9, 1996, File Number
333-03375.) *
10(q) Compensation Agreement between the Company and Brian Bonar dated
September 1, 1994. (Incorporated by reference to Exhibit 10(q) to 1996
Form 10-KSB.) *
-40-
10(q.1) Amendment to Employment Agreement between the Company and Brian Bonar
dated April 1, 1998. (Incorporated by reference to Exhibit 10(q.1) to
1998 Form 10-K.) *
10(r) Promissory Note between Imperial Bank and the Company dated June 23,
1998. (Incorporated by reference to Exhibit 10(r) to 1998 Form 10-K.)*
10(s) Security and Loan Agreement and Addendum thereto (Eximbank Facility)
between Imperial Bank and the Company dated June 23, 1998.
(Incorporated by reference to Exhibit 10(s) to 1998 Form 10-K.) *
10(t) Security and Loan Agreement and Addendum thereto (Foreign Insured A/R
Line) between Imperial Bank and the Company dated June 23.1998.
(Incorporated by reference to Exhibit 10(t) to 1998 Form 10-K.) *
10(u) Security and Loan Agreement and Addendum thereto (Domestic Line)
between Imperial Bank and the Company dated June 23,1998.
(Incorporated by reference to Exhibit 10(u) to 1998 Form 10-K.) *
10(v) Amended and Restated Agreement and Plan of Merger and Plan of
Reorganization dated February 12, 1997 between and among NewGen
Systems Acquisition Corporation, NewGen Imaging Technologies
Corporation and Personal Computer Products, Incorporated.
(Incorporated by reference to form 8-K dated April 28, 1998.) *
10(w) Warrant to Purchase Stock between Imperial Bank and the Company dated
June 23, 1998. (Incorporated by reference to Exhibit 10(w) to 1998
Form 10-K.) *
10(x) Securities Purchase Agreement between Buyers and the Company dated
August 21, 1997. (Incorporated by reference to Exhibit 10(x) to 1998
Form 10-K.) *
10(y) Registration Rights Agreement between Buyers and the Company dated
August 21, 1997 (Incorporated by reference to Exhibit 10(y) to 1998
Form 10-K.) *
10(z) Form of Warrant to Purchase Common Stock between buyers and the
Company dated August 21,1997. (Incorporated by reference to Exhibit
10(z) to 1998 Form 10-K.) *
10(aa) Promissory Note between DataProducts Corporation, NewGen Imaging
Systems, Inc. and the Company dated June 30, 1998. (Incorporated by
reference to Exhibit 10(aa) to 1998 Form 10-K.) *
10(ab) Stock Purchase Agreement between the Company and Stockholders of New
Media Memory Inc. dated November 28, 1997. (Incorporated by reference
to Exhibit 10(bb) to 1998 Form 10-K.) *
10(ac) Agreement and Plan of Merger and Plan of Reorganization between the
Company, ITEC Sub and Color Solutions, Incorporated dated November
30,1997. (Incorporated by reference to Exhibit 10(ac) to 1998 Form
10-K.) *
10(ad) Forbearance Agreement entered into as of November 4, 1998, by and
among the Company, certain of the Company's subsidiaries and Imperial
Bank. (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the
period ended December 31, 1998.) *
10(ae) Letter of Credit Reimbursement Agreement dated as of November 18,
1998, by and between the Company and American Industries, Inc.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period
ended December 31, 1998.) *
10(af) Securities Purchase Agreement dated as of January 13, 1999, by and
among the Company and the applicable parties named therein.
(Incorporated by reference to Exhibit 10.3 to Form 10-Q for the period
ended December 31, 1998.) *
10(ag) Registration Rights Agreement dated as of January 13, 1999, by and
among the Company and the applicable parties named therein.
(Incorporated by reference to Exhibit 10.4 to Form 10-Q for the period
ended December 31, 1998.) *
10(ah) Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share dated January 1, 1999, between the Company and each
of the applicable parties named in Exhibit 10(af) hereto.
(Incorporated by reference to Exhibit 10.5 to Form 10-Q for the period
ended December 31, 1998.) *
10(ai) Securities Purchase Agreement dated as of February 2, 1999, by and
among the Company and the applicable parties named therein.
(Incorporated by reference to Exhibit 10.6 to Form 10-Q for the period
ended December 31, 1998.) *
10(aj) Registration Rights Agreement dated as of February 2, 1999, by and
among the Company and the applicable parties named therein.
(Incorporated by reference to Exhibit 10.7 to Form 10-Q for the period
ended December 31, 1998.) *
10(ak) Form of Warrant to Purchase Shares of Common Stock of the Company at
$.875 per share dated February 2, 1999, between the Company and each
of the applicable parties named in Exhibit 10(aj) hereto.
(Incorporated by reference to Exhibit 10.8 to Form 10-Q for the period
ended December 31, 1998.) *
10(al) Exchange Agreement dated as of February 19, 1999, by and among the
Company and the applicable parties named therein. (Incorporated by
reference to Exhibit 10.9 to Form 10-Q for the period ended December
31, 1998.) *
10(am) Form of Warrant to Purchase 50,000 shares of Common Stock of ITEC at
$1.50 per share, dated March 5, 1999, between ITEC and Carmel Mountain
Environmental L.L.C. (Incorporated by reference to Exhibit 4.9 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629.)*
-41-
10(an) Form of Warrant to Purchase 50,000 Shares of Common Stock of ITEC at
$1.50 per share dated March 5, 1999, between ITEC and Carmel Mountain
#8 Associates, L.P. (Incorporated by reference to Exhibit 4.10 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629.)*
10(ao) Lease Letter Agreement, dated March 1, 1999, by and among ITEC, Carmel
Mountain #8 Associates, L.P. and Carmel Mountain Environmental L.L.C.
(Incorporated by reference to Exhibit 4.11 to Amendment No. 2 to Form
S-3 filed July 16, 1999, File No. 333-77629.) *
10(ap) Form of Warrant to Purchase 5,000 Shares of Common Stock of ITEC at
$1.50 per share, dated March 5, 1999 between ITEC and John P. Mulder.
(Incorporated by reference to Exhibit 4.12 to Amendment No. 2 to Form
S-3 filed July 16, 1999, File No. 333-77629.) *
10(aq) Form of Warrant to Purchase 5,000 Shares of Common Stock of ITEC at
$1.50 per share, dated March 5, 1999 between ITEC and Steve Tiritilli.
(Incorporated by reference to Exhibit 4.13 to Amendment No. 2 to Form
S-3 filed July 16, 1999, File No. 333-77629.) *
10(as) Partial Settlement Agreement, dated March 30, 1999, by and between
ITEC and the party listed on the signature page thereto. (Incorporated
by reference to Exhibit 4.14 to Amendment No. 2 to Form S-3 filed July
16, 1999, File No. 333-77629.) *
10(at) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Software Technology, Inc. (Incorporated by reference
to Exhibit 4.15 to Amendment No. 2 to Form S-3 filed July 16, 1999,
File No. 333-77629.) *
10(au) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Mark A. Osman. (Incorporated by reference to Exhibit
4.16 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(av) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Carmine J. Bua, III. (Incorporated by reference to
Exhibit 4.17 to Amendment No. 2 to Form S-3 filed July 16, 1999, File
No. 333-77629.) *
10(aw) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Frank Leonardi. (incorporated by reference to Exhibit
4.18 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(ax) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Brian Bonar. (Incorporated by reference to Exhibit
4.19 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(ay) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and A.L. Dubrow, including assignment of rights
documentation. (Incorporated by reference to Exhibit 4.20 to Amendment
No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629.) *
10(az) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Frank Kavanaugh, including assignment of rights
documentation. (Incorporated by reference to Exhibit 4.21 to Amendment
No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629.) *
10(ba) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Gerry Berg. (Incorporated by reference to Exhibit
4.22 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(bb) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Joseph Pfeuffer. Incorporated by reference to
Exhibit 4.23 to Amendment No. 2 to Form S-3 filed July 16, 1999, File
No. 333-77629.) *
10(bc) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Christopher McKee (Incorporated by reference to
Exhibit 4.24 to Amendment No. 2 to Form S-3 filed July 16, 1999, File
No. 333-77629.) *
10(bd) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and David Carver. (Incorporated by reference to Exhibit
4.25 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(be) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Paul Barber. (Incorporated by reference to Exhibit
4.26 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(bf) Debt Forgiveness Agreement, dated as of December 30, 1998, by and
between ITEC and Dale Richmond. (Incorporated by reference to Exhibit
4.27 to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629.) *
10(bg) Agreement, dated December 30, 1998, by and between ITEC and Daniel
Caldwell. (Incorporated by reference to Exhibit 4.28 to Amendment No.
2 to Form S-3 filed July 16, 1999, File No. 333-77629.) *
10(bh) Common Stock Purchase Agreement. Incorporated by reference to Exhibit
10.1 to the Company's Report on Form 10-Q for the period ended
September 30, 1998. *
10(bi) Form of Subordinated Note Purchase Agreement. Incorporated by
reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the
period ended September 30, 1998. *
-42-
10(bj) Settlement and Mutual Release Agreement. Incorporated by reference to
Exhibit 10.7 to the Company's Report on Form 10-Q for the period ended
September 30, 1998. *
10(bk) Registration Rights Agreement. Incorporated by reference to Exhibit
10.6 to the Company's Report on Form 10-Q for the period ended
September 30, 1998. *
10(bl) Form of Convertible Subordinated Promissory Note. Incorporated by
reference to Exhibit 10.4 to the Company's Report on Form 10-Q for the
period ended September 30, 1998. *
10(bm) Form of Common Stock Purchase Warrant. Incorporated by reference to
Exhibit 10.12 to the Company's Report on Form 10-Q for the period
ended September 30, 1998. *
10(bn) Form of Common Stock Purchase Warrant. Incorporated by reference to
Exhibit 10.9 to the Company's Report on Form 10-Q for the period ended
September 30, 1998. *
10(bo) Form of Common Stock Purchase Warrant. Incorporated by reference to
Exhibit 10.5 to the Company's Report on Form 10-Q for the period ended
September 30, 1998. *
10(bp) Settlement Agreement, dated April 1999, by and between ITEC and Hiram
French. (Incorporated by reference to Exhibit 4.38 to Amendment No. 2
to Form S-3 filed July 16, 1999, File No. 333-77629.) *
10(bq) Settlement Agreement, dated April, 1999, by and between ITEC and
Edward W. Savarese. (Incorporated by reference to Exhibit 4.39 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No. 333-77629.)*
10(br) Form of Warrant to Purchase 60,000 Shares of Common Stock of ITEC at
$2.50 per share, dated June 23, 1998, between ITEC and Imperial Bank.
(Incorporated by reference to Exhibit 4.40 to Amendment No. 2 to Form
S-3 filed July 16, 1999, File No. 333-77629.) *
10(bs) Standard Industries/Commercial Single-Tenant Lease-Net, dated February
22, 1999 and addendum thereto dated March 5, 1999, by and between
Carmel Mountain #8 Associates, L.P. and ITEC. (Incorporated by
reference to Exhibit 10.10 to Form 10-Q for the period ended March 31,
1999.)
10(bt) 1999 Special Compensation Plan for certain directors, officers and
employees of the Company. (Incorporated by reference to Form S-8,
filed June 18, 1999.) *
10(bu) Form of Restated and Amended Common Stock Purchase Warrants relating
to Exhibit 10(bt) above. (Incorporated by reference to Form S-8, filed
June 18, 1999.) *
10(bv) Form of Compensation Agreement relating to Exhibit 10(bt) above.
(Incorporated by reference to Form S-8, filed June 18, 1999.) *
10(bw) Consulting Agreement dated as of January 10, 1999 between Howard
Schraub and the Company. (Incorporated by reference to Form S-8, filed
January 20, 1999.)
10(bx) Consulting Agreement dated as of January 10, 1999 between George Furla
and the Company. (Incorporated by reference to Form S-8, filed January
20, 1999.) *
10(by) Consulting Agreement dated as of January 10, 1999 between Peter Benz
and the Company. (Incorporated by reference to Form S-8, filed January
20, 1999.) *
10(bz) Consulting Agreement dated as of November 20, 1998 between Richard
Kaplan and the Company. (Incorporated by reference to Form S-8, filed
February 22, 1999.) *
10(ca) Consulting Agreement dated January 10, 1999 between Peter Benz and the
Company. (Incorporated by reference to Form S-8, filed February 22,
1999.) *
10(cb) Consulting Agreement dated June 1, 1999 between Howard Schraub and the
Company. (Incorporated by reference to Form S-8, filed June 7, 1999.)*
10(cc) Consulting Agreement dated June 1, 1999 between George Furla and the
Company. (Incorporated by reference to Form S-8, filed June 7, 1999.)*
10(cd) Consulting Agreement dated June 1, 1999 between Peter Benz and the
Company. (Incorporated by reference to Form S-8, filed June 7, 1999.)*
10(ce) Consulting Agreement dated July 1, 1999 between Howard Schraub and the
Company. (Incorporated by reference to Form S-8, filed August 4,
1999.) *
10(cf) Consulting Agreement dated July 1, 1999 between George Furla and the
Company. (Incorporated by reference to Form S-8, filed August 4,
1999.) *
10(cg) Consulting Agreement dated July 1, 1999 between Peter Benz and the
Company. (Incorporated by reference to Form S-8, filed August 4,
1999.) *
10(ch) Consulting Agreement dated July 1, 1999 between Richard Kaplan and the
Company. (Incorporated by reference to Form S-8, filed August 4,
1999.) *
10(ci) Consulting Agreement dated July 1, 1999 between Franz Herbert and the
Company. (Incorporated by refrence to Form S-8, filed August 4,
1999.) *
10(cj) Consulting Agreement dated July 1, 1999 between Peter Benz and the
Company. (Incorporated by reference to Form S-8, filed September 22,
1999) *
10(ck) Consulting Agreement dated July 1, 1999 between Richard Kaplan and the
Company. (Incorporated by reference to Form S-8, filed September 22,
1999) *
21 List of Subsidiaries of the Company. **
-43-
23 Consent of Independent Accountants. **
27 Financial Data Sheet **
Exhibits 10(a.1), (a.2), (b.l), (b.2), (b.3), (d), (e.1), (e.2), (e.3), (e.4),
(f), (g.l), (g.2), (g.3), (q), (q. 1), (as),(at), (au), (av), (aw), (ax), (ay),
(az), (ba), (bb), (bc), (bd), (be), (bf), (bg), (bp), (bq), (bt), (bu), (bv),
(b2), (bx), (by), (bz) and (ca)-(ck) are management contracts or compensatory
plans or arrangements.
The Company will furnish a copy of any exhibit to a requesting stockholder upon
payment of the Company's reasonable expenses in furnishing any such exhibits.
* Exhibit is incorporated by reference only and a copy in not included in this
Form 10-K filing.
** Filed herewith.
-44-
Exhibit 21 - Subsidiaries of the Company
- - ----------------------------------------
1. Prima International, a California corporation and a wholly-owned
subsidiary of ITEC. (Inactive).
2. Laser Printer Accessories Corporation, a Delaware corporation and a
wholly-owned subsidiary of ITEC (Inactive).
3. Personal Computer Products, Inc., a California corporation and a
wholly-owned subsidiary of ITEC. (Inactive).
4. Co-Processors, Inc., a California corporation and a wholly-owned
subsidiary of ITEC (Inactive).
5. NewGen Imaging Systems, Inc., a California corporation and a
wholly-owned subsidiary of ITEC. (Inactive).
6. Color Solutions, Inc., a California corporation and a wholly-owned
subsidiary of ITEC. (Inactive).
7. McMican Corporation, a California corporation and a wholly-owned
subsidiary of ITEC. (Inactive).
8. DealSeekers.com, Incorporated, a Delaware corporation and a
wholly-owned subsidiary of ITEC.
9. AMT Accel UK Ltd., located at Ritz Plaza House, Denton Road, Milbanke
Way, Wokingham, Berks.
10. ITEC Europe Ltd., located at Ritz Plaza House, Denton Road, Milbanke
Way, Wokingham, Berks.
-45-
Exhibit 23 - Consent of Independent Accountants
- - -----------------------------------------------
We hereby consent to the incorporation by reference in each of the Registration
Statements on Form S-8 (No.'s 333-72957, 33-80135, 333-81033, 333-84457, and
333-87541) and Form S-3 (No.'s 333-77629 and 333-70925) of Imaging Technologies
Corporation of our report dated October 11, 1999 appearing in the June 30, 1999
Annual Report of this Form 10-K.
/s/ BOROS & FARRINGTON APC
- - ------------------------------
BOROS & FARRINGTON APC
San Diego, California
October 13, 1999
-46-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: October 13, 1999 IMAGING TECHNOLOGIES CORPORATION
By: /s/ BRIAN BONAR
----------------------------------
Brian Bonar
President, Chief Executive Officer, and
Acting Chief Financial Officer
POWER OF ATTORNEY
- - -----------------
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signatures appears
below constitutes and appoints Brian Bonar as his attorney-in-fact, each with
full power of substitution and resubstitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Harry J. Saal Chairman of the Board of October 13, 1999
- - ------------------------- Director
/s/ Brian Bonar President, Chief Executive, October 13, 1999
- - ------------------------- Officer, Acting Chief Financial
Offficer and Director
/s/ A.L. Dubrow Director October 13, 1999
- - -------------------------
/s/ David M. Carver Director October 13, 1999
- - -------------------------
-47-
Exhibit 27.1
Financial Data Schedule
DOCUMENT
TYPE EX-27
DESCRIPTION
TEXT
ARTICLE 5
CIK 0000725394
NAME IMAGING TECHNOLOGIES CORPORATION
TABLE
[S] [C]
PERIOD TYPE
FISCAL YEAR END JUN-30-99
PERIOD START
PERIOD END
CASH 75,000
SECURITIES 0
RECEIVABLES 1,959,000
ALLOWANCES 0
INVENTORY 552,000
CURRENT ASSETS 3,163,000
PP&E 986,000
DEPRECIATION 0
TOTAL ASSETS 7,250,000
CURRENT LIABILITIES 19,682,000
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED-MANDATORY 6,875,000
COMMON 110,000
OTHER-SE (19,417,000)
TOTAL LIABILITY AND EQUITY 7,250,000
SALES 16,417,000
TOTAL REVENUES 17,297,000
CGS 14,064,000
TOTAL COSTS 40,173,000
OTHER EXPENSES 0
LOSS-PROVISION 0
INTEREST-EXPENSE 1,969,000
INCOME-PRETAX (24,865,000)
INCOME TAX (264,000)
INCOME-CONTINUING 0
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (25,129,000)
EPS-PRIMARY (1.62)
EPS-DILUTED (1.62)
TABLE
TEXT
DOCUMENT
SUBMISSION