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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
COMMISSION FILE NO. 0-12641
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[LOGO]
IMAGING TECHNOLOGIES CORPORATION
--------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0021693
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
11031 Via Frontera
San Diego, California 92127
(619) 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.
At October 9, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $20,625,000, based on the
last trade price as reported by The Nasdaq SmallCap 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 9, 1998, there were 12,801,078 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 from the Company's definitive Proxy Statement with respect to its 1998
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120
days after June 30, 1998.
FORWARD LOOKING STATEMENTS
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), and Prima International a California corporation
(Prima), Color Solutions, Inc, a California corporation (CSI) and McMican
corporation a California corporation (McMican), ITEC Europe, Ltd, formed under
the laws of the United Kingdom, (ITEC Europe) and AMT Accel Uk Ltd, formed
under the laws of the United Kingdom (AMT).
PART I
ITEM 1.
BUSINESS
Imaging Technologies Corporation develops, manufactures, and distributes
high-quality digital imaging solutions. The Company produces a wide range of
printer and imaging products for use in graphics and publishing, digital
photography as well as other niche business and technical markets. Beginning
with a core technology in the design and development of controllers for
non-impact printers and multifunction peripherals, the Company has expanded
its product offerings to include monochrome and color printers, external
print servers, digital image storage devices, and software to improve the
accuracy of color reproduction.
ITEC manufactures advanced digital color and monochrome output devices for
the publishing, prepress, graphic design, on-demand printing, business and
technical office, and digital photography markets, as well as other niche
applications. The new generation of products incorporate advanced printer and
imaging controller technologies to produce faster, enhanced image output at
competitive prices. All of ITEC's color laser and dye-sublimation printers
are "ColorBlind Aware" incorporating the Company's proprietary
ColorBlind-Registered Trademark- Color Management software.
ITEC's Xtinguisher-TM- line of external print servers are designed to enable
printing of high-quality images on digital color copiers. This is an
extension of ITEC's technical strengths in embedded controllers. In the
digital photographic imaging and storage market, ITEC offers specialized
memory modules, PC cards and associated readers, digital cameras, removable
hard disks, and solid state data storage devices. ITEC manufactures data
storage modules, as well as distributes imaging and storage solutions.
The Company's ColorBlind-Registered Trademark- Color Management software is a
suite of applications, utilities and tools designed to create, edit and apply
industry standard ICC (International Color Consortium) profiles that produce
accurate color rendering across a wide range of peripheral devices. "ColorBlind
Aware" is being recognized as an industry standard for color accuracy as
manufacturers integrate ColorBlind's Color Management resources into their
product designs.
ITEC benefits from technology alliances with industry leaders, 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-Registered Trademark- PostScript-Registered Trademark-Development
Partners, ITEC produces printer controllers that provide modularity, and
performance advantages for its OEM customers. 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 11031 Via Frontera, San Diego, California 92127. The Company's
main phone number is (619) 613-1300.
2
MARKET OVERVIEW
ITEC's principal markets encompass many aspects of digital imaging, printing
and image storage technology. The Company's primary market segments include
digital memory storage, used to capture and transfer the image from the
digital camera to a computer for manipulation and placement; image management
technology to control the function of the printer or digital copier; as well
as digital printers and proofing devices that take the image to the plate
making stage. Throughout the imaging process, color integrity is an important
underlying requirement. Factors that the Company believes will influence
these markets in the future include 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.
The desktop color laser printer market is a rapidly-growing segment of the
computer printing industry. The total color laser market grew 42% from 1996
to 1997, and International Data Corporation ("IDC") estimates that the
shipments of desktop color laser printers are expected to grow at a 1997-2002
compound annual growth rate of 56%. The Company believes this is largely due
to increased user education on the benefits of color in office documents and
the availability of higher quality, easier to use, lower priced desktop color
laser printers. In 1997, the color laser printer market was made up of 78%
desktop color laser printer shipments, and 21% color laser copier shipments.
IDC estimates that by 2002, desktop color laser printer shipments are
expected to increase to 91% of the total and that total printer shipments in
the US are expected to reach 22 million units.
Changes in the technology of document creation, management, production and
transmittal are 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 the way
printing and document management is being administered. In just a few short
years, the market has gone from dedicated printers and scanners at the
workstation, to a document workflow with network shared imaging solutions and
remote document delivery and distribution. "Print and Distribute" has given
way to "Distribute and Print". Imaging professionals are dealing with an
increasingly complex and distributed workflow. Powerful authoring
applications enable the creation of documents, the components of which
originate from multiple locations around the world. Adobe Systems'
Acrobat-Registered Trademark- Portable Document Format (PDF)-Registered
Trademark- and PostScript-Registered Trademark- printing technologies are
becoming increasingly 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
resultant solutions trickle down to small business and the home office
environment.
The transition from traditional film-based photography to digital technologies
is driving a revolution in photographic imaging. This revolution is producing
rapid growth in the use of digital products and tools. Today there are about 120
different digital still cameras on the market for under $1,000.
ITEC believes that the overriding demands of the imaging market are for higher
resolution, faster printing, easier and more consistent color rendering, and a
reduced dependence on device specific applications. In the future, imaging
productivity will drive the market as customers shift from the current print and
distribute mode, to an on-demand global distribute and print environment.
BUSINESS STRATEGY
The Company's mission is to be a global market leader in digital imaging by
delivering higher-quality, easier to use solutions and engineering greater
value into each product. ITEC is focused on the continued development and
manufacturing of advanced integrated digital imaging solutions. The primary
products ITEC is targeting include embedded printer controller technology for
non-impact printers (laser, dye-sublimation and ink jet); external digital
print controllers and print servers for the Print-On-Demand market;
specialized printers and digital proofers for the graphics and publishing
markets, and other niche business applications; color management software
products; and data storage modules for digital imaging.
PRINTER CONTROLLER PRODUCTS
ITEC's core intelligence is in the design, development, and integration of
digital printing controller technology. The printer controller manages the
intelligent functions of the modern laser or other non-
3
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 engineers and manufactures
embedded imaging controllers for original equipment manufacturers (OEMs).
ITEC's customers benefit by outsourcing their engineering development and
manufacturing, thus achieving faster time-to-market. In an age of constantly
changing technology, the ability to achieve faster time-to-market is critical
to product success.
ITEC has established relationships with leading OEMs around the world and
with Adobe Systems, Inc. As one of only three independent authorized
Adobe-Registered Trademark- PostScript-Registered Trademark-Development
Partners, ITEC has the ability to embed the core technology of PostScript
into every image management product. Adobe-Registered Trademark-
PostScript-Registered Trademark- is the most widely accepted printing and
imaging technology for corporations, publishers, and government agencies. Of
all commercial publications printed, 75% are imaged on PostScript-Registered
Trademark- devices. These include monochrome and color printers, imagesetters
and plate making devices, as well as direct digital printing systems.
The newest release, Adobe-Registered Trademark- PostScript-Registered
Trademark-3-TM-, takes the PostScript standard beyond a page description
language into a fully optimized printing system that addresses a broad range
of new requirements in today's increasingly complex document workflow. By
incorporating PostScript-Registered Trademark- technology, ITEC's controllers
can deliver advanced features and universal operating environment in the
digital document arena.
ITEC produces a range of integrated controller solutions for printers and
multifunction peripherals. The Company's new line of ImageScript-Registered
Trademark- embedded imaging controllers are sold to OEM customers for
integration into digital color and monochrome printers. ImageScript represents a
milestone in controller technology. With true Adobe-Registered Trademark-
PostScript-Registered Trademark- 3-TM- compatibility, a powerful RISC (reduced
instruction set computer) processor, image enhancement coprocessors and
resolution up to 1200 dpi, the ImageScript controller accommodates a wide range
of new printer designs. The flexible architecture of the ImageScript controller
allows the OEM customer to select from a range of options including processor
speed, resolution and communication/networking connectivity.
PRINT-ON-DEMAND
The Print-On-Demand market is a natural extension for ITEC's technical strengths
in embedded print controllers, as well as ITEC's color management technology.
The combination of digital color copiers and powerful external controllers are
the foundation for the Print-On-Demand movement. Where once we had photocopy
machines that scanned and output one printed page at a time, today digital copy
machines bypass the desktop printer in the digital workflow and go directly to
reproducing quantities of collated and bound documents.
The Xtinguisher-TM- line of network print servers is designed to enable
printing of high-quality images on digital color copiers, as well as wide
format color printers. This new line of Windows-Registered Trademark-
NT-based servers incorporate Adobe-Registered Trademark-
PostScript-Registered Trademark-to improve performance and enhance image
quality. A single Xtinguisher-TM- server is designed to simultaneously support
several copiers. Integrated into each Xtinguisher workstation is ITEC's
ColorBlind-Registered Trademark- Color Management.
For the monochrome digital duplicator market, ITEC produces an Adobe-Registered
Trademark- PostScript-Registered Trademark- 3-TM- raster image processing (RIP)
controller. This controller is sold to OEM manufacturers and integrated into
digital duplicators. Unlike a copier, digital or analog, 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 using lithography ink. A digital duplicator is
referred to as a "stencil duplicator" or more generically as a modern day
equivalent of the Mimeograph machine. Digital duplicators are used for short run
printing due to significant cost savings over conventional copy machines when
printing in relative volume. 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 of the
major manufacturers.
DIGITAL PRINTERS
ITEC's new line of laser printers are network compatible and incorporate
Adobe-Registered Trademark- PostScript-Registered Trademark- 3-TM- technology to
provide higher performance, enhanced image quality, and advanced page
processing.
4
Under the ITEC and NewGen brand names, the Company sells an expanding range
of products in both monochrome and color.
The Company's product strategy is to produce higher-value added printers that
meet the more exacting requirements of specialized segments of the market.
The ColorImage-Registered Trademark- 2400 color laser printers feature
proprietary printer controller technology and color management software
developed by ITEC. With resolution up to 1200 dpi, a powerful RISC processor,
a special image enhancement chip, and a precision toner delivery system,
these printers are designed to produce quick, convenient color or monochrome
output in the business or technical office environment. The
ColorImage-Registered Trademark- lasers are the first of a new generation
that integrate ITEC's key technical strengths in image enhancement and
placement, embedded controller function, and color management and represent
the Company's first entry into the office color market.
The new LaserImage-TM- 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 quickly printing complex documents or high
volumes. LaserImage-TM- 1200 printers feature Adobe-Registered Trademark-
PostScript-Registered Trademark- 3-TM- with a RISC processor-based controller
technology designed and engineered by ITEC. These printers are available in a
number of network compatibility and paper size configurations to satisfy
specific prepress proofing and workgroup requirements.
In the digital prepress market, ITEC's ColorImage-Registered Trademark- 3120
is designed to provide accurate color prepress proofs. The
ColorImage-Registered Trademark- 3120 is a dual technology (dye-sublimation
and thermal) continuous tone color printer which is capable of producing full
bleed tabloid/A3 sized (12.4" x 19.8") output of digital color comps and
proofs for computer-to-plate and direct-to-press applications as well as
photo-realistic renderings. The color output on the ColorImage-Registered
Trademark- 3120 is highly accurate and repeatable.
ITEC is expanding its product offerings in the digital photographic market
with its next generation digital color photographic printer. The
ColorImage-Registered Trademark- 3000 is a dye-sublimation color printer that
produces continuous tone color images targeted for the mid-to-high-end
digital photography market. The ColorImage-Registered Trademark- 3000
delivers digital photographs with the look and feel of traditional glossy
photographs. Precise control of the thermal printing combines with a new
high-density ink to produce vivid saturated colors, smooth gradations, and
print-to-print color uniformity.
COLOR MANAGEMENT
Easy to use, predictable and consistent, color is one of the largest single
problems facing the imaging industry. The way different devices deal with color
is referred to as the color space. Unfortunately the color space for printed
materials (CMYK: cyan, magenta, yellow and black) is different from the color
space for devices such as cameras, scanners and monitors (RGB: red, green,
blue). Because these color spaces are different in size and the colors they
contain, a color management system is needed so users can convert their files
for use with the different devices. Conversion among color spaces is typically
performed by a color management method (CMM). But the CMM must know something
about the characteristics of each device to perform the color management as
accurately as possible. The varying characteristics of each device are captured
in a device profile. The ICC - International Color Consortium - has established
a standard for the format for these ICC profiles.
ITEC's ColorBlind-Registered Trademark- Color Management software is a suite of
applications, utilities and tools that allows users to precisely profile each
device in the color workflow including scanners, monitors, digital cameras,
printers and other specialized digital color input and output devices. Devices
are profiled in conformance with the internationally accepted ICC standards.
Once profiled, ColorBlind balances these profiles to produce accurate,
consistent and reliable color rendering from input to output.
"ColorBlind Aware" is being recognized as an industry standard for color
accuracy, as printer scanner and monitor manufacturers integrate ColorBlind's
Color Management resources into product designs. ColorBlind is sold as a
standalone application or licensed by OEM's for resale in conjunction with
peripherals.
DIGITAL IMAGE STORAGE
Continued expansion of the digital photographic market creates increasing
opportunities for ITEC's "dfilm-TM-" (digital film) line of digital photographic
storage products and accessories. As consumers use and share their digital
pictures, demand increases for the digital media to quickly transfer the image
from the camera to the computer or printer for hardcopy output. ITEC
manufactures a range of digital imaging storage products to fit most of the
digital cameras on the market today.
5
"dfilm-TM-" is the equivalent of traditional chemical-based film in the new
generation of digital cameras. The "dfilm-TM-" products feature Flash memory
modules for high-speed transfer of stored images and data. The "dfilm"
modules also have applications in many portable devices such as handheld
personal computers running the Windows CE-Registered Trademark- operating
system.
OPERATIONS
EXPANDED INTERNATIONAL PRESENCE.
The Company intends to pursue international markets as key avenues for growth
and to increase the percentage of sales generated in international markets.
In Fiscal 1998, 1997, and 1996, sales outside the United States represented
approximately 56%, 57% and 81% of the Company's net sales, respectively. In
1998, the Company established a European Headquarters to facilitate its
European sales operations. Located in Bracknell, Berkshire, near London, 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. In addition, at the close of Fiscal 1998, ITEC acquired the
European-based assets and operations of AMT. AMT was the European sales and
distribution arm of Singapore-based Lam Soon, manufacturer of dot matrix,
laser and inkjet printers and plotters for specialized applications.
The Company expects export sales to continue to represent a significant
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 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.
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 and Canada, in the EC and on the European
Continent, as well as a growing number of 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 headquartered in San
Diego, which serve North and South America, the Pacific Rim and Asia. In
addition, ITEC Europe, located in a suburb of London, manages distribution
and service for customers in Europe, Africa and the Middle East. As of June
30, 1998, the Company directly employed 32 individuals involved in marketing
and sales activities. The sales and marketing operation is headquartered in
ITEC's Silicon Valley offices in Northern California.
The Company's sales are principally made through distributors which may carry
competing product lines. Such distributors could reduce or discontinue sales
of the Company's products which could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that these independent distributors will devote the resources
necessary to provide effective sales and marketing support of the Company's
products. In addition, the Company is dependent upon the continued viability
and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique
factors affecting the Company's markets. The Company believes that its
future growth and success will continue to depend in large part upon its
distribution channels. There can be no assurance that actual bad debts from
the Company's distributors will not exceed recorded allowances resulting in a
material adverse effect on the Company. 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.
PRODUCTION AND SOURCES OF SUPPLY
ITEC presently outsources the production of most of its manufactured products
through a number of vendors located in Northern and Southern California. These
vendors assemble products, utilizing components purchased by the Company from
other sources or from their own internal inventory. The terms of supply
contracts are negotiated separately in each instance. The Company believes that
its present vendors have 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.
ITEC's contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. ITEC, in turn, includes
appropriate software, performs additional tests on the products, then packages
and ships products into the distribution channels. In addition to buying such
items as printed circuit boards and other components from outside vendors, the
Company purchases and/or licenses software programs, including operating systems
and intellectual property modules (pre-written software code to execute a
specifically defined operation). 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 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.
RESEARCH AND DEVELOPMENT
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.
COMPETITION
The markets for the Company's products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than 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. See "Risks and Uncertainties--Short Product Lives and
Technological Change" and "Business--Competition."
6
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. In many product hardware
designs, the Company develops application-specific integrated circuits
(ASICs) which encapsulate proprietary technology and are installed on the
circuit board. This can serve to significantly reduce the risk of duplication
by competitors, but in no way ensures 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, ImagePress, 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: dfilm, Xtinguisher,
ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP.
From time to time, certain competitors have asserted patent rights relevant
to the Company's business. The Company expects that this will continue. The
Company carefully evaluates each assertion relating to its products. If the
Company is not successful in establishing that asserted rights have not been
violated, the Company could be prohibited from marketing the products that
incorporate such technology. The Company could also incur substantial costs
to redesign its products or to defend any legal action taken against the
Company. If the Company's products should be found to infringe upon the
intellectual property rights of others, the Company could be enjoined from
further infringement and be liable for any damages. The Company relies on a
combination of trade secret, copyright and trademark protection and
non-disclosure agreements to protect its proprietary rights. There can be no
assurance, however, that the measures adopted by the Company for the
protection of its intellectual property will be adequate to protect its
interests, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
PERSONNEL RESOURCES
Imaging Technologies Corporation employed a total of 124 individuals worldwide
as of June 30, 1998. None of ITEC's employees are represented by any union. Of
this number 14 are involved in corporate administration and finance, 56 are in
engineering and research and development, 13 are in manufacturing operations, 32
are in sales and marketing and 9 are in technical support. Of that number,
ITEC's European Headquarters employed 10 individuals.
RISKS AND UNCERTAINTIES
FUTURE CAPITAL NEEDS
There can be no assurance with respect to the Company's future profitability
or revenue growth. Losses may occur on a quarterly or annual basis for a
number of reasons outside the Company's control. See "Potential Fluctuation
in Quarterly Performance." The growth of the Company's business will require
the commitment of substantial capital resources. If funds are not available
from operations, the Company will need additional funds. The Company may seek
such additional funding through public and private financing, including debt
or equity financing. Adequate funds for these purposes, whether through
financial markets or from other sources, may not be available when needed or,
if available, not on terms acceptable to the Company. Insufficient funds may
require the Company to delay, reduce or eliminate some or all of its planned
activities.
POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE
The Company's quarterly operating results can fluctuate significantly depending
on factors such as the timing of product announcements and subsequent
introductions of products by the Company and its competitors, availability and
cost of components, timing of shipments of the Company's products, mix of
product families shipped, market acceptance of new products, seasonality,
currency fluctuations, changes in prices by the Company and its competitors, and
price protection for selling price reductions offered to distributors and OEMs.
In addition, the timing of expenditures for staffing and related support costs,
advertising, trade show attendance, promotion, research and development
expenditures, and, of course, changes in general economic conditions can 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.
HIGHLY COMPETITIVE INDUSTRY
The markets for the Company's products are highly competitive and rapidly
changing. Some of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources than 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
7
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. 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 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.
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. Furthermore, 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.
RISKS RELATED TO ACQUISITIONS
During Fiscal 1998, ITEC made a number of acquisitions to complement its
technical position in the imaging market. CSI, a producer of color management
software was acquired in a stock transaction. McMican, a two-year-old
manufacturer of digital memory products for data storage and exchange between
digital cameras and imaging systems was acquired in a stock transaction. ITEC
also acquired the assets of AMT, the European sales and distribution
subsidiary of Singapore-based Lam Soon. AMT had been ITEC's master stocking
distributor of printers and supplies in the EC and on the European Continent.
The Company's future performance will depend in part on its ability to
integrate and grow these acquired businesses.
Acquisitions involve a number of risks, including: the integration of acquired
products and technologies in a timely manner; the integration of businesses and
employees with the Company's business; the management of
geographically-dispersed operations; adverse effects on the Company's reported
operating results from acquisition-related charges and amortization of goodwill;
potential increases in stock compensation expense and increased compensation
expense resulting from newly-hired employees; the diversion of management
attention; the assumption of unknown liabilities; potential disputes with the
sellers of one or more acquired entities; the inability of the Company to
maintain customers or goodwill of an acquired business; the need to divest
unwanted assets or products; and the
8
possible failure to retain key acquired personnel. Client satisfaction or
performance problems with an acquired business could also have a material
adverse effect on the 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.
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 additional suitable
acquisition candidates, acquire any such candidates on acceptable terms,
integrate their operations or technology successfully, or 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 likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition. In addition, the Company would likely face the same integration
issues described above with respect to any future acquisitions. If the Company
is unable to manage internal or acquisition-based growth effectively, the
Company would be materially and adversely affected.
Due to all of the foregoing, the Company's execution on 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
ITEC presently outsources the production of most of its manufactured products
through a number of vendors located in California. These vendors assemble
products, utilizing components purchased by the Company from other sources or
from their own internal inventory. The terms of supply contracts are
negotiated separately in each instance. The Company believes that its present
vendors have 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.
ITEC's contract vendors generally perform multi-step quality control testing
prior to shipping their products to the Company. ITEC, in turn, includes
appropriate software, performs additional tests on the products, then
packages and ships products into the distribution channels. In addition to
buying such items as printed circuit boards and other components from outside
vendors, the Company purchases and/or licenses software programs, including
operating systems and intellectual property modules (pre-written software
code to execute a specifically defined operation). 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 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.
9
POSSIBILITY OF CHALLENGE TO COMPANY'S 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, ImagePress, 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: dfilm, Xtinguisher,
ChroMATCH, ChromaxPro, ImagerPro, DuoSetter, ImagerPlus, and DesignXP.
From time to time, certain competitors have asserted patent rights relevant
to the Company's business. The Company expects that this will continue. The
Company carefully evaluates each assertion relating to its products. If the
Company is not successful in establishing that asserted rights have not been
violated, the Company could be prohibited from marketing the products that
incorporate such technology. The Company could also incur substantial costs
to redesign its products or to defend any legal action taken against the
Company. If the Company's products should be found to infringe upon the
intellectual property rights of others, the Company could be enjoined from
further infringement and be liable for any damages. The Company relies on a
combination of trade secret, copyright and trademark protection and
non-disclosure agreements to protect its proprietary rights. There can be no
assurance, however, that the measures adopted by the Company for the
protection of its intellectual property will be adequate to protect its
interests, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
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. In Fiscal 1998, the
Company experienced contract cancellations and the write-off of significant
receivables related to continuing economic deterioration in foreign
countries, particularly in Asian countries. 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 as key avenues for growth
and to increase the percentage of sales generated in international markets.
In Fiscal 1998, 1997, and 1996, sales outside the United States represented
approximately 56%, 57% and 81% of the Company's net sales, respectively. In
1998, the Company established a European Headquarters to facilitate its
European sales operations. Located in Bracknell, Berkshire, near London,
ITEC Europe provides both sales and support functions to customers within the
United Kingdom, EC and Eastern European Block for ITEC's printer and imaging
products. In addition, at the close of Fiscal 1998, ITEC acquired the
European-based assets and operations of AMT. AMT was the European sales and
distribution arm of Singapore-based Lam Soon, manufacturer of dot matrix,
laser and inkjet printers and plotters for specialized applications.
The Company expects export sales to continue to represent a significant
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 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 ON INDIRECT DISTRIBUTION
The Company's products are marketed and sold through an established
distribution channel of VARs, manufacturer's representatives, retail vendors,
and systems integrators. ITEC has a network of dealers and distributors in
the United States and Canada, in the EC and on the European Continent, as
well as a growing number of 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 headquartered in San Diego, which serve North and South
America, the Pacific Rim and Asia. In addition, ITEC Europe Ltd., located in
a suburb of London, manages distribution and service for customers in Europe,
Africa and the Middle East. As of June 30, 1998, the Company directly
employed 32 individuals involved in marketing and sales activities. The sales
and marketing operation is headquartered in ITEC's Silicon Valley offices in
Northern California.
The Company's sales are principally made through distributors which may carry
competing product lines. Such distributors could reduce or discontinue sales
of the Company's products which could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that these independent distributors will devote the resources
necessary to provide effective sales and marketing support of the Company's
products. In addition, the Company is dependent upon the continued viability
and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique
factors affecting the Company's markets. The Company believes that its future
growth and success will continue to depend in large part upon its
distribution channels. There can be no assurance that actual bad debts from
the Company's distributors will not exceed recorded allowances resulting in a
material adverse effect on the Company's financial condition and results of
operations. To expand its distribution channels, the Company has entered into
select OEM arrangements that allow it to address specific market segments or
geographic areas. In order to prevent inventory write-downs, to the extent
that OEM customers do not purchase products as anticipated, the Company may
need to convert such products to make them salable to other customers.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock historically has fluctuated
significantly. The Company believes that factors such as general stock market
trends, announcements of developments related to the Company's business,
fluctuations in the Company's operating results, general conditions in the
computer
10
peripheral market and the markets served by the Company or in the worldwide
economy, a shortfall in revenue or earnings from securities analysts'
expectations, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in patents or
other intellectual property rights and developments in the Company's
relationships with its customers and suppliers could cause a further
significant fluctuation in the price of the Company's Common Stock. In
addition, in recent years the stock market in general, and the market for
shares of technology stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. 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.
YEAR 2000 COMPLIANCE
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. The Company has procured a new business system that is year 2000
compliant and plans are to implement the new system in Quarters three and
four of the 1999 fiscal year ending June 30, 1999.
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. The Company plans to devote the necessary resources
to resolve significant year 2000 issues in a timely manner; however, 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 14,000 square feet
of space in a facility located at 11031 Via Frontera, San Diego, California
92127, at a monthly lease rate of approximately $10,750. This facility houses
corporate management and engineering offices. That lease expires on January 31,
1999. In addition, the Company leases approximately 12,000 square feet of space
in a nearby facility that houses manufacturing, operations and finance located
at 10966 Via Frontera, San Diego, California 92127, at a monthly lease rate of
approximately $7,600. The lease expires on May 31, 1999.
ITEC operates a software research and development center in Cardiff, California.
The Company leases approximately 3700 square feet of space located at 120
Birmingham Drive, Cardiff, California 92007, at a monthly lease rate of
approximately $6,400. The lease expires on November 30, 1998. Adjacent to that
11
facility, at 2053 San Elijo Avenue, Cardiff, California 92007, the Company
leases approximately 2600 square feet of space at a monthly lease rate of
approximately $2800. The lease expires on June 30, 1999.
ITEC operates a memory product development and sales office in Newport Beach,
California. The Company leased approximately 1,200 square feet of space located
at 120 Newport Center Drive, Suite 245, Newport Beach California. The monthly
lease rate is approximately $2,400. The lease expires on October 31, 1999.
In Northern California, ITEC leases approximately 5,000 square feet of space in
a facility located at 3350 Scott Boulevard, Building No. 7, Santa Clara,
California 95054, at a monthly lease rate of $5,800. This facility houses sales
and marketing staff. The lease expires on June 30, 2002.
ITEC's European headquarters, ITEC Europe Ltd., leases approximately 3,000
square feet in a facility located outside London, England, The address is ITEC
House, Unit 9 Milbanke Court, Milbanke Way, Bracknell Berkshire RG12 1RP. This
facility houses sales, distribution and technical support personnel. The monthly
lease rate is U.S. $5,600 and it expires on March 31, 2003.
On April 22, 1998, the Company announced the closure of ITEC's printer
manufacturing, distribution and sales operations in Costa Mesa, California. That
facility encompassed approximately 27,000 square feet of space located at 3545-A
Cadillac Avenue, Costa Mesa, California 92626. The plant was closed at lease
expiration on July 31, 1998. The monthly lease rate was $13,900. The equipment
and operations at the Costa Mesa site were relocated to a facility adjacent to
the corporate headquarters in San Diego.
ITEM 3.
LEGAL PROCEEDINGS
The Company, because of the nature of its business, is from time to time
threatened or involved in legal actions. The Company, does not believe any of
the legal actions now pending against the Company will result in a material
adverse effect on the Company and, further, does not consider that any such
proceedings fall outside ordinary, routine litigation incidental to the
business of the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
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 Small Cap Market (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
Small Cap Market or 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.
High Low
-------------------------------------------------------
Year ended June 30, 1996
First quarter $ 2.50 $ 1.25
Second quarter 2.65 .90
Third quarter 4.70 1.90
Fourth quarter 12.80 3.75
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
The number of holders of record of the Company's Common Stock, $.005 par
value, was approximately 3,000 at June 30, 1998.
ITEC has never declared, or paid, any cash dividends on ITEC's 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 ITEC's 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, and commencing on October 15, 1986. ITEC has
never declared, or paid any cash dividends on ITEC's 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 1998 were $497,000.
13
ITEM 6.
SELECTED FINANCIAL DATA
The consolidated statement of operations data with respect to the years ended
June 30, 1998, 1997 and 1996 and the consolidated balance sheet data at June
30, 1998, and 1997, 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 beow, 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:
1998 1997 1996*
----------------------------
NET REVENUES
Sales of Product 30,740 26,081 9,522
Engineering Fees 2,327 5,860 2,379
License Fees and Royalties 1,350 296 603
----------------------------
Net Total Revenues 34,417 32,237 12,504
COSTS & EXPENSES
Cost of Products Sold 22,536 17,022 7,942
Selling, General and Administrative 10,269 10,460 3,849
Cost of Engineering & Purchased R&D 2,475 4,243 2,135
Amortization of Capitalized Software - - 233
Special Charges 8,941 - 2,058
----------------------------
----------------------------
INCOME (LOSS) FROM OPERATIONS (9,804) 512 (3,713)
----------------------------
NET INCOME (LOSS) (10,163) 723 (3,665)
EARNING (LOSS) PER COMMON SHARE
Basic $(0.90) $0.07 $(0.77)
Diluted $(0.90) $0.06 $(0.77)
----------------------------
* EXCLUDES $116 OF EXTRAORDINARY GAIN ON CONVERSION OF NOTES PAYABLE
Balance Sheet Data:
1998 1997
--------------------------
Cash $ 3,023 $ 255
Working capital 315 4,818
Total assets 20,961 14,075
Long-term obligations 1,828 228
Preferred stock 2,780 420
Total shareholders' equity 4,604 7,877
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Imaging Technologies Corporation develops, manufactures, and distributes
high-quality digital imaging solutions. The Company produces a wide range of
printer and imaging products for use in graphics and publishing, digital
photography as well as other niche business and technical markets. Beginning
with a core technology in the design and development of controllers for
non-impact printers and multifunction peripherals, the Company has expanded
its product offerings to include monochrome and color printers, external
print servers, digital image storage devices, and software to improve the
accuracy of color reproduction.
ITEC has acquired four separate businesses during the past eighteen months
that have expanded the Company's strategic position in the digital imaging
market. In addition, the Company has altered its focus away from some of its
traditional revenue sources and has been required to make expenditures to
support these changes. As of the end of Fiscal 1998, 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 was 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 never completed by the OEM, were
never introduced into the market and shipped or were cancelled by the
customer before ITEC completed the deliverables portion of the contract. The
timing and amount of income from these customers ultimately depended on sales
levels and shipping schedules for the OEM products into which the Company's
products were incorporated. The Company had no control over the shipping date
or volumes of products shipped by its OEM customers, and there was no
assurance that any OEM would continue to ship products that incorporate the
Company's technology. Failure of these OEMs to achieve significant sales of
products incorporating the Company's technology and fluctuations in the
timing and volume of such sales had in a materially adverse effect on the
Company.
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.
To execute successfully 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, 1998 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. While this financing improved the Company's working capital
position, the Company needs to raise additional funds to operate its business
effectively. The Company has recently 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 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."
CORPORATE RESTRUCTURING
Beginning in April 1998, the Company implemented a plan to realign the
management and create a divisional structure within the organization. ITEC
consolidated all of its independent operating subsidiaries under a single
financial and operational structure. The Company undertook this
restructuring based in part upon its belief that by breaking down the
barriers between the subsidiaries and organizing the Company around functions
the Company would be able to improve the effectiveness of its established
sales channels and to enhance cross-selling opportunities. The Company
also believes that this structure will improve the management and
commercialization of its diverse technology base. In addition to the
structural realignment, ITEC closed the 27,000 square-foot printer
manufacturing and distribution facility it operated in Costa Mesa,
California, at lease end, and relocated those operations to a new
12,000-square-foot facility adjacent to the Corporate Headquarters in San
Diego. The Company also relocated most of its marketing and sales activities
from Costa Mesa to ITEC's existing operation in the San Jose region of
Northern California. By streamlining operations and locating manufacturing
and distribution in one centralized plant, the Company expects to eventually
realize an annualized savings of approximately $1.5 to $2 million, primarily
as a result of workforce reductions, decreased factory space requirements and
the elimination of redundant operations.
14
STRATEGIC ACQUISITIONS
In Fiscal 1998, the Company made several strategic acquisitions to reinforce
its technology position and expand sales channels. ITEC purchased privately
held McMican Corporation. The new division operates as the Storage Products
division of ITEC, producing specialized memory modules. McMican's "dfilm-TM-"
line of data storage products feature Flash memory modules for high-speed
transfer of stored images and data. "dfilm-TM-" modules have applications in
portable digital cameras and many other portable devices such as handheld
personal computers running the Windows CE-Registered Trademark- operating
system.
In fiscal 1998 ITEC merged with Color Solutions, Inc., a three-year-old
software development firm located in Cardiff, California. Color Solutions'
ColorBlind-Registered Trademark- software allows users to precisely profile
peripherals such as scanners, monitors, digital cameras, printers and other
specialized color digital devices, all based on internationally-accepted ICC
color standards. Color management is a key element for the printing and
graphics industry, but also color reproduction in the textile, motion
picture, and ceramics industries.
At the close of Fiscal 1998, ITEC acquired the assets of AMT, the European
sales and distribution subsidiary of Singapore-based Lam Soon. Lam Soon is
worldwide manufacturer of dot matrix, inkjet and specialized laser printers.
AMT had been ITEC's master stocking distributor of printers and supplies in
the EC and on the European Continent. AMT's European operations are being
integrated into ITEC's recently established European Headquarters operation,
ITEC Europe, located near London.
SPECIAL CHARGES
In the fourth quarter of fiscal 1998, the Company wrote-off contract and
license receivables of approximately $5.2 million 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.
In addition, 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
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.
15
RESULTS OF OPERATIONS
REVENUES
Revenues were $34.4 million, $32.2 million and $12.5 million for the
fiscal years ended June 30, 1998, 1997 and 1996, respectively. Sales of
product were $30.7 million, $26.1 million and $9.5 million for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively. The increase in
product sales from 1997 to 1998 was due primarily to an increase in sales of
printer products, and the increase from 1996 to 1997 was due primarily to the
Company's merger with NewGen, which commenced operations in 1997.
Engineering fees were $2.3 million, $5.9 million and $2.4 million for the
fiscal years ended June 30, 1998, 1997 and 1996, respectively. The decrease
in 1998 compared to 1997 was primarily the result of the Company's change in
strategic direction, focusing more on internal product development and sales
and less on engineering for third parties. The increase in 1997 as compared
to 1996 was primarily the result of several large OEM contracts in 1997.
License fees and royalties were $1.4 million, $.3 million and $.6 million for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The
increase from 1997 to 1998 was due primarily to the sales of a license to AMT
of $1.3 million. The decrease in 1997 as compared to 1996 was primarily the
result of declining royalties on older technology products.
COST OF PRODUCTS SOLD
Cost of products sold were $22.5 million or 73% of product sales, $17.0
million or 65% of product sales and $7.9 million or 83% of product sales for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively. The
percentage 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. The 1996 cost of product sold related primarily to the Prima
division which has remained relatively constant as a percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $10.3 million or 30% of
total revenues, $10.5 million or 32% of total revenues and $3.8 million or
31% of total revenues for the fiscal years ended June 30, 1998, 1997 and
1996, 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 and legal, advertising and other marketing
related expenses, and fees for professional services. The decrease both in
absolute dollars and as a percentage of net revenues in selling, general and
administrative expenses in 1998 as compared to 1997 was due primarily to the
reclassification of redundant costs to restructuring charges. The increase
both in absolute dollars and as a percentage of net revenues in selling,
general and administrative expenses in 1997 as compared to 1996 was due
primarily to the additional personnel acquired in the merger with NewGen
in 1997.
COST OF ENGINEERING AND PURCHASED R&D
Cost of engineering and purchased R&D was $2.5 million or 106% of engineering
revenues, $4.2 million or 72% of engineering revenues and $2.1 million or 90%
of engineering revenues for the fiscal years ended June 30, 1998, 1997 and
1996, respectively. As a percentage of engineering revenues, the increase in
fiscal 1998 over 1997 results from cost overruns on contracts that were
terminated. The decrease from fiscal 1996 to 1997 results from several large
OEM contracts.
16
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. In addition, the economies of certain foreign countries, particularly
in Asia, have weakened recently creating greater risk of nonpayment for the
Company from these areas. 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.
As of June 30, 1998, the Company had working capital of $0.3 million a
decrease of $4.5 milion as compared to June 30, 1997. The decrease is
primarily the result of the private placement of increased borrowings during
fiscal 1998. The Company's other principal source of liquidity at June 30,
1998, were lines of credit with Imperial Bank aggregating $7 million.
Borrowing under the lines of credit at June 30, 1998 totaled $2 million. The
Company also has a term loan with Imperial Bank, the principal balance of
which at June 30, 1998, was $2.5 million. The lines of credit and the term
loan bear interest at Imperial Bank's prime rate plus 0.75% per annum. The
applicable interest rate at June 30, 1998, was 9.25%. The Company's
obligations under the lines of credit and the term loan are secured by all of
the Company's accounts receivable, inventories, and other assets. In
September 1998, Imperial Bank ceased funding under the lines of credit and
notified the Company that it intended to terminate its banking relationship
with the Company. After further discussions, the Company and Imperial Bank
have agreed on the principal terms of a Forbearance Agreement pursuant to
which Imperial Bank would resume funding to the Company under the lines of
credit and the Company would repay all outstanding indebtedness owed to
Imperial Bank by January 15, 1999. The Forbearance Agreement is subject to
further negotiation and the approval of senior Management at Imperial Bank
and the Company's Board of Directors and there can be no assurance that such
approvals will be obtained. Although the Company is in discussions with
several lenders regarding new financing for the Company, there can be no
assurance that the Company will secure new financing by January 15, 1999, if
ever. The failure of Imperial Bank to continue to provide funding to the
Company under the lines of credit or the failure of the Company to secure
sufficient new financing to repay all indebtedness owed to Imperial Bank on
or before January 15, 1999, would have a material adverse effect on the
Company.
As of June 30, 1998, the Company also had a line of credit with the Bank of
Yorba Linda with a principal balance of $.4 million. The loan bears interest at
prime plus 3% per annum and matured on August 13, 1998. The Company currently
plans to refinance this obligation as part of the new financing it is
attempting to secure. There can be no assurance, however, that the Company
will be able to secure new financing to repay the Bank of Yorba Linda loan,
and the Company's failure to do so could have a material adverse effect on
the Company.
Net cash used in operating activities increased to $7.1 million during the year
ended June 30, 1998, from $4.0 million and $1.3 million during the years ended
June 30, 1997 and 1996, respectively. The increase
17
from 1998 as compared to 1997 resulted primarily from the operating loss and
special charges. The increase from 1997 as compared to 1996 resulted
primarily from improved operating results.
Net cash used in investing activities increased to $3.8 million during the year
ended June 30, 1998, from $2.2 million and $0.5 million during the years ended
June 30, 1997 and 1996, respectively. The increase from 1998 as compared to 1997
resulted primarily from capitalized software. The increase from 1997 as compared
to 1996 resulted primarily from increased purchases of property and equipment
and 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,
1998, was approximately $497,000.
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, 1998
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. While this
financing improved the Company working capital position, the Company needs to
raise additional funds to operate its business effectively. The Company has
recently 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 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."
18
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of independent accountants 20
Consolidated balance sheets as of June 30, 1998 and 1997 21
Consolidated statements of operations for the years ended
June 30, 1998, 1997, and 1996 22
Consolidated statements of shareholders' equity for the years ended
June 30, 1998, 1997, and 1996 23
Consolidated statements of cash flows for the years ended
June 30, 1998, 1997, and 1996 24
Notes to consolidated financial statements 25
19
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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998 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.
BOROS & FARRINGTON APC
San Diego, California
October 5, 1998
20
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1998 1997
Current assets
Cash $ 3,023 $ 255
Accounts receivable, net 4,133 7,635
Inventories 6,287 2,348
Prepaid expenses and other 1,401 550
--------- ---------
Total current assets 14,844 10,788
Property and equipment, net 1,525 1,668
Prepaid licenses 635 697
Capitalized software, net 3,655 549
Other 302 373
--------- ---------
$ 20,961 $ 14,075
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank lines of credit $ 5,203 $ 955
Short-term debt 1,998 200
Current portion of long-term debt 903 144
Deferred revenue - 356
Accounts payable 5,027 2,876
Accrued expenses 1,398 1,439
--------- ---------
Total current liabilities 14,529 5,970
Long-term debt, less current portion 1,828 228
--------- ---------
Total liabilities 16,357 6,198
--------- ---------
Commitments and contingencies (note 11)
Shareholders' equity
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 -
Preferred stock, $1,000 par value, 2,383 shares authorized,
no shares issued and outstanding - -
Common stock, $0.005 par value, 100,000,000 shares authorized;
12,402,256 shares issued and outstanding 62 53
Paid-in capital 35,859 31,368
Shareholder loans (110) (140)
Accumulated deficit (33,987) (23,824)
--------- ---------
Total shareholders' equity 4,604 7,877
--------- ---------
$ 20,961 $ 14,075
--------- ---------
--------- ---------
See notes to consolidated financial statements.
21
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997 1996
Revenues
Sales of products $ 30,740 $26,081 $ 9,522
Engineering fees 2,327 5,860 2,379
Licenses and royalties 1,350 296 603
-------- ------- -------
34,417 32,237 12,504
-------- ------- -------
Costs and expenses
Costs of products sold 22,536 17,022 7,942
Selling, general, and administrative 10,269 10,460 3,849
Cost of engineering fees 2,475 4,243 2,135
Amortization of capitalized software costs - - 233
Special charges
Write-off of contract and license receivables 5,157 - -
Restructuring costs 3,784 - 2,058
-------- ------- -------
44,221 31,725 16,217
-------- ------- -------
Income (loss) from operations (9,804) 512 (3,713)
-------- ------- -------
Other income (expense)
Interest, net (341) (87) (60)
Other - 64 (4)
-------- ------- -------
(341) (23) (64)
-------- ------- -------
Income (loss) before income taxes and extraordinary items (10,145) 489 (3,777)
Income tax benefit (expense) (18) 234 (4)
-------- ------- -------
Income (loss) before extraordinary item (10,163) 723 (3,781)
Extraordinary gain on conversion of notes payable
(0.02 per share) - - 116
-------- ------- -------
Net income (loss) $(10,163) $ 723 $(3,665)
-------- ------- -------
-------- ------- -------
Earnings (loss) per common share
Basic $ (0.90) $ 0.07 $ (0.77)
-------- ------- -------
-------- ------- -------
Diluted $ (0.90) $ 0.06 $ (0.77)
-------- ------- -------
-------- ------- -------
Weighted average common shares 11,295 8,698 4,997
-------- ------- -------
-------- ------- -------
Weighted average common shares - assuming dilution 11,295 10,623 4,997
-------- ------- -------
-------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
BALANCE, JULY 1, 1995 $ 2,318 $ 1,162 $ - $22 $18,206
Issuance of common stock
Conversion of notes payable
(58,862 shares) - - - - 102
Conversion of accounts payable
(176,001 shares) - - - 1 310
Exercise of options and warrants
(1,243,007 shares) - - - 6 3,362
Private sale
(1,801,334 shares) - - - 9 2,516
Sale of warrants - - - - 513
Net loss - - - - -
------- ------- ------- --- -------
BALANCE, JUNE 30, 1996 2,318 1,162 - 38 25,009
Issuance of common stock
Conversion of preferred stock
(556,601 shares) (1,898) (1,162) - 3 3,056
Business mergers and acquisitions
(2,150,000 shares) - - - 11 2,547
Exercise of options and warrants
(162,993 shares) - - - 1 256
Private sale
(100,000 shares) - - - - 500
Net income - - - - -
------- ------- ------- --- -------
BALANCE, JUNE 30, 1997 420 - - 53 31,368
Issuance of preferred stock
(500 shares) - - 5,000 - (211)
Issuance of common stock
Conversion of preferred stock
(958,598 shares) - - (2,640) 5 2,617
Conversion of note payable
(64,516 shares) - - - - 100
Business acquisitions
(240,000 shares) - - - 1 349
Exercise of options and warrants
(554,530 shares) - - - 3 1,636
Collection of shareholder loans - - - - -
Net loss - - - - -
------- ------- ------- --- -------
BALANCE, JUNE 30, 1998 $ 420 $ - $ 2,360 $62 $35,859
------- ------- ------- --- -------
------- ------- ------- --- -------
SHAREHOLDER ACCUMULATED
LOANS DEFICIT TOTAL
BALANCE, JULY 1, 1995 $ - $(20,882) $ 826
Issuance of common stock
Conversion of notes payable
(58,862 shares) - - 102
Conversion of accounts payable
(176,001 shares) - - 311
Exercise of options and warrants
(1,243,007 shares) (8) - 3,360
Private sale
(1,801,334 shares) - - 2,525
Sale of warrants - - 513
Net loss - (3,665) (3,665)
-------- -------- --------
BALANCE, JUNE 30, 1996 (8) (24,547) 3,972
Issuance of common stock
Conversion of preferred stock
(556,601 shares) - - (1)
Business mergers and acquisitions
(2,150,000 shares) (82) - 2,476
Exercise of options and warrants
(162,993 shares) (50) - 207
Private sale
(100,000 shares) - - 500
Net income - 723 723
-------- -------- --------
BALANCE, JUNE 30, 1997 (140) (23,824) 7,877
Issuance of preferred stock
(500 shares) - - 4,789
Issuance of common stock
Conversion of preferred stock
(958,598 shares) - - (18)
Conversion of note payable
(64,516 shares) - - 100
Business acquisitions
(240,000 shares) - - 350
Exercise of options and warrants
(554,530 shares) (53) - 1,586
Collection of shareholder loans 83 - 83
Net loss - (10,163) (10,163)
-------- -------- --------
BALANCE, JUNE 30, 1998 $ (110) $(33,987) $ 4,604
-------- -------- --------
-------- -------- --------
See notes to consolidated financial statements.
23
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997 1996
Cash flows from operating activities
Net income (loss) $(10,163) $ 723 $(3,665)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Non-cash special charges 7,073 - 2,058
Extraordinary gain on conversion of notes payable - - (116)
Depreciation and amortization 657 909 428
Changes in operating assets and liabilities
Accounts receivable (973) (3,893) (476)
Inventories (3,263) (202) 112
Prepaid expenses and other (413) 61 (156)
Accounts payable and accrued expenses 338 (1,602) 191
Deferred revenue (356) (32) 361
-------- -------- -------
Net cash from operating activities (7,100) (4,036) (1,263)
-------- -------- -------
Cash flows from investing activities
Prepaid licenses (274) (641) (169)
Capitalized software (3,106) (526) -
Capital expenditures (413) (1,009) (311)
Other - (36) (50)
-------- -------- -------
Net cash from investing activities (3,793) (2,212) (530)
-------- -------- -------
Cash flows from financing activities
Capital contributions (NewGen) - 1,002 -
Cash acquired from business acquisitions 40 - -
Net borrowings under bank lines of credit 3,915 340 (151)
Net borrowings under short-term notes payable 1,000 - (400)
Net proceeds from issuance of common stock 1,586 707 5,927
Net proceeds from issuance of preferred stock 5,000 - -
Stock issuance costs (229) - -
Sale of warrants - - 513
Collection of shareholder loans 83 - -
Issuance of long term debt 2,500 143 -
Repayment of long-term debt (234) (83) (27)
-------- -------- -------
Net cash from financing activities 13,661 2,109 5,862
-------- -------- -------
Net increase (decrease) in cash 2,768 (4,139) 4,069
Cash, beginning of year 255 4,394 325
-------- -------- -------
Cash, end of year $ 3,023 $ 255 $ 4,394
-------- -------- -------
-------- -------- -------
See notes to consolidated financial statements.
24
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ITEC and its
active subsidiaries, PCPI Technologies, Inc. ("PCPI"), Prima Inc. doing
business as Prima International ("Prima"), NewGen Imaging Systems, Inc.
("NewGen"), AMT Accel UK Ltd. ("AMT"), McMican Corporation doing business as
ITEC Memory ("McMican"), and Color Solutions, Inc. ("CSI"). All significant
inter-company accounts and transactions 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, 1998, and for the year
then ended, the Company experienced a net loss and a significant decline in
working capital and net worth which raised substantial doubt about its ability
to continue as a going concern. The losses have resulted primarily from losses
on contract cancellations and the resulting lack of expected royalty income
because the OEMs such as Panasonic, Apple Computer, Mita, Minolta, and Canon
have failed to bring the end products to market. In addition, the Company has
experienced relatively high operating costs due in part to redundancies and
inefficiencies resulting from recent mergers and acquisitions. The Company is
taking a new strategic direction whereby it will manufacture imaging products
under its own name. To this end the Company has acquired increased
manufacturing, selling, and distribution capabilities through key mergers and
acquisitions. The Company is in the process of consolidating and restructuring
these operations to conform to the new strategic plan. While management
believes that these new products will be well received by the market, the
Company must obtain additional funds to provide adequate working capital and
finance operations. Management expects to raise these funds through a
combination of debt and equity financing and is actively pursuing such matters.
However, no assurance can be given that the financing will be obtained and that
the Company will achieve profitable operations. 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.
PREPAID LICENSES
Up-front payments for licenses of software are recorded as prepaid licenses.
Amortization of prepaid licenses is recorded on a straight-line basis over
estimated useful lives generally ranging from three to five years, commencing
from the date the underlying technology is available for use by the Company.
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 from the sale of products is recognized as of the date shipments are
made to customers. Revenue from long-term software and technology license fees
is recognized once the collection is made, or is "probable" as
25
prescribed in AICPA Statement of Position 91-1 "Software Revenue
Recognition," and there are no further contractual obligations under the
license agreement. Royalties are recognized upon the sale of such products
by the licensee.
The Company currently has development contracts with original equipment
manufacturers ("OEMs") to adapt the Company's software products to the OEMs'
hardware products. Revenues under these contracts, 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
1998, 1997 and 1996, the Company incurred advertising and promotion costs of
approximately $660, $1,056 and $215 thousand, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Such costs
have been immaterial for fiscal 1998, 1997 and 1996 as the Company has focused
engineering resources on the development of technologies, which have
technological feasibility, for use in OEM and Company products.
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". The capitalized software development costs are related to
software contained in laser printer controllers. Capitalized software includes
emulations of existing software printer control languages currently in the
marketplace, as well as software included in laser printer controllers for
existing laser printers. The Company's software emulation products are
generally offered in different combinations that are designed to provide more
value than its competitors' products. Its printer controller products are
generally designed to allow existing laser printers to operate at higher
performance levels than originally configured. While the Company believes its
new 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.
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 product-by-product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product, or (b) the straight-line
method over the estimated economic life of the product, generally three years.
Amortization begins when the product is available for general release to
customers.
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.
25
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, 1996
Net loss $ (3,665)
Preferred dividends (174)
---------
Basic and diluted EPS $ (3,839) 4,997 $(0.77)
--------- ------
--------- ------
JUNE 30, 1997
Net income $ 723
Preferred dividends (126)
---------
Basic EPS 597 8,698 $ 0.07
Effect of options and warrants - 1,837
Effective 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)
--------- ------
--------- ------
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.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of its foreign sales
subsidiaries at the year-end exchange rates. Any gains and losses from the
translations are credited or charged to "accumulated translation adjustment"
in shareholders' equity. Such amounts were immaterial in fiscal 1998, 1997,
and 1996.
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.
26
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
supersedes Statement of Position 91-1, "Software Revenue Recognition". SOP
97-2, and amendments thereto, provide guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and is
effective for transactions entered into in fiscal years beginning after December
15, 1997. Retroactive application of the provisions of SOP 97-2 is prohibited.
Management is currently evaluating the requirements of SOP 97-2 and the impact
that adoption of SOP 97-2 will have on the financial statements of the Company.
Such adoption, however, may delay the timing of revenue recognition on certain
of the Company's contracts.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. An enterprise that has no items of other comprehensive
income in any period presented is not required to report comprehensive income.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. AFAS 131 is effective for fiscal years beginning after December 15,
1997. Management plans to adopt this accounting standard in fiscal 1999.
Management has not yet assessed the impact that the adoption of SFAS 131 will
have on the Company's financial statements.
RECLASSIFICATIONS
Certain prior year financial statement classifications have been reclassified
to conform with the current year's presentation.
NOTE 2. SPECIAL CHARGES
WRITE-OFF OF CONTRACT AND LICENSE 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.
SOFTWARE TECHNOLOGY, INC. STI is a Korean corporation who manufactures and
distributes computer related products in the 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
27
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 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.
In fiscal 1996, the Company reassessed the future benefit of certain
"older-technology" product lines. As a result, the Company took a non-cash
write-down of an aggregate of $2,058 thousand which including capitalized
software of $937 thousand, prepaid licenses and royalties of $583 thousand,
inventories of $204 thousand, and certain pre-paid assets of $334 thousand to
reduce these assets to their net realizable value.
NOTE 3. BUSINESS COMBINATIONS
AMT AND MCMICAN CORPORATION
Effective May 31, 1998, the Company acquired 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.
The above transactions were accounted for as purchases; accordingly, the
results of AMT's and McMican's operations have been included in consolidated
operations from the date of acquisition. The following are the un-audited
pro forma results of operations of the Company as though AMT and McMican were
acquired on July 1, 1995. The proforma summary does not necessarily reflect
the results of operations as they would have been had AMT and McMican been
combined with the Company as of the beginning of the years ended June 30:
1998 1997 1996
Revenues $ 40,228 $ 38,811 $ 17,517
-------- -------- --------
-------- -------- --------
Net income (loss) $ (9,906) $ 1,127 $ (3,455)
-------- -------- --------
-------- -------- --------
NEWGEN SYSTEMS ACQUISITION CORPORATION AND COLOR SOLUTIONS, INC.
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.
28
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"). 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.
The above mergers were accounted for as a pooling of interests. Details of the
results of operations of the previously separate companies for the periods prior
to combination are as follows for the years ended June 30:
1998 1997 1996
Revenues
ITEC $ 33,028 $ 23,443 $ 11,621
CSI 1,389 1,604 883
NewGen - 7,190 -
-------- -------- --------
Combined $ 34,417 $ 32,237 $ 12,504
-------- -------- --------
-------- -------- --------
Extraordinary item
ITEC $ - $ 116
CSI -
NewGen - - -
-------- -------- --------
Combined $ - $ 116
-------- -------- --------
-------- -------- --------
Net Income (loss)
ITEC $(10,163) $ 2,388 $ (3,613)
CSI - (115) (52)
NewGen - (1,550) -
-------- -------- --------
Combined $(10,163) $ 723 $ (3,665)
-------- -------- --------
-------- -------- --------
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:
1998 1997
Accounts receivable
Trade $ 5,068 $ 3,663
Contract 458 4,979
------- -------
5,526 8,642
Less allowance for doubtful accounts (1,393) (1,007)
------- -------
$ 4,133 $ 7,635
------- -------
------- -------
Inventories
Materials and supplies $ 2,081 $ 1,475
Finished goods 4,206 873
------- -------
$ 6,287 $ 2,348
------- -------
------- -------
Property and equipment
Computers and other equipment $ 2,529 $ 2,069
Office furniture and fixtures 516 487
Leasehold improvements 103 78
------- -------
3,148 2,634
Less accumulated depreciation and amortization (1,623) (966)
------- -------
$ 1,525 $ 1,668
------- -------
------- -------
Accrued liabilities
Compensation and vacation $ 694 $ 681
Other 704 758
------- -------
$ 1,398 $ 1,439
------- -------
------- -------
30
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
1998 1997 1996
Non-cash financing activities
Conversion of preferred stock into common stock $ 2,640 $3,060 $ -
Conversion of notes payable into common stock 100 1,582 198
Conversion of accounts payable and accrued liabilities
into notes payable 987 227 54
Conversion of accounts payable and accrued liabilities
into common stock - - 319
Stock issued for loans 53 50 8
Fixed assets acquired under capital leases 4 7 28
Conversion of accrued interest into common stock - - 12
Net 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 370 111 62
Cash paid during the year for income taxes 5 9 4
NOTE 6. SHORT-TERM DEBT
LINES OF CREDIT
At June 30, 1998, the Company has lines of credit agreements with a bank which
provide for borrowings of up to $7.5 million and expire on September 30, 1999.
Borrowings under the lines bear interest at the bank's prime interest rate plus
0.75%, are restricted to finance certain eligible inventory and accounts
receivable, and are collateralized by substantially all assets of the Company.
The agreements provide, among other requirements and covenants, that the Company
shall maintain a ratio of trading assets (accounts receivable and inventory) to
trading liabilities (accounts payable and bank lines outstanding) of at least
1.3 to 1, a ratio of debt to equity of not greater than 1.75 to 1, and minimum
debt coverage of 2.5 to 1. In addition, the Company shall maintain minimum
trading capital of $6 million and minimum tangible net worth of $12.5 million.
At June 30, 1998, the Company was not in compliance with certain of these
covenants.
The Company previously had a line of credit with Coast Savings which was
terminated in July 1998.
The Company has an additional line of credit available to a subsidiary which
provides for borrowing of up to $388 thousand and expired on August 15, 1998.
Borrowings under the line bear interest at prime plus 3% and are guaranteed
by the Parent Company.
NOTES PAYABLE
The following summarizes short-term notes payable at June 30:
1998 1997
Payable to suppliers, 7-8% $ 998 $100
Payable to a former director; 7%, convertible into common
stock at $1.55 per share - 100
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 -
------ ----
$1,998 $200
------ ----
------ ----
31
NOTE 7. LONG-TERM DEBT
The following summarizes long-term debt at June 30:
1998 1997
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 214 338
Capital lease obligations, 9-20% 17 34
------ -------
2,731 372
Less current portion 903 144
------ -------
$1,828 $ 228
------ -------
------ -------
MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:
YEAR ENDING JUNE 30:
1999 $ 903
2000 870
2001 949
2002 9
------
$2,731
------
------
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 1998, 1997, or 1996.
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.
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
32
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 12.
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 $497 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:
PRICE UNDERLYING
PER COMMON
SHARE SHARES
June 30, 1995 $3.00-$7.50 604
Granted $1.00-$5.00 3,443
Exercised $1.50-$3.10 (1,227)
Canceled $3.00-$3.75 (351)
------
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 4,484
------
------
Exercisable at June 30, 1998 $1.00-$7.50 3,039
------
------
In July 1995, the Company issued to one of its then officers five-year warrants
to purchase an aggregate of 30,000 shares of common stock at $1.00 per share,
the fair market value of the Company's stock on the date the warrants were
granted. During fiscal 1998 and 1997, the former officer exercised warrants to
purchase 10,000 and 20,000 shares, respectively.
In September 1995, two-year warrants to purchase 40,000 shares of the Company's
unregistered common stock at $2.50 per share were issued to an investor group
that provided the Company loan financing in consideration for $6 thousand and a
six month extension to their existing loan. These warrants were exercised in
fiscal 1998.
In September 1995, the Company issued to each of two investors groups that
provided a loan financing, two-year warrants to purchase 6,185 shares (an
aggregate of 12,370 shares) of the Company's unregistered common stock at $2.50
per share. Warrants to purchase 3,093 were exercisable immediately and the
remaining 3,092 warrants were exercisable after six months for each investor
group. All of these warrants were issued in exchange for cash consideration of
approximately $2 thousand which management believes approximates their fair
market value. These warrants were exercised in fiscal 1998.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the then current market value.
Accordingly, an aggregate of 350,607 warrants were canceled and reissued at an
exercise price $1.00 per share. In addition, the Company issued to three of its
officers and its two
33
outside directors warrants to purchase an aggregate of 415,460 shares of the
Company's common stock. Warrants for 20,000 shares were exercised in fiscal
1997 and 226,666 shares in fiscal 1998.
In October 1995, the Company issued as part of a financing, five-year warrants
to purchase 50,000 unregistered shares of the Company's common stock at $1.25
per share. These warrants remain outstanding at June 30, 1998.
Between January and April 1996, the Company issued to various consultants
warrants to purchase an aggregate of 544,000 shares of the Company's common
stock at prices ranging from $1.50 to $5.00 per share. As of June 30, 1998 and
1997, warrants to purchase 20,000 shares, which expire in January 2001, remained
outstanding and are exercisable at the price of $5.00 per share.
In January 1996, the Company sold to its Chairman for $500 thousand a
five-year warrant to purchase 2,000,000 unregistered shares of its common
stock at the rate of $5.00 per share. The warrant contains certain
anti-dilution provisions should the Company issue equity instruments at less
than 50% of the exercise price. Subsequently, in connection with a private
placement with various private investors of approximately $2.5 million, the
exercise price of this warrant was reduced to $3.00 per share in accordance
with the warrants anti-dilution provision. During fiscal 1997 and 1996,
warrants to purchase 684,667 shares were exercised and as of June 30, 1998,
warrants to purchase 1,315,333 shares were outstanding.
In June 1997, the Company issued to six of its officers and its two outside
directors warrants to purchase an aggregate of 725,000 shares of the Company's
common stock at an exercise price of $6.25 per share vesting monthly over 44
months. During fiscal 1998, warrants for 65,000 shares were cancelled.
In July 1997, the Company issued to a co-developer and sales representative
three-year warrants to purchase 270,000 shares of its common stock at an
exercise price of $5.00 per share and 100,000 shares at $5.50 per share. During
fiscal 1998, warrants for 100,000 shares were exercised at $5.00 per share.
In August 1997, the Company issued three-year warrants to purchase 200,000
shares of its common stock at an exercise price of $7.50 per share in connection
with the issuance of the Series C Preferred Stock.
In fiscal 1998, the Company issued to officers of the Company ten-year warrants
to purchase 930,000 shares of its common stock at exercise prices ranging from
$3.00 to $4.00 per share. During fiscal 1998, warrants for 80,000 shares were
cancelled. In addition, the Company issued to key employees four-year warrants
to purchase 270,000 shares of its common stock at an exercise price of $2.25 per
share
In June 1998, the Company issued to directors and advisors of the Company
ten-year warrants to purchase 160,000 shares of its common stock at an
exercise price of $2.25 per share.
In June 1998, the Company issued five-year warrants to purchase 60,000 shares of
its common stock at an exercise price of $2.50 per share.
During fiscal 1998, the Company issued to suppliers of the Company warrants to
purchase 40,000 shares of its common stock at exercise prices ranging from $3.00
to $4.25 per share.
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.
No shares are available for future issuance under the 1984 Plan due to the
expiration of the plan during 1994. As of June 30, 1998, 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.
34
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:
1984, 1988, AND 1997 PLANS OTHER OPTIONS
PRICE UNDERLYING PRICE UNDERLYING
PER COMMON PER COMMON
SHARE SHARES SHARE SHARES
JUNE 30, 1995 $2.50-$5.10 72 $1.65-$3.60 265
Granted $1.00-$5.00 33 $1.00 334
Exercised $1.00 (8) $1.00 (8)
Cancelled $1.60-$5.10 (61) $1.00-$3.60 (278)
--- ----
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)
Cancelled $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)
Cancelled $1.00-$8.45 (94) $1.00 (3)
--- ----
JUNE 30, 1998 $1.00-$8.45 396 $1.00 195
--- ----
--- ----
EXERCISABLE AT JUNE 30, 1998 48 178
--- ----
--- ----
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:
35
1998 1997 1996
Net income (loss)
As reported $(10,163) $ 723 $(3,665)
Pro forma $(11,154) $ 518 $(3,730)
Basic earnings (loss) per share
As reported $ (0.90) $0.07 $ (0.77)
Pro forma $ (0.99) $0.05 $ (0.78)
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:
1998 1997 1996
Fair value of options granted $2.37 $5.45 $0.78
Risk free interest rate 6% 7% 7%
Expected life (years) 3 5 5
Expected volatility 95% 95% 95%
Expected dividends - - -
EXTRAORDINARY GAINS
During fiscal 1996, the Company recognized extraordinary gains on certain
issuances of common stock of app1roximately $116,000, representing the
difference in the aggregate conversion price and the market value of the shares
on the conversion date.
NOTE 9. SIGNIFICANT CUSTOMERS, REVENUE DATA, AND CONCENTRATION OF CREDIT RISK
As of and during the years ended June 30, 1998 and 1997, no customer accounted
for more than 10% of consolidated accounts receivable or total consolidated
revenues.
As of and during the year ended June 30, 1996, Narbon Technologies accounted for
27% of consolidated accounts receivable and 4% of total consolidated revenues;
Canon USA accounted for 11% of consolidated accounts receivable and 3% of total
consolidated revenues; and Computer 2000 accounted for 8% of consolidated
accounts receivable and 17% of total consolidated revenues.
The majority of the Company's product sales in fiscal 1998, 1997, and 1996 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 56% in fiscal 1998, 57% in fiscal 1997, and 81% in fiscal 1996, as
reflected in the following table for the years ended June 30:
1998 1997 1996
Europe $13,912 $12,221 $ 6,750
Asia 4,189 4,438 2,887
Others 1,223 1,764 452
------- ------- -------
$19,324 $18,423 $10,089
------- ------- -------
------- ------- -------
The Company typically has not required collateral for its sales. However, it
has required letters of credit or prepayment from time-to-time as deemed
necessary.
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.
The benefit (provision) for income taxes is as follows for the years ended June
30:
36
1998 1997 1996
Current - State $ (18) $ (5) $ (4)
Deferred benefit - 241 -
------- ------ ------
$ (18) $ 236 $ (4)
------- ------ ------
------- ------ ------
The components of deferred income taxes are as follows at June 30:
1998 1997
Deferred tax assets
Federal net operating loss carryforwards $ 8,793 $ 4,728
State net operating loss carryforwards 834 225
Book reserves and accrued liabilities 490 349
Federal general business credits and other
tax credits 517 517
State R&D and other credits 102 102
-------- -------
10,736 5,921
Valuation allowance (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:
1998 1997 1996
Benefit (provision) at federal statutory income tax rate $ 3,449 $ (246) $ 1,286
Utilization of Federal net operating loss carryforward - 485 -
Losses for which no current benefit is available (3,449) - (1,286)
State income taxes (18) (5) (4)
------- ------ -------
$ (18) $ 234 $ (4)
------- ------ -------
------- ------ -------
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, 1998 and 1997, the cost of
such equipment was $56 and $117 thousand and the related accumulated
amortization was $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 2003. Total rental
expense was approximately $574 thousand in fiscal 1998, $509 in fiscal 1997,
and $252 in fiscal 1996.
Future minimum lease payments under these long-term non-cancelable operating
leases are as follows:
YEAR ENDING JUNE 30,
1999 $393
2000 142
2001 146
2002 149
2003 50
----
$880
----
----
37
LEGAL MATTERS
The Company, because of the nature of its business, is from time to time
threatened or involved in legal actions. The Company does not consider that
any of these legal actions now pending will result in a material adverse
effect on the consolidated financial position or results of operations of the
Company and, further, does not consider that any such proceedings fall
outside ordinary, routine litigation incidental to the business of the
Company.
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 $120 thousand in fiscal
1998, $120 thousand in fiscal 1997, and $108 thousand in 1996. 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.
As shown in Note 6, one of the Company's former directors loaned to the
Company an aggregate of $100 thousands with interest at the rate of 7% per
year. In June 1998, the note was converted 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.
As further described in Note 13, subsequent to June 30, 1998, a group of several
private investors, one of whom is a director of the Company, provided the
Company with funding totaling $4,380 thousand.
NOTE 13. EVENTS SUBSEQUENT TO JUNE 30, 1998
On September 25, 1998, the Company redeemed all outstanding shares of the
Series C Convertible Preferred Stock (Series C Shares). Owners of the Series
C Shares received $2.23 million in cash, $1 million in subordinated notes and
Warrants to purchase 300,000 shares of Common Stock (100,000 shares at the
exercise price of $4.00, and 200,000 shares at an exercise price of $2.025).
The Company financed the redemption through a $4.38 million private
placement of newly issued shares of common stock and subordinated notes.
The $4.38 million in funding came from several private investors, one of whom is
a director of the Company. In exchange, the Company issued a total of 500,000
shares of the Company's common stock at a price of $2.50 per share and
subordinated promissory notes in the amount of $3.13 million. All of the
promissory notes bear interest at 16% per year. A portion of the notes, $675
thousand, mature in two years and are convertible, at the option of each
investor, at any time into shares of Company common stock at $2.025 per share
(subject to adjustment under certain circumstances). The remaining notes, $2.45
million, mature in one year and are not convertible. The Company also issued
warrants to the investors as part of the financing. The warrants authorize the
purchase of 490,000 shares of common stock at an exercise price of $2.025 per
share. This price is based on the average of the closing bid prices for ITEC's
common stock for the five trading days ended September 14, 1998.
38
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
39
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 from the
Company's definitive Proxy Statement with respect to its 1998 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A within 120 days after
June 30, 1998.
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 Statements on page 19.
(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, 1998.
(c) Exhibits.
The following exhibits are filed as part of, or incorporated by
reference into, this Form 10-K.
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also Item 4(a). (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) By-Laws of the Company, as amended, and currently in effect.
(Incorporated by reference to Exhibit 3(b) to 1987 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 Convertibles Preferred Stock of Imaging Technologies
Corporation filed on August 21, 1997 . . . . . . . . . . . . . **
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) in 1989 Form 10-K.) . . . . . . . . . *
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 to lease; addendum II to lease; Addendum III to
Lease. (Incorporated by reference to Exhibit 10(c) to 1996
Form 10-KSB) . . . . . . . . . . . . . . . . . . . . . . . . . . *
40
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
10(d) Reference is made to the various stock options and warrants
granted in 1996 to directors and executive officers 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. . . . . . . . . . . . . **
10(e.4) Amendment to Employment Agreement between the Company and
Edward W. Savarese dated June 12, 1998. . . . . . . . . . . . . **
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 1, 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. . . . . . . . . . . . . . . . . . . **
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. 1, 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 10-KSB). . . . . . . . *
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). . . . . . . . *
41
# DESCRIPTION OF EXHIBIT PAGE
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
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 10-KSB) . . . . . . . . . . . . . . . . . . . . *
10(n) ITEC/MEI 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) . . . . . . . . . . . . . . . . . . . . . . *
10(q.1) Amendment to Employment Agreement between the Company and Brian
Bonar dated April 1, 1998. . . . . . . . . . . . . . . . . . . . **
10(r) Promissory Note between Imperial Bank and the Company dated
June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . **
10(s) Security and Loan Agreement and Addendum thereto (Eximbank
Facility) between Imperial Bank and the Company, dated June 23,
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
10(t) Security and Loan Agreement and Addendum thereto (Foreign
Insured A/R Line) between Imperial Bank and the Company, dated
June 23, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . **
10 u) Security and Loan Agreement and Addendum thereto (Domestic Line)
between Imperial Bank and the Company, dated June 23, 1998. . . **
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. . . . . . . . . . . . . . . . . . . **
10(x) Securities Purchase Agreement between Buyers and the Company
dated August 21, 1997. . . . . . . . . . . . . . . . . . . . . . **
10(y) Registration Rights Agreement between Buyers and the Company
dated August 21, 1997. . . . . . . . . . . . . . . . . . . . . . **
10(z) Form of Warrant to purchase Common Stock between buyers and the
Company dated August 21, 1997. . . . . . . . . . . . . . . . . . **
10(aa) Promissory Note between DataProducts Corporation and the Company
dated June 30, l998. . . . . . . . . . . . . . . . . . . . . . . **
10(ab) Stock Purchase Agreement between the Company and Stockholders
of New Media, Incorporated dated November 28, 1997. . . . . . . **
42
# DESCRIPTION OF EXHIBIT PAGE
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- ---------------------------------------------------------------------------------
10(ac) Agreement and Plan of Merger and Plan of Reorganization between
the Company and Color Solutions, Incorporated dated
November 30, l997. . . . . . . . . . . . . . . . . . . . . . . . *
21 List of Subsidiaries of the Company. . . . . . . . . . . . . . . **
23 Consent of Independent Accountants . . . . . . . . . . . . . . . **
Exhibits 10(a.1), (a.2), (b.1), (b.2), (b.3), (d), (e.1), (e.2), (e.3), (e.4),
(f), (g.1), (g.2), (g.3), (q), and (q.1) 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 such exhibit.
* Exhibit is incorporated by reference only and a copy in not
included in this filing.
** Filed Herewith.
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, 1998 IMAGING TECHNOLOGIES CORPORATION
By: /s/ BRIAN BONAR
--------------------------------
Brian Bonar
President, and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Brian Bonar and Michael K. Clemens, and each
of them acting individually 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 Directors October 13, 1998
- ------------------------
Harry J. Saal
/s/ Brian Bonar President and Chief Executive October 13, 1998
- ------------------------ Officer
Brian Bonar (Principal Executive Officer)
/s/ Michael K. Clemens Senior Vice President, and October 13, 1998
- ------------------------ Chief Financial Officer
Michael K. Clemens (Principal Financial and
Accounting Officer)
/s/ David M. Carver Director October 13, 1998
- ------------------------
David M. Carver
/s/ A.L. Dubrow Director October 13, 1998
- ------------------------
A.L. Dubrow
/s/ Warren T. Lazarow Director October 13, 1998
- ------------------------
Warren T. Lazarow
/s/ Stephen A. MacDonald Director October 13, 1998
- ------------------------
Stephen A. MacDonald
43