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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
COMMISSION FILE NO. 0-12641
[GRAPHIC OMITED]
IMAGING TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0021693
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer ID No.)
17075 Via Del Campo
San Diego, California 92127
(858) 451-6120
(Address of Principal Executive Offices and Registrant's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.005 par value
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No [ ]
Indicate by check mark whether the registrant is an accelerated filer. Yes [ ]
No X
At November 10, 2003 the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $5,241,517 based on the last
trade price as reported on the NASD Electronic Bulletin Board. For purposes of
this calculation, shares owned by officers, directors, and 10% shareholders
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 November 10, 2003, there were 291,195,402 shares of the registrant's Common
Stock, $0.005 par value, issued and outstanding.
Documents incorporated by reference:
None
FORWARD-LOOKING STATEMENTS
This document contains some forward-looking statements that involve substantial
risks and uncertainties. These forward-looking statements can generally be
identified by the use of forward-looking words like "may," "will," "expect,"
"anticipate," "intend," "estimate," "continue," "believe" or other similar
words. Similarly, statements that describe our future expectations, objectives
and goals or contain projections of our future results of operations or
financial condition are also forward-looking statements. Our future results,
performance or achievements could differ materially from those expressed or
implied in these forward-looking statements as a result of certain factors,
including those listed under the heading "Risk Factors" and in other cautionary
statements in this document.
PART I
=======
ITEM 1. BUSINESS
- ------------------
Imaging Technologies Corporation (OTCBB symbol: IMTO) ("ITEC" or the
"Company") 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 17075 via Del
Campo, San Diego, CA 92127. The Company's main phone number is (858) 451-6120.
We provide a variety of financial services to small and medium-size
businesses. These services allow our customers to outsource many human resources
tasks, including payroll processing, workers' compensation insurance, health
insurance, employee benefits, 401k investment services, personal financial
management, and income tax consultation. In November 2001, we began to provide
these financial services that relieve existing and potential customers of the
burdens associated with personnel management and control. To this end, the
Company, through strategic acquisitions, became a professional employer
organization ("PEO").
ITEC provides financial services principally through its wholly-owned
SourceOne Group, Inc. ("SOG") subsidiary, which includes several operating
units, including ProSportsHR , MedicalHR , and, CallCenterHR (established
subsequent to June 30, 2003). These units provide a broad range of financial
services, including: benefits and payroll administration, health and workers'
compensation insurance programs, personnel records management, employer
liability management, and (in the case of MedicalHR and CallCenterHR), temporary
staffing services, to small and medium-sized businesses.
In January 2003, we completed the acquisition of a controlling interest
approximating 88% of the shares of Greenland Corporation. Greenland shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC. Greenland is
a financial services company, whose wholly-owned ExpertHR subsidiary provides
the same services as SOG. Greenland's wholly-owned Check Central, Inc.
subsidiary is an information technology company that has developed the Check
Central Solutions' transaction processing system software and related MAXcash
Automated Banking Machine (ABM kiosk designed to provide self-service check
cashing and ATM-banking functionality). At present, there is no activity in this
subsidiary; and management is evaluating its future.
In January 2003, we completed the acquisition of a controlling interest
(approximately 85%) in the shares of Quik Pix, Inc. ("QPI"). QPI shares are
traded on the National Quotation Bureau Pink Sheets under the symbol QPIX. QPI
is a visual marketing support firm located in Buena Park, California. QPI's
major source of revenues is in developing and mounting photographic and digital
images for use in display advertising for tradeshows and customer building
interiors. QPI also has a proprietary product PhotoMotion , which is a patented
color medium of multi-image transparencies. The process uses existing originals
to create the illusion of movement, and allows for three to five distinct images
to be displayed with an existing lightbox.
In prior years, we were principally involved in the development and
distribution of imaging products. Our core technologies are related to the
design and development of software products that improve the accuracy of color
reproduction. Our ColorBlind software provides color management to improve the
accuracy of color reproduction - especially as it relates to matching color
between different devices in a network, such as monitors and printers. These
products are now supported and distributed by QPI. Additionally, we market our
ColorBlind software products on the Internet through our color.com website.
MARKET OVERVIEW - FINANCIAL SERVICES
- ----------------------------------------
Our entry into the financial services business, in November 2001, was
through the acquisition of professional employer organizations ("PEO"). We are
expanding the services we provide beyond PEO services, which will include a
variety of products and services to employers and employees, and expanded
employee benefit programs such as payroll advances, life insurance, automated
payroll credit cards, and branded healthcare plans.
The PEO industry emerged in the early 1980's largely in response to the
burdens placed on small and medium-sized employers by the complex legal and
regulatory issues related to human resources management. While various service
providers were available to assist these businesses with specific tasks, PEOs
emerged as providers of a more comprehensive range of services relating to the
employer/employee relationship. In a PEO arrangement, the PEO assumes broad
aspects of the employer/employee relationship. Because PEOs provide
employee-related services to a large number of employees, they can achieve
economies of scale that allow them to perform employment-related functions more
efficiently, provide a greater variety of employee benefits and devote more
attention to human resources management.
We believe that the demand for our services is driven by (1) the trend by
small and medium-sized businesses toward outsourcing management tasks outside of
core competencies; (2) the difficulty of providing competitive health care and
related benefits to attract and retain employees; (3) the increasing costs of
health and workers' compensation insurance coverage and workplace safety
programs; and (4) complex regulation of labor and employment issues and the
related costs of compliance.
Growing pressure from federal agencies such as the Department of Labor, the
Immigration and Naturalization Service, and the Equal Employment Opportunity
Commission, and the burdens of employment-related compliance such as COBRA,
OSHA, workers' compensation, unemployment compensation, wrongful termination,
ADA ("Americans with Disabilities Act"), and FMLA ("Family and Medical Leave
Act") demand increasing levels of resources from small businesses.
According to the National Association of Professional Employer
Organizations ("NAPEO"), the PEO industry collectively serves approximately 4
million work site employees in the United States. The target market for the PEO
industry is represented by companies with 100 or fewer employees; a market of
approximately 60 million people.
The most recent research from NAPEO reports that the average annual cost of
regulation, paperwork, and tax compliance for firms with fewer than 500
employees is approximately $5000 per employee. The average small business owner
spends between 7% and 25% of his time handling employee-related administration.
NAPEO also reports that current PEO industry gross revenues are
approximately $43 billion, representing approximately 2.5 million employees in
every state in the U.S. The average annual growth rate of the industry, since
1985, has been 25%. A typical PEO client company has 15 work site employees and
an average annual pay per work site employee of $23,258. Presently, there are
approximately 800 PEO companies operating in the U.S.
According to the U.S. Small Business Administration ("SBA"), the U.S. has
over 6 million small businesses, defined as those companies with 100 or fewer
employees, representing over 99% of all businesses. The U.S. Census Bureau
reports that small businesses represent the fastest growing segment of U.S.
employment and commerce, representing an estimated annual payroll of $1.4
trillion.
MARKET OVERVIEW - IMAGING PRODUCTS
- --------------------------------------
ColorBlind software is a suite of software applications, which allow users
to build color profiles of images in order to insure accurate output on digital
devices such as printers, plotters, scanners, monitors, and cameras.
According to various market research companies such as International Data
Corporation ("IDC") and The Gartner Group ("Gartner"), the worldwide
document/imaging market is expected to grow to over $200 billion by 2003.
In-house color document production is expected to grow at a compound annual rate
of 40% over the next few years. Various underlying industries may have a direct
impact on our market potential. For example, according to Gartner, approximately
13 million of the 103 million households in the United States currently have a
digital camera. Worldwide digital camera shipments are forecast to increase
dramatically to approximately 42 million by 2004, according to IDC. The market
growth and acceptance of the digital camera and the improved resolution of these
cameras have created larger demand for color management and accurate color
printing.
Changes in the technology of document creation, management, production, and
transmittal (including the Internet) have been changing the dynamics of the
imaging market. The greater bandwidth now available to even small desktop
computers has facilitated the movement of color images, which has resulting in
increased demand for cross platform color reproduction.
The direct-to-plate and direct-to-print trends in the printing industry
have created more demand for digital color proofing.
Accordingly, color integrity is an important underlying requirement in the
imaging process. The widespread use of color applications at the desktop, demand
for higher quality color reproduction, expanded use of the Internet for document
dissemination and e-commerce, growth of office networks, and the increased
acceptance and use of digital photography are some of the factors that influence
our markets.
Photomotion, a QPI technology, is a patented process for adding multiple
images to backlit static displays that appear to change as the viewer passes by
the image. The Photomotion process uses existing original art to create an
illusion of movement; and allows for separate and distinct image displays. It
allows for three to five distinct images to be displayed within an existing
light box. Images appear to change or "morph" as the viewer passes the display.
QPI offers a spectrum of services allowing a client to produce color
visuals (digital and photographic) according to parameters as specified by a
client. We also offer a full range of color laboratory reproduction services.
The market for Photomotion and color reproduction services is vast. The
products are especially useful in point-of-purchase displays, indoor display
advertising, and trade show exhibits and displays. To date, marketing has been
limited to targeted customers such as beverage companies, casinos, sports
arenas, and other specialty clients.
BUSINESS STRATEGY
- ------------------
FINANCIAL AND PEO SERVICES
The PEO business provides a broad range of services associated with human
resources management. These include benefits and payroll administration, health
and workers' compensation insurance programs, personnel records management,
employer liability management, employee recruiting and selection, performance
management, and training and development services.
Administrative Functions. We perform a wide variety of processing and
record keeping tasks, mostly related to payroll administration and government
compliance. Specific examples include payroll processing, payroll tax deposits,
quarterly payroll tax reporting, employee file maintenance, unemployment claims
processing and workers' compensation claims reporting.
Benefit Plans Administration. We sponsor benefit plans including group
health coverage. We are responsible for the costs and premiums associated with
these plans, act as plan sponsor and administrator of the plans, negotiate the
terms and costs of the plans, maintain the plans in accordance with applicable
federal and state regulations, and serve as liaison for the delivery of such
benefits to worksite employees.
Personnel Management. We provide a variety of personnel management
services, which provide our client companies access to resources normally found
in the human resources departments of larger companies. Our client companies
will have access to a personnel guide, which will set forth a systematic
approach to administering personnel policies and practices and can be customized
to fit a client company's particular work culture/environment.
Employer Liability Management. Under our Client Services Agreement ("CSA"),
we assume many employment-related responsibilities associated with
administrative functions and benefit plans administration. Upon request, we can
also provide our clients guidance on avoiding liability for discrimination,
sexual harassment, and civil rights violations. We employ counsel specializing
in employment law.
Client Service Agreement. All clients enter into our CSA, which establishes
our service fee. The CSA is subject to periodic adjustments to account for
changes in the composition of the client's workforce and statutory changes that
affect our costs. The CSA also establishes the division of responsibilities
between our Company and the client as co-employers. Pursuant to the CSA, we are
responsible for personnel administration and are liable for certain
employment-related government regulation. In addition, we assume liability for
payment of salaries, wages (including payroll taxes), and employee benefits of
worksite employees. The client retains the employees' services and remains
liable for the purposes of certain government regulations.
Our PEO business represents a distribution channel for certain value-added
services, including a wide variety of employer and employee benefit programs
such as 401(k) plans, Section 125 cafeteria plans, legal services, tax
consulting, payroll advances, and other insurance programs. Our intention is to
expand our business through offering a variety of financial services
Additionally, we operate two new business units, launched subsequent to June 30,
2003, (MedicalHR and CallCenterHR) to provide temporary staff to the medical and
call center industries.
The PEO business is growing rapidly, but profit margins are small.
Consequently, profitability depends on (1) economies of scale leading to greater
operating efficiencies; and (2) value-added services such as training,
education, Internet support, and other services that may be used by employers
and employees.
The income model for this business generally revolves around fees charged
per employee. While gross profit is low, gross revenues are generally
substantial. To this end, the Company intends to pursue acquisitions of small
PEO firms. Each acquisition is expected to include retention of some existing
management and staff in order to assure continuity of operations.
We evaluate our PEO business as one segment even though our PEO products
are offered under various brand names.
COLOR MANAGEMENT SOFTWARE
Accurate color reproduction is one of the largest single challenges facing
the imaging industry. Customers demand systems that are easy to use, predictable
and consistent. A color management system is needed so users can convert files
for use with different devices. The varying characteristics of each device are
captured in a device profile. The International Color Consortium ("ICC") has
established a standard for the format for these profiles.
Our ColorBlind color management software is a pre-packaged suite of
applications, utilities, and tools that allow users to precisely create ICC
profiles for each device in the color workflow including scanners, monitors,
digital cameras, printers, and other specialized digital color input and output
devices. Once profiled, ColorBlind balances these profiles to produce accurate,
consistent, and reliable color rendering from input to output. ColorBlind
software is sold as a stand-alone application or licensed to OEM's for resale to
be bundled with peripheral devices.
We operate an internet site, color.com, as a resource center to provide
information on the highest quality correct color. This site allows consumers to
purchase our products, including ColorBlind software; and serves as an
information resource for color imaging, including white papers on color imaging
and management, links to color consultants and experts, and products.
ColorBlind Academy provides advanced color management training for
resellers of color imaging products, including printers, copiers, monitors and
other imaging products.
QPI - PHOTOMOTION
QPI's Photomotion Images are based upon patented technology. The resulting
product is a unique color medium that uses existing original images to create
the illusion of movement or multiple static displays that allow three to five
distinct images to be displayed in an existing light box. The images appear to
change, or "morph," as a viewer passes the display. This ability to put multiple
images in a single space, without the need for mechanical devices, allows for
the creation of an active and entertaining display. The product is currently
marketed in the U.S., Europe, Asia and Latin America.
Visual marketing, including out-of-home media, is a large and growing,
multi-billion dollar worldwide industry. An industry survey suggests that the
field of visual marketing will increase at a rate of 50% annual for the next ten
years. Out-of-home media plays a critical role in the media plans of national
and international advertisers.
GREENLAND CORPORATION
The acquisition of a controlling interest in Greenland Corporation has
contributed to our PEO business through the establishment of ExpertHR, Inc. as a
wholly-owned subsidiary of Greenland. Expert HR operations mirror those of SOG.
Greenland's ExpertHR-Oklahoma, Inc. subsidiary is also a PEO company.
Greenland's wholly owned subsidiary, Check Central, is the developer of the
Check Central Solutions' transaction processing system software and related
MAXcash Automated Banking Machine (ABM ) kiosk designed to provide
self-service check cashing and ATM-banking functionality. The MAXcash system
provides full ATM functionality, phone card, and money order dispensing and, in
the near future, will offer bill paying, and wire transfer services.
The payroll check-cashing industry continues to expand, serving a
population that now numbers 35% of working Americans.
We are evaluating the future of this business unit, which has been inactive
for the past year, with the objective of developing a plan to provide the
advantages of the MAXcash ABM to our clients and other PEO companies.
COMPETITION
- -----------
The markets for our products and services are highly competitive and
rapidly changing. Our ability to compete in our markets depends on a number of
factors, including the success and timing of product and services introductions
by us and our competitors, selling prices, performance, distribution, marketing
ability, and customer support. A key element of our strategy is to provide
competitively-priced, quality products and services.
The PEO business is also highly competitive, with approximately 800 firms
operating in the U.S. There are several firms that operate on a nationwide basis
with revenues and resources far greater than ours. Some large PEO companies are
owned by insurance carriers and some are public companies whose shares trade on
Nasdaq, including Administaff, Inc., Team Staff, Inc., Barrett Business
Services, and Staff Leasing, Inc. Also see "Risks and Uncertainties."
OPERATIONS
- ----------
ITEC's 6,000 square foot corporate headquarters facility in San Diego,
California houses most of our administrative operations. PEO operations are
conducted from the Company's headquarters offices and small branch offices in
Troy, Michigan; Tulsa, Oklahoma; and Tustin, California. Additional sales
offices are maintained in Richmond, Virginia; Miami, Florida; and Covington,
Louisiana.
MANUFACTURING, PRODUCTION, AND SOURCES OF SUPPLY
- -----------------------------------------------------
ITEC has traditionally outsourced nearly all of its manufacturing. In June
2001, we suspended manufacturing of ITEC-branded products. We will continue to
manufacture our software products in-house and through selected outside vendors.
Also see "Risks and Uncertainties."
RESEARCH AND DEVELOPMENT
- --------------------------
Some of our products are characterized by rapidly evolving technology,
frequent new product introductions, and significant price competition.
Accordingly, we monitor new technology developments and coordinate with
suppliers, distributors and dealers to enhance existing products and to lower
costs. Advances in technology require ongoing investment. We have entered into
no formal projects in research and development for several years; however, we do
make modifications to existing products on an as-needed basis to maintain their
currency. Also see "Risks and Uncertainties."
INTELLECTUAL PROPERTY
- ----------------------
ITEC's software products are copyrighted. However, copyright protection
does not prevent other companies from emulating the features and benefits
provided by our software. We protect our software source code as trade secrets
and make our proprietary source code available to OEM customers only under
limited circumstances and specific security and confidentiality constraints. QPI
holds the patent for Photomotion. Technology products exist in a rapidly
changing business environment. Consequently, we believe the effectiveness of
patents, trade secrets, and copyright protection is less important in
influencing long term success than the experience of our employees and our
contractual relationships.
We have obtained U.S. registration for several of our trade names or
trademarks, including ColorBlind, Photomotion, ExpertHR, MedicalHR,
CallCenterHR, and ProSportsHR. These trade names are used to distinguish our
products and services in the markets we serve.
If we fail to establish that we have not violated the asserted rights, we
could be prohibited from marketing the associated product and/or services, and
we could be liable for damages. We rely on a combination of trade secret,
copyright and trademark protection, and non-disclosure agreements to protect our
proprietary rights. Also see "Risks and Uncertainties."
PERSONNEL
- ---------
ITEC (including our subsidiaries) employed a total of 68 individuals worldwide
as of June 30, 2003. Of this number, 54 were involved in sales, marketing,
corporate administration and finance, and 14 were in engineering, research and
development, and technical support. There is no union representation for any of
ITEC's employees.
GOING CONCERN CONSIDERATIONS
- ------------------------------
At June 30, 2003, and for the fiscal year then ended, we had a net loss and
negative working capital, which raise substantial doubt about our ability to
continue as a going concern. Our losses have resulted primarily from an
inability to achieve sales targets due to insufficient working capital and entry
into new business segments. Our ability to continue operations will depend on
positive cash flow from future operations and on our ability to raise additional
funds through equity or debt financing. We have reduced and/or discontinued some
of our operations and, if we are unable to raise or obtain needed funding, we
may be forced to discontinue operations.
For the year ended June 30, 2003, our net loss was $6.9 million. At June
30, 2003 our negative working capital was $28.4 million. Specific steps that we
have taken to address these problems include obtaining working capital through
the issuance and sale of convertible debentures, the relocation of our
facilities to reduce rent payments, and growing our financial services business.
Furthermore, we plan to overcome the circumstances that impact our ability
to remain a going concern through a combination of increased revenues and
decreased costs with interim cash flow deficiencies being addressed through
additional equity financing. We have been able to reduce our costs by reducing
our number of employees and suspending unprofitable operations associated with
the computer printer business. We commenced a program to reduce our debt, which
we will address more aggressively in our current fiscal year, partially through
debt-to-equity conversions. Finally, we continue to pursue the acquisition of
business units that will be consistent with these measures. We anticipate that
all of these initiatives will be carried out throughout the fiscal year ending
June 30, 2004.
RISKS AND UNCERTAINTIES
- -------------------------
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE OUR
OPERATIONS.
Our business has not been profitable in the past and it may not be
profitable in the future. We may incur losses on a quarterly or annual basis for
a number of reasons, some within and others outside our control. See "Potential
Fluctuation in Our Quarterly Performance." The growth of our business will
require the commitment of substantial capital resources. If funds are not
available from operations, we will need additional funds. We 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 we need them. Even if
funds are available, the terms under which the funds are available to us may not
be acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
the Company's June 30, 2003 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 our working
capital and net worth. The Company plans to overcome the circumstances that
impact our ability to remain a going concern through a combination of increased
revenues and decreased costs, with interim cash flow deficiencies being
addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
Our quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a negative impact on our results
of operations. We may experience significant quarterly fluctuations in revenues
and operating expenses as we introduce new products and services. Accordingly,
any inaccuracy in our forecasts could adversely affect our financial condition
and results of operations. Demand for our products and services could be
adversely affected by a slowdown in the overall demand for imaging products
and/or financial and PEO services. Our failure to complete shipments during a
quarter could have a material adverse effect on our results of operations for
that quarter. Quarterly results are not necessarily indicative of future
performance for any particular period.
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS FLUCTUATED SIGNIFICANTLY.
Our stock price could fluctuate significantly in the future based upon any
number of factors such as: general stock market trends, announcements of
developments related to our business, fluctuations in our operating results, a
shortfall in our revenues or earnings compared to the estimates of securities
analysts, announcements of technological innovations, new products or
enhancements by us or our competitors, general conditions in the markets we
serve, general conditions in the worldwide economy, developments in patents or
other intellectual property rights, and developments in our relationships with
our customers and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of technology and other stocks have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
SINCE MANY OF OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES
THAN WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for our products and services are highly competitive and
rapidly changing. Some of our current and prospective competitors have
significantly greater financial, technical, and marketing resources than we do.
Our ability to compete in our markets depends on a number of factors, some
within and others outside our control. These factors include: the frequency and
success of product and services introductions by us and by our competitors, the
selling prices of our products and services and of our competitors' products and
services, the performance of our products and of our competitors' products,
product distribution by us and by our competitors, our marketing ability and the
marketing ability of our competitors, and the quality of customer support
offered by us and by our competitors.
The PEO industry is highly fragmented. While many of our competitors have
limited operations, there are several PEO companies equal or substantially
greater in size than ours. We also encounter competition from "fee-for-service"
companies such as payroll processing firms, insurance companies, and human
resources consultants. The large PEO companies have substantially more resources
than us and provide a broader range of resources than we do.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR
OVERALL FINANCIAL PERFORMANCE.
In order to grow our business, we may acquire businesses that we believe
are complementary. To successfully implement this strategy, we must identify
suitable acquisition candidates, acquire these candidates on acceptable terms,
integrate their operations and technology successfully with ours, retain
existing customers and maintain the goodwill of the acquired business. We may
fail in our efforts to implement one or more of these tasks. Moreover, in
pursuing acquisition opportunities, we 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 we do. Competition
for these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. Our overall financial performance will be materially and adversely
affected if we are unable to manage internal or acquisition-based growth
effectively. Acquisitions involve a number of risks, including: integrating
acquired products and technologies in a timely manner, integrating businesses
and employees with our business, managing geographically-dispersed operations,
reductions in our 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, our
inability to maintain customers or goodwill of an acquired business, the need to
divest unwanted assets or products, and the possible failure to retain key
acquired personnel.
Client satisfaction or performance problems with an acquired business could
also have a material adverse effect on our reputation, and any acquired business
could significantly under perform relative to our expectations. We cannot be
certain that we will be able to integrate acquired businesses, products or
technologies successfully or in a timely manner in accordance with our strategic
objectives, which could have a material adverse effect on our overall financial
performance.
In addition, if we issue equity securities as consideration for any future
acquisitions, existing stockholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY MANNER, WE
MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY HURT OUR
ABILITY TO CONTINUE OPERATIONS.
The markets for our products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in product
selling prices due to competitive pressures over the life of a product are
common. Our future success will depend on our ability to continue to develop new
versions of our ColorBlind software, and to acquire competitive products from
other manufacturers. We monitor new technology developments and coordinate with
suppliers, distributors and dealers to enhance our products and to lower costs.
If we are unable to develop and acquire new, competitive products in a timely
manner, our financial condition and results of operations will be adversely
affected.
IF WE ARE FOUND TO BE INFRINGING ON A COMPETITOR'S INTELLECTUAL PROPERTY RIGHTS
OR IF WE ARE REQUIRED TO DEFEND AGAINST A CLAIM OF INFRINGEMENT, WE MAY BE
REQUIRED TO REDESIGN OUR PRODUCTS OR DEFEND A LEGAL ACTION AT SUBSTANTIAL COSTS
TO US.
We currently hold only one patent through our QPI subsidiary for its
Photomotion product. Our software products are copyrighted. However, copyright
protection does not prevent other companies from emulating the features and
benefits provided by our software. We protect our software source code as trade
secrets and make our proprietary source code available to OEM customers only
under limited circumstances and specific security and confidentiality
constraints.
IF OUR DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS, OUR BUSINESS
MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our products are marketed and sold through a distribution channel of value
added resellers, manufacturers' representatives, retail vendors, and systems
integrators. We have a small network of dealers and distributors in the United
States and internationally. We support our worldwide distribution network and
end-user customers through operations headquartered in San Diego.
Portions of our sales are made through distributors, who may carry
competing product lines. These distributors could reduce or discontinue sales of
our products, which could adversely affect us. These independent distributors
may not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are 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 our markets.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES, AND WORKERS'
COMPENSATION RATES WILL HAVE A SIGNIFICANT EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Health insurance premiums, state unemployment taxes, and workers'
compensation rates are, in part, determined by our PEO companies' claims
experience, and comprise a significant portion of our direct costs. We employ
risk management procedures in an attempt to control claims incidence and
structure our benefits contracts to provide as much cost stability as possible.
However, should we experience a large increase in claims activity, the
unemployment taxes, health insurance premiums, or workers' compensation
insurance rates we pay could increase. Our ability to incorporate such increases
into service fees to clients is generally constrained by contractual agreements
with our clients. Consequently, we could experience a delay before such
increases could be reflected in the service fees we charge. As a result, such
increases could have a material adverse effect on our financial condition or
results of operations.
WE CARRY SUBSTANTIAL LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS.
Under our client service agreements, we become a co-employer of worksite
employees and we assume the obligations to pay the salaries, wages, and related
benefits costs and payroll taxes of such worksite employees. We assume such
obligations as a principal, not merely as an agent of the client company. Our
obligations include responsibility for (a) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to us of the associated service fee; and (2) providing
benefits to worksite employees even if the costs incurred by us to provide such
benefits exceed the fees paid by the client company. If a client company does
not pay us, or if the costs of benefits provided to worksite employees exceed
the fees paid by a client company, our ultimate liability for worksite employee
payroll and benefits costs could have a material adverse effect on the our
financial condition or results of operations.
AS A MAJOR EMPLOYER, OUR OPERATIONS ARE AFFECTED BY NUMEROUS FEDERAL, STATE, AND
LOCAL LAWS RELATED TO LABOR, TAX, AND EMPLOYMENT MATTERS.
By entering into a co-employer relationship with employees assigned to work
at client company locations, we assume certain obligations and responsibilities
or an employer under these laws. However, many of these laws (such as the
Employee Retirement Income Security Act ("ERISA") and federal and state
employment tax laws) do not specifically address the obligations and
responsibilities of non-traditional employers such as PEOs; and the definition
of "employer" under these laws is not uniform. Additionally, some of the states
in which we operate have not addressed the PEO relationship for purposes of
compliance with applicable state laws governing the employer/employee
relationship. If these other federal or state laws are ultimately applied to our
PEO relationship with our worksite employees in a manner adverse to us, such an
application could have a material adverse effect on our financial condition or
results of operations.
While many states do not explicitly regulate PEOs, over 20 states have
passed laws that have licensing or registration requirements for PEOs, and
several other states are considering such regulation. Such laws vary from state
to state, but generally provide for monitoring the fiscal responsibility of PEOs
and, in some cases, codify and clarify the co-employment relationship for
unemployment, workers' compensation, and other purposes under state law. There
can be no assurance that we will be able to satisfy licensing requirements of
other applicable relations for all states. Additionally, there can be no
assurance that we will be able to renew our licenses in all states.
THE MAINTENANCE OF HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT COVER
WORKSITE EMPLOYEES IS A SIGNIFICANT PART OF OUR BUSINESS.
The current health and workers' compensation contracts are provided by
vendors with whom we have an established relationship, and on terms that we
believe to be favorable. While we believe that replacement contracts could be
secured on competitive terms without causing significant disruption to our
business, there can be no assurance in this regard.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT.
Accordingly, the short-term nature of our client service agreements make us
vulnerable to potential cancellations by existing clients, which could
materially and adversely affect our financial condition and results of
operations. Additionally, our results of operations are dependent, in part, upon
our ability to retain or replace client companies upon the termination or
cancellation of our agreements.
A NUMBER OF PEO INDUSTRY LEGAL ISSUES REMAIN UNRESOLVED WITH RESPECT TO THE
CO-EMPLOYMENT AGREEMENT BETWEEN A PEO AND ITS WORKSITE EMPLOYEES, INCLUDING
QUESTIONS CONCERNING THE ULTIMATE LIABILITY FOR VIOLATIONS OF EMPLOYMENT AND
DISCRIMINATION LAWS.
Our client service agreement establishes a contractual division of
responsibilities between our clients and us for various personnel management
matters, including compliance with and liability under various government
regulations. However, because we act as a co-employer, we may be subject to
liability for violations of these or other laws despite these contractual
provisions, even if we do not participate in such violations. Although our
agreement provides that the client is to indemnify us for any liability
attributable to the conduct of the client, we may not be able to collect on such
a contractual indemnification claim, and thus may be responsible for satisfying
such liabilities. Additionally, worksite employees may be deemed to be our
agents, subjecting us to liability for the actions of such worksite employees.
IF THE SUPERIOR SECURITY INTEREST HELD BY IMPERIAL BANK IS REMOVED AND IF ALL OF
THE LAWSUITS CURRENTLY FILED WERE DECIDED AGAINST US AND/OR ALL THE JUDGMENTS
CURRENTLY OBTAINED AGAINST US WERE TO BE IMMEDIATELY COLLECTED, WE WOULD HAVE TO
CEASE OUR OPERATIONS.
Throughout fiscal 2001, 2002 and 2003, and through the date of this filing,
approximately fifty trade creditors have made claims and/or filed actions
alleging the failure of us to pay our obligations to them in a total amount
exceeding $3 million. These actions are in various stages of litigation, with
many resulting in judgments being entered against us. Several of those who have
obtained judgments have filed judgment liens on our assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars. Should we be
required to pay the full amount demanded in each of these claims and lawsuits,
we may have to cease our operations. However, to date, the superior security
interest held by Imperial Bank has prevented nearly all of these trade creditors
from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING CAPITAL AND
A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING, WE MAY BE
FORCED TO DISCONTINUE OPERATIONS.
For several recent periods, up through the present, we had a net loss and
negative working capital, which raises substantial doubt about our ability to
continue as a going concern. Our losses have resulted primarily from an
inability to achieve revenue targets due to insufficient working capital. Our
ability to continue operations will depend on positive cash flow, if any, from
future operations and on our ability to raise additional funds through equity or
debt financing. Although we have reduced our work force, suspended some of our
operations, and entered into new market segments (financial services), if we are
unable to achieve the necessary revenues or raise or obtain needed funding, we
may be forced to discontinue operations.
IF AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE MAY NOT
BE ABLE TO CARRY OUT OUR BUSINESS PLAN.
On August 20, 1999, at the request of Imperial Bank, our primary lender,
the Superior Court, San Diego appointed an operational receiver to us. On August
23, 1999, the operational receiver took control of our day-to-day operations. On
June 21, 2000, the Superior Court, San Diego issued an order dismissing the
operational receiver as a part of a settlement of litigation with Imperial Bank
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. This agreement does not
require us to pay any interest unless we default on the settlement agreement and
fail to cure the default. Regardless, we have continued to accrue interest on
this debt until it has been paid and there is no possibility that such interest
will become due and payable. However, in the future, without additional funding
sufficient to satisfy Imperial Bank and our other creditors, as well as
providing for our working capital, there can be no assurances that an
operational receiver may not be reinstated. If an operational receiver is
reinstated, we will not be able to expand our products nor will we have complete
control over sales policies or the allocation of funds.
The penalty for noncompliance of the Settlement Agreement is a stipulated
judgment that allows Imperial Bank to immediately reinstate the operational
receiver and begin liquidation proceedings against us. Our current arrangement
with Imperial Bank reduces are monthly payments to $50,000.
THE DELISTING OF OUR COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET HAS MADE IT
MORE DIFFICULT TO RAISE FINANCING, AND THERE IS LESS LIQUIDITY FOR OUR COMMON
STOCK AS A RESULT.
The Nasdaq SmallCap Market and Nasdaq Marketplace Rules require an issuer
to evidence a minimum of $2,000,000 in net tangible assets, a $35,000,000 market
capitalization or $500,000 in net income in the latest fiscal year or in two of
the last three fiscal years, and a $1.00 per share bid price, respectively. On
October 21, 1999, Nasdaq notified us that we no longer complied with the bid
price and net tangible assets/market capitalization/net income requirements for
continued listing on The Nasdaq SmallCap Market. At a hearing on December 2,
1999, a Nasdaq Listing Qualifications Panel also raised public interest concerns
relating to our financial viability. While the Panel acknowledged that we were
in technical compliance with the bid price and market capitalization
requirements, the Panel was of the opinion that the continued listing of our
common stock on The Nasdaq Stock Market was no longer appropriate. This
conclusion was based on the Panel's concerns regarding our future viability. Our
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, stockholders may find it more difficult to sell our common
stock. This lack of liquidity also may make it more difficult for us to raise
capital in the future.
Trading of our common stock is now being conducted over-the-counter through
the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that generally
define a "penny stock" as any equity security that has a market price of less
than $5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of stockholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
WE HAVE NOT REMAINED CURRENT IN OUR PAYMENT OF FEDERAL AND STATE INCOME AND
OTHER PAYROLL-RELATED TAXES WITHHELD IN OUR PEO BUSINESS.
We have not been able to remain current in our payments of federal and
state tax obligations related to our PEO operations. We are currently working
with the Internal Revenue Service and state agencies to resolve these issues and
establish repayment plans. If we are not able to establish repayment plans that
allow us to continue our operations, we may be forced to cease doing business in
the financial services marketplace.
ITEM 2. PROPERTIES
- --------------------
ITEC owns no real property. We lease approximately 6,000 square feet of
space in a facility located at 17075 Via Del Campo, San Diego, California 92127,
at a monthly lease rate of $6,500. This facility houses corporate management,
marketing, sales, engineering, and support offices. The lease expires in
September 2005. However, ownership of this facility has changed and we are in
discussions with the new owner terms upon which we may move to new facilities
prior to the end of the lease.
We also have month-to-month leases on small branch offices in Troy,
Michigan, Tustin, California, and San Diego, CaliforniaWe have additional one
year leases in Miami, Florida and Phoenix, Arizona, each with two year renewal
options.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody
made a public announcement that they had filed a lawsuit against us and certain
current and past officers and/or directors, alleging violation of federal
securities laws and, in November 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. In January 2003, we entered into a Stipulation of
Settlement with the plaintiffs. We agreed to pay the plaintiffs 5,000,000 shares
of common stock and $200,000 in cash. The Parties have accepted the settlement.
We have issued the shares, and our insurance carrier has paid the $200,000 cash
payment. Pursuant to a hearing in May 2003 the Court provided approval to the
settlement.
On August 22, 2002, we were sued by our former landlord, Carmel Mountain #8
Associates, L.P. or past due rent on its former facilities at 15175 Innovation
Drive, San Diego, CA 92127. The amount related to this obligation was included
as an expense in the year ended June 30, 2003.
ITEC was a party to a lawsuit filed by Symphony Partners, L.P. related to
its acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July 22,
2003, the plaintiffs sought payment of $702 thousand. In June 2003, we entered
into a settlement with the plaintiffs for a cash payment of $274 thousand, which
has been paid.
ITEC is one of dozens of companies sued by The Massachusetts Institute of
Technology, et.al, `related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, we entered into a settlement with the
plaintiffs who have agreed to dismiss their claims against us with prejudice in
exchange for a settlement fee payment of $10,000, which has been paid.
We have been sued in Illinois state court along with AIA/Merriman, our
insurance brokers, by the Arena Football League-2 ("AF2"). Damages payable to
AF2, should they win the suit, could exceed $700,000. We expect to defend our
position and rely on representations of our insurance brokers.
Throughout fiscal 2000, 2001, and 2002, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3.0 million, which has been reduced to $1.8 million during the
2003. These actions are in various stages of litigation, with many resulting in
judgments being entered against us. Several of those who have obtained judgments
have filed judgment liens on our assets. These claims range in value from less
than one thousand dollars to just over one million dollars, with the great
majority being less than twenty thousand dollars.
In connection with ITEC's acquisition of controlling interest of Greenland
Corporation, the following are the outstanding legal matters for Greenland
Corporation:
Greenland, along with Seren Systems ("Seren"), its then current and primary
software developer and supplier for its own ABM terminals, was in the process of
completing development of the check cashing service interface to the Mosaic
Software host system being implemented to support a large network of V.com
terminals. In September 2000, Seren unilaterally halted testing and effectively
shut-down any further check cashing development for the V.com project. The
parties participating in this project may have been financially damaged, related
to the delay in performance by Greenland and Seren. None of the parties have
brought suit against Greenland and/or Seren at this time. There is no assurance,
however, that such suit(s) will not be brought in the future.
On May 23, 2001 Greenland filed a Complaint in San Diego County naming
Michael Armani as the defendant. The Complaint alleges breach of contract by
Michael Armani in connection with two separate stock purchase agreements.
Greenland seeks damages in the amount of $474,595. On August 7, 2001 Greenland
filed a request for Entry of Default against Mr. Armani in the amount of
$474,595 and the court granted entry of default. Subsequently Mr. Armani filed a
motion to set aside the entry of default and on October 26, 2001 the court
granted said motion and the entry of default was set aside. Greenland and Mr.
Armani participated in mediation and as a result entered into a settlement
agreement whereby Mr. Armani agreed to make certain cash payments to Greenland
and the parties entered into mutual release of all claims. Mr. Armani defaulted
in his obligation to make the first cash payment and consequently, Greenland
obtained a judgment against Mr. Armani for $100,000. Greenland is continuing its
efforts to collect on the judgment.
On May 23, 2001 Arthur Kazarian, Trustee for the General Wood Investment
Trust (the "Landlord") filed a Complaint in San Diego County naming Greenland as
a defendant. The Complaint alleges breach of contract pursuant to the terms of
the lease agreement between the Company and the Landlord for the real property
located at 1935 Avenida Del Oro, Oceanside, California and previously occupied
by Greenland. The Complaint seeks damages in the amount of approximately
$500,000. Although Greenland remains liable for the payments remaining for the
term of the lease, the Landlord has a duty to mitigate said damages. Greenland
recorded a lease termination liability of $275,000 during the year ended
December 31, 2001. Greenland entered into a settlement agreement with Arthur
Kazarian, Trustee for the General Wood Investment Trust (the "Landlord") where
by Greenland agreed to pay the sum of $220,000 to the Landlord in installments
payments of $20,000 in May 2002, $50,000 in October 2002 and the remaining
balance in December 2002. In the event Greenland defaults in any or all
scheduled payments, the Landlord is entitled to a stipulated judgment of
approximately $275,000. Greenland was unable to make the scheduled payments and
as a result, on July 8, 2002, the Landlord has entered a judgment lien against
Greenland in the amount of $279,654.
Greenland entered into an agreement with Intellicorp, Inc. ("Intellicorp")
whereby Intellicorp agreed to invest $3,000,000 in exchange for seats on the
board of directors and restricted shares of common stock of Greenland. After
making the initial payment of $500,000, Intellicorp defaulted on the balance.
Greenland sued for recovery of the unpaid $2,500,000. Greenland had issued
46,153,848 shares of common stock for the investment, which were returned to
Greenland and cancelled. A default judgment was entered against defendant
IntelliCorp, IntelliGroup, and Isaac Chang. In June 2003, a judgment was
entered in the Superior Court of the State of California, County of San Diego,
against the defendants in favor of Greenland. The amount of the judgment was
$3,950,640.02 and was comprised of an award of $2,950,640.02 for compensatory
damages and an award of $1,000,000.00 for punitive damages. The Court found, by
clear and convincing evidence, that the Defendants acted maliciously and with
the intent to defraud Greenland when they entered into a private placement
transaction to fund Greenland. The defendant's ability to pay is unknown. The
appeal period has expired and we are beginning the collection process.
Max Farrow, a formal officer of Greenland, filed a Complaint in San Diego
County naming Greenland, Thomas J. Beener, Intelli-Group, Inc., Intelli-Group
LLC and Intelli-Corp, Inc. as defendants. The Complaint alleges breach of
contract in connection with Mr. Farrow's resignation as an officer and director
of the Company in January 2001. Greenland and Mr. Thomas Beener, entered into a
settlement agreement with Max Farrow whereby Mr. Farrow agreed to release Mr.
Beener from all claims, obligations etc., in exchange for the issuance of 8
million restricted shares of Greenland common stock. The good faith settlement
was approved by the court and the agreed upon consideration was delivered to Mr.
Farrow. Greenland entered into a settlement with Farrow whereby Greenland agreed
to a judgment of $125,000. However, the judgment will not be enforced until such
time as efforts to collect against IntelliCorp et al, have been exhausted. In
the event funds are collected from IntelliCorp. Mr. Farrow will receive the
first $125,000 plus 50% of the next $200,000 collected. Greenland will retain
all amounts collected thereafter.
Fund Recovery, a temporary staffing service filed a complaint against
Greenland alleging breach of contract. A summary judgment motion is pending.
Greenland recorded the liability amount of $14,000 in the consolidated financial
statements.
John Ellis has filed a demand for arbitration in San Diego County against
Greenland seeking damages of approximately $70,000 for an alleged breach of
contract action. Greenland believes it has valid defenses to the allegations.
Mr. Ellis appears to have abandoned this action in arbitration and has elected
to pursue a civil suit. However, arbitration action is proceeding .In addition,
the parties are attempting mediation to avoid the cost and time of an
arbitration proceeding.
John Ellis has filed an action in San Diego County against Greenland seeking
damages of approximately $60,000 for an alleged breach of contract action.
Greenland believes it has valid defenses to the allegations. This amount was
recorded as a liability in the consolidated financial statements. Greenland has
filed a motion to quash service of the civil action and to compel arbitration.
The court has stayed the proceedings pending the progress and/or outcome of
arbitration.
NKS Enterprises, Inc. commenced a legal action against Greenland in San
Diego Superior Court in Vista California seeking damages in connection with the
purchase and operation of a MaxCash ABM. The case was settled in December 2002.
The maximum amount to be paid under the settlement is $100,000. In exchange,
Greenland will receive the MaxCash ABM sold to NKS Enterprises. This amount was
recorded as a liability in the consolidated financial statements.
In connection with the Company's acquisition of controlling interest of
Quik Pix, Inc., we are unaware of any pending litigation.
From time to time, Greenland and QPI may be involved in litigation relating
to claims arising out of their operations in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
None.
PART II
========
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
- ---------------------------------------------------
AND RELATED SHAREHOLDER MATTERS
----------------------------------
Our common stock is traded in the over-the-counter market, and quoted on
the NASD Electronic Bulletin Board under the symbol: "IMTO".
The following table sets forth the high and low bid quotations of ITEC
common stock for the periods indicated as reported by the NASD Electronic
Bulletin Board. Prices shown in the table represent inter-dealer quotations,
without adjustment for retail markup, markdown, or commission, and do not
necessarily represent actual transactions.
High Low
------ -----
Year ended June 30, 2001*
First quarter. . . . $18.40 $1.00
Second quarter . . . 6.00 1.00
Third quarter. . . . 7.60 1.00
Fourth quarter . . . 2.60 1.20
Year ended June 30, 2002
First quarter. . . . $ 0.07 $0.03
Second quarter . . . 0.02 0.05
Third quarter. . . . 0.05 0.01
Fourth quarter . . . 0.04 0.01
Year ended June 30, 2003
First quarter. . . . $ 0.05 $0.01
Second quarter . . . 0.04 0.01
Third quarter. . . . 0.02 0.01
Fourth quarter . . . 0.02 0.01
* As adjusted for a 1-for-20 reverse split in August 2002
The number of holders of record of our common stock, $.005 par value,
including banks, brokers, and nominees, reported by our transfer agent, American
Stock Transfer, was approximately 458 at June 30, 2003.
DIVIDENDS
We have never declared nor paid any cash dividends on our common stock. We
currently intend to retain earnings, if any, after any payment of dividends on
our 5% Convertible Preferred Stock, for use in our business and therefore, do
not anticipate paying any cash dividends on our common stock.
Holders of the 5% Convertible Preferred Stock are entitled to receive, when
and as declared by the Board of Directors, but only out of amounts legally
available for the payment thereof, cumulative cash dividends at the annual rate
of $50.00 per share, payable semi-annually, commencing on October 15, 1986. ITEC
has never declared nor paid any cash dividends on the 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 2003 were $381 thousand.
We do not anticipate paying dividends on the 5% Convertible Preferred Stock
in the near future. However, the 5% Convertible Preferred Stock is convertible,
at any time, into shares of ITEC 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, we shall reserve, and keep reserved, out
of our authorized but un-issued shares of common stock, sufficient shares to
effect the conversion of all shares of the 5% convertible preferred stock.
On August 9, 2002, pursuant to shareholder authorization, we implemented a
1-for-20 reverse split of our common stock. All share and per share data in this
Form 10-K have been retroactively restated to reflect this reverse stock split.
ITEM 6.SELECTED FINANCIAL DATA
- ---------------------------------
The consolidated statement of operations data with respect to the five
years ended June 30, 2003, and the consolidated balance sheet data at June 30
set forth below are derived from our consolidated financial statements included
in Item 8 below. The consolidated financial statements for the years ended June
30, 1999, 2000, and 2001 were audited by Boros & Farrington APC, independent
accountants; the consolidated financial statements for the year ended June 30,
2002 were audited by Stonefield Josephson, Inc. The financial statements for the
year ended June 30, 2003 were audited by our current independent accountants,
Pohl, McNabola, Berg & Company, LLP ("PMB"). The selected consolidated financial
data set forth (in thousands, except per share data) should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in Item 7 below, and the our consolidated
financial statements and the notes thereto contained in Item 8 below. Historical
results are not necessarily indicative of future results of operations.
Statement of Operations Data:
In thousands (except per share data)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
NET REVENUES
Sales of products . . . . . . . . . . . . . . . $ 924 $ 3,574 $ 2,897 $ 1,634 $ 16,417
Software sales, licenses, and royalties . . . . 367 580 555 788 730
PEO services. . . . . . . . . . . . . . . . . . 2,899 3,254 - - -
--------- --------- --------- --------- ---------
Net total revenues. . . . . . . . . . . . . . . 4,190 7,408 3,452 2,422 17,147
COSTS AND EXPENSES
Cost of products sold . . . . . . . . . . . . . 396 2,868 2,742 5,197 18,015
Cost of software sales, licenses and royalties. 90 99 - - -
Cost of PEO services. . . . . . . . . . . . . . 1,813 2,389 - - -
Selling, general, and administrative. . . . . . 7,586 12,442 8,720 7,780 13,707
Research and development. . . . . . . . . . . . - - 250 1,929 2,033
Special charges . . . . . . . . . . . . . . . . - - - - 5,181
--------- --------- --------- --------- ---------
9,885 17,778 11,712 14,906 38,936
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . (5,695) (10,390) (8,260) (12,484) (21,789)
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (6,855 $(13,688) $ (9,888) $(14,198) $(25,129)
LOSS PER COMMON SHARE
Basic and diluted . . . . . . . . . . . . . . . $ (0.07) $ (1.12) $ (1.51) $ (4.05) $ (37.60)
Balance Sheet Data:
In thousands
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Cash and cash equivalents . . . . . . . . . . . $ 1,223 $ 43 $ 35 $ 291 $ 75
Working Capital . . . . . . . . . . . . . . . . (28,446) (20,751) (16,920) (14,532) (16,519)
Total assets. . . . . . . . . . . . . . . . . . 7,595 1,180 1,212 1,683 7,250
Long-term obligations . . . . . . . . . . . . . 1,364 - - - -
Preferred stock . . . . . . . . . . . . . . . . 420 420 420 420 6,875
Total shareholders' deficit . . . . . . . . . . (24,901) (20,427) (16,110) (13,854) (12,432)
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
----------------------------
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Annual Report on Form 10-K. The statements contained in this Report on Form
10-K that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
regarding our expectations, hopes, intentions or strategies regarding the
future. Forward-looking statements include statements regarding: future
product or product development; future research and development spending and our
product development strategies, and are generally identifiable by the use of the
words "may", "should", "expect", "anticipate", "estimates", "believe", "intend",
or "project" or the negative thereof or other variations thereon or comparable
terminology. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance,
or achievements (or industry results, performance or achievements) expressed or
implied by these forward-looking statements to be materially different from
those predicted. The factors that could affect our actual results include, but
are not limited to, the following: general economic and business conditions,
both nationally and in the regions in which we operate; competition; changes in
business strategy or development plans; our inability to retain key employees;
our inability to obtain sufficient financing to continue to expand operations;
and changes in demand for products by our customers.
OVERVIEW
- --------
We provide a variety of financial services to small and medium-size
businesses. These services allow our customers to outsource many human resources
tasks, including payroll processing, workers' compensation insurance, health
insurance, employee benefits, 401k investment services, personal financial
management, and income tax consultation. In November 2001, we began to provide
these services to relieve some of the negative impact they have on the business
operations of our existing and potential customers. To this end, through
strategic acquisitions, we became a professional employer organization ("PEO").
We provide financial services principally through our wholly-owned
SourceOne Group, Inc. ("SOG") subsidiary, which includes several operating
units, including ProSportsHR , MedicalHR , and CallCenterHR . These units
provide a broad range of financial services, including: benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, and (in the case of MedicalHR
and CallCenterHR), temporary staffing services, to small and medium-sized
businesses.
In January 2003, we completed the acquisition of controlling interest
(approximately 85%) in the shares of Greenland Corporation. Greenland shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC. Greenland is
a financial services company, whose wholly-owned ExpertHR subsidiary provides
the same services as SOG. Greenland's wholly-owned Check Central, Inc.
subsidiary Greenland's Check Central subsidiary is an information technology
company that has developed the Check Central Solutions' transaction processing
system software and related MAXcash Automated Banking Machine (ABM kiosk
designed to provide self-service check cashing and ATM-banking functionality.
In January 2003, we completed the acquisition of a controlling interest
(85%) in the shares of Quik Pix, Inc. ("QPI"). QPI shares are traded on the
National Quotation Bureau Pink Sheets under the symbol QPIX. QPI is a visual
marketing support firm located in Buena Park, California. Its principal service
is to provide photographic and digital images mounted for customer displays in
tradeshow and other displays .Its principal product, PhotoMotion is a patented
color medium of multi-image transparencies. The process uses existing originals
to create the illusion of movement, and allows for three to five distinct images
to be displayed with an existing lightbox.
In prior years, we were principally involved in the development and
distribution of imaging products. Our core technologies are related to the
design and development of software products that improve the accuracy of color
reproduction. Our ColorBlind software provides color management to improve the
accuracy of color reproduction - especially as it relates to matching color
between different devices in a network, such as monitors and printers. These
products are supported and distributed by QPI. Additionally, we market our
ColorBlind software products on the Internet through our color.com website.
As of the end of fiscal 2003, our business continues to experience
operational and liquidity challenges. Accordingly, year-to-year financial
comparisons may be of limited usefulness now and for the next several periods
due to anticipated changes in the Company's business as these changes relate to
increased sales of financial services, potential acquisitions of new businesses,
changes in product lines, and the potential for discontinuing certain components
of the business.
Our current strategy is: (1) to expand its financial services business; (2)
to commercialize its own technology, which is embodied in its ColorBlind Color
Management software, (3) to market Photomotion images through sales and
licensing to distributors in international markets; and (4) to operate and
improve our e-commerce initiatives in order to sell our products and services.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
our June 30, 2003 financial statements includes an explanatory paragraph
indicating there is a substantial doubt about our ability to continue as a going
concern, due primarily to the decreases in our working capital and net worth. We
plan to overcome the circumstances that impact our ability to remain a going
concern through a combination of achieving profitability, raising additional
debt and equity financing, and renegotiating existing obligations.
There can be no assurance, however, that we 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 our capital
requirements. Any additional equity or convertible debt financings could result
in substantial dilution to our shareholders. If adequate funds are not
available, we may be required to delay, reduce, or eliminate some or all of our
planned activities, including any potential mergers or acquisitions. Our
inability to fund our capital requirements would have a material adverse effect
on the Company. Also see "Liquidity and Capital Resources." and "Item 1.
Business - Risks and Uncertainties - Future Capital Needs."
RESTRUCTURING AND NEW BUSINESS UNITS
In July 2001, we temporarily suspended our printer controller development
and manufacturing operations in favor of selling products from other companies
to its customers. We continue to sell proprietary imaging products, including
our ColorBlind suite of color management software.
During the year-ended June 30, 2003, we suspended our sales efforts related
to the resale of products from other manufacturers, including printers, copiers,
and other digital imaging products. We may begin selling such products again, in
the future, principally to our financial services customer base.
ACQUISITION AND SALE OF BUSINESS UNITS
In December 2000, we acquired all of the shares of EduAdvantage.com, Inc.,
an internet sales organization that sells computer hardware and software
products to educational institutions and other customers via its websites:
www.eduadvantage.com and www.soft4u.com. During fiscal 2001, we began
integrating EduAdvantage operations. However, these operations were not
profitable. At present, and until we can determine our comprehensive strategy
related to internet marketing, we have suspended these operations.
In October 2001, we acquired certain assets, for stock, related to our
office products and services business activities, representing $250,000 of
inventories, fixed assets, and accounts receivable. These assets have been
written off.
In November 2001, we acquired SOG and we operate it as a wholly-owned
subsidiary. SOG provides financial services, including payroll administration,
employer and employee benefit plans, health and workers' compensation insurance
programs, personnel records management, employer liability management, and other
services to small and medium-sized businesses. SOG also includes several
operating units, including MedicalHR, CallCenterHR, and ProSportsHR.
In March 2002, we acquired all of the outstanding shares of EnStructure,
Inc. ("EnStructure), a PEO company, for restricted ITEC common stock. The terms
of the acquisition were defined in the acquisition agreement, which was
exhibited as part of our Form 8-K, dated March 28, 2002. EnStructure has no
operations at this time.
In May 2002, we entered into an agreement to acquire Dream Canvas, Inc.,
("DCT"), a Japanese corporation, that developed machines used for the automated
printing of custom stickers, popular in the Japanese consumer market. We
completed the acquisition of DCT in October 2002 and paid the sum of $40,000
with the issuance of 100,000 shares of ITEC common stock. In December 2002, we
sold DCT to Baseline Worldwide Limited for $75,000 in cash, and reported the
transaction on Form 8-K, filed on December 19, 2002.
In July 2002, we entered into an agreement to acquire controlling interest
in Quik Pix, Inc. ("QPI"). QPI shares are traded on the National Quotation
Bureau Pink Sheets under the symbol QPIX. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of QPI. The terms of
the acquisitions were disclosed on Form 8-K filed January 21, 2003.
In August 2002, we entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of Greenland. The
terms of the acquisitions were disclosed on Form 8-K filed January 21, 2003
In March 2003, we purchased certain PEO contracts from Staff Pro Leasing 2
and Staff Pro Leasing, Inc. for $269,000. The purchase price was paid via an
initial cash payment of $45,000 and the remainder of the purchase price is in
the form of a promissory note to be paid over 24 months. The value attributed to
the purchased PEO contracts is included as a component of intangible assets in
the accompanying consolidated balance sheet and is being amortized over the
expected life of the contracts of 5 years.
In April 2003, we formed a wholly-owned subsidiary of Greenland
Corporation, ExpertHR Oklahoma. Subsequent to its formation, the new Company
purchased a group of PEO clients for $921,000 of convertible preferred stock of
Greenland Corporation. ExpertHR of Oklahoma, Inc., at that time, was a newly
formed corporation whose only asset was the PEO contracts purchased by
Greenland. The value attributed to the purchased PEO contracts of $921,000 is
included as a component of intangible assets in the accompanying consolidated
balance sheet and is being amortized over the expected life of the contracts of
5 years.
SPECIAL CHARGES AND GAINS
During the year ended June 30, 2003, we had a gain on extinguishment of
debt of approximately $2.4 million. This gain resulted primarily from the write
off of stale accounts payable as discussed below, as well as a gain on a
settlement of a long-term note payable of $702,000, which was settled for
$274,000 in cash resulting in a gain of $428,000, which is included in the $2.4
million. With respect to the write-off of accounts payable, we reviewed our
accounts payable and determined that $2.0 million was associated with unsecured
creditors. ITEC, based upon an opinion provided by independent legal counsel,
has been released as the obligator of these liabilities. Accordingly, management
has elected to adjust its accounts payable and to classify such adjustments as
extinguishment of debt.
RESULTS OF OPERATIONS
- -----------------------
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
We believe the following accounting policies are critical and/or require
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue and direct cost recognition - We account for our revenues in accordance
with EITF 99-19. Our PEO segment revenues are derived from our gross billings,
which are based on (i) the payroll cost of our worksite employees; and (ii) a
markup computed as a percentage of the payroll cost. The gross billings are
invoiced concurrently with each periodic payroll of our worksite employees.
Revenues are recognized ratably over the payroll period as worksite employees
perform their service at the client worksite. Revenues that have been recognized
but not invoiced are included in unbilled accounts receivable on our
Consolidated Balance Sheets.
Previously, we included both components of our gross PEO billings in revenues
(gross method) and related costs due primarily to the assumption of significant
contractual rights and obligations associated with being an employer, including
the obligation for the payment of the payroll costs of our worksite employees.
We assume our employer obligations regardless of whether we collect our gross
billings. After discussions with the Securities and Exchange Commission staff,
we have changed our presentation of revenues and related costs from the gross
method to an approach that presents our revenues net of worksite employee
payroll costs (net method) primarily because we are not generally responsible
for the output and quality of work performed by the worksite employees.
In determining the pricing of the markup component of the gross billings, we
take into consideration estimates of the costs directly associated with our
worksite employees, including payroll taxes, benefits and workers' compensation
costs, plus an acceptable gross profit margin. As a result, our operating
results are significantly impacted by our ability to accurately estimate,
control and manage our direct costs relative to the revenues derived from the
markup component of our gross billings.
Consistent with our revenue recognition policy, our direct costs do not include
the payroll cost of our worksite employees. Our direct costs associated with our
PEO revenue generating activities are comprised of all other costs related to
our worksite employees, such as the employer portion of payroll-related taxes,
employee benefit plan premiums and workers' compensation insurance premiums.
NET REVENUES
Revenues were $4.2 million, $7.4 million, and $3.5 million, for the fiscal
years ended June 30, 2003, 2002, and 2001, respectively. The decrease in total
revenues in fiscal 2003 as compared with fiscal 2002 was due to a 69% decrease
in product sales. During fiscal 2003, we concentrated primarily in building our
financial services business segment. The increase in revenues in fiscal 2002
compared with fiscal 2001 was due primarily to revenues associated with acquired
PEO operations.
Financial Services
- -------------------
We recognize our revenues associated with our PEO business pursuant to EITF
99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." Our
revenues are reported net of worksite employee payroll cost (net method). Our
revenues from this business segment are affected by three primary sources - new
client sales, client retention, and changes in existing clients through worksite
employee new hires and layoffs.
PEO revenues were $2.9 million for the year ended June 30, 2003. PEO
revenues were $3.3 million for the year ended June 30, 2002. The decrease of
$355 thousand (11%) was due to changes in the customer structure of SOG.
Throughout fiscal 2003, we lost several customers due to changes in rates for
services, particularly workers' compensation insurance. Additionally, we elected
to terminate certain customers due to profitability concerns. We entered this
business segment through acquisitions in November 2001. Consequently, there were
no reported PEO revenues in the prior year. (Also see "Risk Factors" and the
"Notes to the Consolidated Financial Statements" related to our PEO business.)
Imaging Products
- -----------------
Sales of imaging products, consisting primarily of QPI photographic and
digital reproduction services, ColorBlind software sales, and Photomotion
Images, were $1.3 million, $4.2, and $3.5 million for the fiscal years ended
June 30, 2003, 2002, and 2001, respectively. There were no sales related to QPI
operations prior to its acquisition on January 14, 2003. The decrease of $2.1
million (69%) in product sales was due, primarily, to our suspension of sales of
office-related products from other manufacturers and our concentration on
providing financial services instead of the sale of imaging products. Prior to
the year ended June 30, 2003, we were involved in the sale of a variety of
imaging hardware and software products, many from other manufacturers. These
products included printers, copiers, scanners, and other digital imaging
products, which we no longer sell. Our current product lines are based upon our
own technologies. Our persistent lack of sufficient working capital has had, and
may continue to have, a negative adverse effect on imaging products sales.
The increase in product sales from fiscal 2002 as compared to fiscal 2001 was
due to increased sales of imaging products such as copiers and printers.
We had $50,000 of revenues from license fees and royalties in the year ended
June 30, 2003. License fees and royalties, were $580 thousand and $555 thousand
for the fiscal years ended June 30, 2002 and 2001, respectively. Since we
suspended our controller technology development efforts, license fees and
royalties have been associated with our ColorBlind software technology.
COST OF PRODUCTS SOLD
Financial Services
- -------------------
Our primary costs related to financial (PEO) services include payroll
taxes, benefits, and workers' compensation insurance. The costs of PEO services
were $1.8 million (63% of PEO revenues), for the year ended June 30, 2003; and
$2.4 million (73% of PEO revenues) for the year ended June 30, 2002. The 10%
increase in profit margin is primarily due to the securing of worker's
compensation policy coverages, which generated a greater profit margin than
expected in our SOG subsidiary. We began providing PEO services pursuant to
acquisitions in the prior fiscal year. Accordingly, there are no comparative
results for the prior year periods. (Also see "Risk Factors" related to our PEO
business.)
Imaging Products
- -----------------
Cost of products sold were $486 thousand (38% of product sales), $2.9
million (71% of product sales), and $2.7 million (95% of product sales), for the
fiscal years ended June 30, 2003, 2002, and 2001, respectively. The increase in
profitability over the three-year period was due primarily to changes in the mix
of products we sell, which had the effect of increasing overall profit margins.
We have been able to maintain reasonable profit margins on sales of products.
Software products, in particular, provide significantly higher profit margins
than hardware products such as printers, plotters, and copiers.
There were no costs associated with licensing and royalties in the year
ended June 30, 2003. Costs were $99,000 (17% of licensing and royalty revenues)
in the year ended June 30, 2002. There were no costs in the prior fiscal year.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $7.6 million (181% of
total revenues), $12.4 million (49% of total revenues), and $8.7 million (253%
of total revenues), for the fiscal years ended June 30, 2003, 2002, and 2001,
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, consulting, advertising, and other marketing related expenses.
The 39% decrease in selling, general and administrative expenses in fiscal
2003 as compared to fiscal 2002 was due, primarily, reductions in employees and
facilities, which was made possible by changing our main business focus to
providing financial services instead of imaging products sales and distribution;
and to smaller fees and expenses related to financing activities.
During the year ended June 30, 2002, we took a charge of $1.9 million
related to the write off of goodwill associated with our acquisition of
EduAdvantage.com in December 2000 and SOG in November 2001. While overall
selling, general and administrative expenses increased $3.7 million (43%) during
fiscal 2002 as compared with fiscal 2001, there was a decrease in these expenses
as a percentage of revenues due primarily to the additional revenues associated
with our PEO business.
RESEARCH AND DEVELOPMENT
There were no research and development expenses for the years ended June
30, 2003 and 2002. There were research and development expenses of $250 thousand
for the year ended June 30, 2001. In fiscal 2001 the Company substantially
reduced its research and development activities and, in July 2001, suspended its
printer controller development and manufacturing operations. Current research
and development activities are associated with our ColorBlind software product
line.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations primarily through cash
generated from operations, debt financing, and from the sale of equity
securities.
In December 2000, the Company entered into a Convertible Note Purchase
Agreement for $850,000, bearing an annual interest rate of 8%, due December
2003. The Note is convertible into the Company's common stock. As of October 15,
2003, $675 thousand had been converted into common stock.
In July 2001, we entered into a Convertible Note Purchase Agreement for
$1,000,000, bearing an annual interest rate of 8%, due July 2004. The Note is
convertible into ITEC common stock. As of October 15, 2003, there were no
conversions.
In September 2001, we entered into a Convertible Note Purchase Agreement
for $300,000, bearing an interest rate of 8%, due September 2004. The Note is
convertible into ITEC common stock. As of October 15, 2003, there were no
conversions.
In November 2001, we entered into a Convertible Note Purchase Agreement for
$200,000, bearing an interest rate of 8% due November 7, 2004. The Note is
convertible into ITEC common stock. As of October 15, 2003, there were no
conversions.
In January 2002, we entered into a Convertible Note Purchase Agreement for
$500,000, bearing an interest rate of 8% due January 22, 2002. The Note is
convertible into ITEC common stock. As of October 15, 2003, there were no
conversions.
We continue to pursue additional financings to fund our operations and
growth. There can be no assurance, however, that we 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 our capital
requirements. Any additional equity or convertible debt financings could result
in substantial dilution to our shareholders. If adequate funds are not
available, we may be required to delay, reduce or eliminate some or all of our
planned activities. Our inability to fund our capital requirements would have a
material adverse effect on the Company. (Also see "Item 1. Business--Risks and
Uncertainties--Future Capital Needs.")
As of June 30, 2003, we had negative working capital of approximately $28.4
million, an increase of $7.6 million from June 30, 2002. The increase is
primarily due to the effect of operating losses and the difficulty in obtaining
sufficient long-term debt and equity financing.
Net cash provided by operating activities was $1,1 million compared to net
cash used for operating activities of $2.5 million in fiscal 2002 and $3.5
million in fiscal 2001. The changes are due to gains realized for the settlement
of liabilities.
Net cash used for investing activities was $101 thousand in fiscal 2003
compared to $197 thousand in fiscal 2002 and $171 thousand in fiscal 2001. The
decrease of $96 thousand (49%) was due primarily to the absence of cash
acquired in our 2002 acquisition of SOG.
We have no material commitments for capital expenditures. Our 5%
convertible preferred stock, which ranks prior to our 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, 2003, was
approximately $381 thousand.
Our capital requirements depend on numerous factors, including market
acceptance of our services and products, the resources we devote to marketing
and selling our services and products, and other factors. We anticipate that our
capital requirements will increase in future periods as we reduce our debt and
increase our sales and marketing efforts. The report of our independent auditors
accompanying our June 30, 2003 financial statements includes an explanatory
paragraph indicating there is a substantial doubt about our ability to continue
as a going concern, due primarily to the decreases in our working capital and
net worth.
We plan to overcome the circumstances that impact our ability to remain a
going concern through a combination of increased revenues and decreased costs,
with interim cash flow deficiencies being addressed through additional debt
and/or equity financing.
Subsequent to June 30, 2003, we issued an additional 109,963,339 shares of
our common stock. Of this amount, 2,750,000 shares were issued due to exercise
of warrants, 6,480,000 shares were used to pay consultants, and 100,733,339
shares were used to repay indebtedness; including convertible notes payable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Imaging Technologies
Corporation and subsidiaries were prepared by management, which is responsible
for their integrity and objectivity. The statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and, as such, include amounts based on judgments of management.
Management is further responsible for maintaining internal controls
designed to provide reasonable assurance that the books and records reflect the
transactions of the companies and that established policies and procedures are
carefully followed. From a shareholder's point of view, perhaps the most
important feature in internal control is that it is continually reviewed for
effectiveness and is augmented by written policies and guidelines, the careful
selection and training of qualified personnel, and a strong program of internal
audit.
Pohl, NcNabola, Berg and Company ("PMB"), an independent auditing firm, is
engaged to audit the consolidated financial statements of Imaging Technologies
Corporation and subsidiaries and issue reports thereon. The audit is conducted
in accordance with auditing standards generally accepted in the United States of
America that comprehend the consideration of internal control and tests of
transactions to the extent necessary to form an independent opinion on the
financial statements prepared by management.
The Board of Directors, through the Audit Committee (composed entirely of
independent Directors), is responsible for assuring that management fulfills its
responsibilities in the preparation of the consolidated financial statements.
The Audit Committee annually recommends to the Board of Directors the selection
of the independent auditors and submits the selection for ratification by
shareholders at the Company's annual meeting. In addition, the Audit Committee
reviews the scope of the audits and the accounting principles being applied in
financial reporting. The independent auditors, representatives of management,
and the internal auditors meet regularly (separately and jointly) with the Audit
Committee to review the activities of each, to ensure that each is properly
discharging its responsibilities, and to assess the effectiveness of internal
control. It is management's conclusion that internal control at June 30, 2003
provides reasonable assurance that the books and records reflect the
transactions of the companies and that established policies and procedures are
complied with. To reinforce complete independence, PMB has full and free access
to meet with the Audit Committee, without management representatives present, to
discuss the results of the audit, the adequacy of internal control, and the
quality of financial reporting.
By:/s/ BRIAN BONAR
-----------------
Brian Bonar
Chairman of the Board, President, and Chief Executive Officer
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IMAGING TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 2003, 2002, AND 2001
CONTENTS
Independent Auditors' Report -June 30, 2003. . . . . 25
Independent Auditors' Report -June 30, 2002. . . . . 26
Independent Auditors' Report -June 30, 2001. . . . . 27
Consolidated Balance Sheets. . . . . . . . . . . . 28
Consolidated Statements of Operations. . . . . . . 29
Consolidated Statement of Shareholders' Deficiency 30
Consolidated Statements of Cash Flows. . . . . . . 31
Notes to Consolidated Financial Statements . . . . 33
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of
Imaging Technologies Corporation
We have audited the accompanying consolidated balance sheet of Imaging
Technologies Corporation and Subsidiaries as of June 30, 2003 and the related
consolidated statements of operations, shareholders' deficiency and cash flows
for the year then ended. These financials statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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
audit provides 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 Subsidiaries as of June 30, 2003 and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with auditing standards generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the accompanying consolidated financial statements, for the year ended June 30,
2003 the Company experienced a net loss of $6,855,000 and as of June 30, 2003,
the Company had a negative working capital deficiency of $28,446,000 and had a
negative shareholders' deficiency of $24,901,000. In addition, the Company is
in default on certain note payable obligations and is being sued by numerous
trade creditors for nonpayment of amounts due. The Company is also deficient in
its payments relating to payroll tax liabilities. These conditions raise
substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also discussed in Note 1. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ POHL, McNABOLA, BERG & COMPANY, LLP
POHL, McNABOLA, BERG & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
San Francisco, California
October 17, 2003
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of
Imaging Technologies Corporation
We have audited the accompanying consolidated balance sheet of Imaging
Technologies Corporation and Subsidiaries as of June 30, 2002 and the related
consolidated statements of operations, shareholders' deficiency and cash flows
for the year then ended. These financials statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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
audit provides 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 Subsidiaries as of June 30, 2002 and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with auditing standards generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the accompanying consolidated financial statements, for the year ended June 30,
2002, the Company experienced a net loss of $13,688,000 and as of June 30, 2002,
the Company had a negative working capital deficiency of $20,751,000 and had a
negative shareholders' deficiency of $20,427,000. In addition, the Company is
in default on certain note payable obligations and is being sued by numerous
trade creditors for nonpayment of amounts due. The Company is also deficient in
its filings and its payments relating to payroll tax liabilities. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plan in regard to these matters is also discussed in Note
1. These consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ STONEFIELD JOSEPHSON, INC.
STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Irvine, California
November 7, 2002
INDEPENDENT AUDITORS' REPORT
----------------------------
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, 2001 and the related
consolidated statements of operations, shareholders' deficiency, and cash flows
for each of the two years in the period ended June 30, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated
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, 2001, and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements the Company has 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 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BOROS & FARRINGTON APC
BOROS & FARRINGTON APC
San Diego, California
October 10, 2001
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30,
-----------------
ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 2002
----------------- ----------------
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,223 $ 43
Accounts receivable, net of allowance of $725 and $280. . . . . . . . . . . . . . . 507 629
Inventory, net of obsolescence reserve of $293 and $275 . . . . . . . . . . . . . . 15 151
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . 20 33
----------------- ----------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,765 856
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,822 -
Patents, net of accumulated amortization of $60. . . . . . . . . . . . . . . . . . . . . 1,558 -
PEO contracts, net of accumulated amortization of $49. . . . . . . . . . . . . . . . . . 1,127 -
Property and equipment, net of accumulated depreciation
of $2,607 and $849 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 212
Worker's compensation deposit and other assets . . . . . . . . . . . . . . . . . . . . . 173 112
----------------- ----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,595 $ 1,180
================= ================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Cash overdraft. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87 $ -
Borrowings under bank notes payable . . . . . . . . . . . . . . . . . . . . . . . . 3,170 3,295
Notes payable, current portion (including related party
note of $1,500). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,097 2,796
Convertible debentures, net of discounts of $473 and $1,302 . . . . . . . . . . . . 1,427 803
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,647 7,343
Obligation under capital lease. . . . . . . . . . . . . . . . . . . . . . . . . . . 405 -
PEO payroll taxes and other payroll deductions. . . . . . . . . . . . . . . . . . . 6,511 690
PEO accrued worksite employee . . . . . . . . . . . . . . . . . . . . . . . . . . . 752 644
Advances from related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 280
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,835 5,756
----------------- ----------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 30,211 21,607
----------------- ----------------
Long-term liabilities:
Long-term capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 -
Long term convertible debentures, less discounts of $245. . . . . . . . . . . . . . 430 -
Long-term notes payable (including related party note of $250). . . . . . . . . . . 906 -
----------------- ----------------
Total long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,364 -
----------------- ----------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,575 21,607
----------------- ----------------
Preferred stock - minority interest in subsidiary. . . . . . . . . . . . . . . . . . . . 921 -
Commitments and contingencies (Note 12). . . . . . . . . . . . . . . . . . . . . . . . . - -
Shareholders' deficiency
Series A convertible, redeemable preferred stock, $1,000
par value, 7,500 shares authorized, 420.5 shares issued
and outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 420
Common stock, $0.005 par value, 500,000,000 shares
authorized; 181,232,063 and 21,929,365 shares
issued and outstanding, respectively. . . . . . . . . . . . . . . . . . . . . 906 110
Common stock warrants and options . . . . . . . . . . . . . . . . . . . . . . . . . 475 475
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,077 79,492
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107,779) (100,924)
----------------- ----------------
Total shareholders' deficiency . . . . . . . . . . . . . . . . . . . . . . . . (24,901) (20,427)
----------------- ----------------
Total liabilities and shareholders' deficiency. . . . . . . . . . . . . . . . . . . . . $ 7,595 $ 1,180
================= ================
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(In thousands, except per share amounts)
FOR THE YEARS ENDED JUNE 30,
2003
------------------------------
Revenues
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 924
Software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . . . . . 367
PEO services (gross billings of $10,946, $21,100, and
zero, respectively; less worksite employee payroll costs of
$8,029, $17,526, and zero, respectively). . . . . . . . . . . . . . . . . . . . . 2,899
------------------------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,190
------------------------------
Costs of revenues
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
Cost of software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . 90
Cost of PEO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,813
------------------------------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,299
------------------------------
Operating expenses
Selling, general, and administrative. . . . . . . . . . . . . . . . . . . . . . . . 7,586
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
------------------------------
7,586
------------------------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,695)
------------------------------
Other income (expense):
Interest and finance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . (3,530)
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,370
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
------------------------------
(1,160)
------------------------------
Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (6,855)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,855)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21)
------------------------------
Net loss attributed to common shareholders . . . . . . . . . . . . . . . . . . . . . . . $ (6,876)
==============================
Loss per common shares
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.07)
==============================
Weighted average common shares -
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,316
==============================
The accompanying notes are an integral part of these consolidated financial statements.
(In thousands, except per share amounts)
2002 2001
--------------- ---------------
Revenues
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,574 $ 2,897
Software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . . . . . 580 555
PEO services (gross billings of $10,946, $21,100, and
zero, respectively; less worksite employee payroll costs of
$8,029, $17,526, and zero, respectively). . . . . . . . . . . . . . . . . . . . . 3,254 -
--------------- ---------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,408 3,452
--------------- ---------------
Costs of revenues
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,868 2,742
Cost of software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . 99 -
Cost of PEO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,389 -
--------------- ---------------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,356 2,742
--------------- ---------------
Operating expenses
Selling, general, and administrative. . . . . . . . . . . . . . . . . . . . . . . . 12,442 8,720
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 250
--------------- ---------------
12,442 8,970
--------------- ---------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,390) (8,260)
--------------- ---------------
Other income (expense):
Interest and finance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . (3,298) (1,628)
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- ---------------
(3,298) (1,628)
--------------- ---------------
Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (13,688) (9,888)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- ---------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,688) (9,888)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21) (21)
--------------- ---------------
Net loss attributed to common shareholders . . . . . . . . . . . . . . . . . . . . . . . $ (13,709) $ (9,909)
=============== ===============
Loss per common shares
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.12) $ (1.51)
=============== ===============
Weighted average common shares -
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,201 6,574
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
(in thousands, except share data)
SERIES A SERIES D&E COMMON
PREFERRED PREFERRED STOCK COMMON
STOCK STOCK WARRANTS STOCK
------------ -------------- ------------ -----------
BALANCE, 6/30/2000 . . . . . . . . . . . . . . . . . 420 - - 26
Issuance of common
Cash (2,185,910). . . . . . . . . . . . . . . . . - - - 11
Acquisition (187,500) . . . . . . . . . . . . . . - - - 1
Software (60,000) . . . . . . . . . . . . . . . . - - - -
Services (219,333). . . . . . . . . . . . . . . . - - - 1
Conversion of liabilities (913,757) . . . . . . . - - - 5
Issuance of warrants . . . . . . . . . . . . . . . . - - 508 -
Exercise of warrants . . . . . . . . . . . . . . . . - - (33) -
Beneficial conversion on notes . . . . . . . . . . . - - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - -
------------ -------------- ------------ -----------
BALANCE, 6/30/2001 . . . . . . . . . . . . . . . . . 420 - 475 44
Issuance of common
Cash - exercise of options and warrants
(6,754,739) - - - 34
Business acquisition (500,000). . . . . . . . . . - - - 1
Asset purchase (250,000). . . . . . . . . . . . . - - - 1
Services (3,179,978). . . . . . . . . . . . . . . - - - 16
Conversion of liabilities (2,375,706) . . . . . . - - - 12
Exercise of warrants for services (323,889) . . . - - - 2
Re-priced warrants & Options . . . . . . . . . . . . - - - -
Beneficial conversion on notes . . . . . . . . . . . - - - -
Value of warrants issued with notes. . . . . . . . . - - - -
Value of warrants issued for services. . . . . . . . - - - -
Value of options granted below fair value. . . . . . - - - -
Write-off of shareholder loan. . . . . . . . . . . . - - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - -
------------ -------------- ------------ -----------
BALANCE, 6/30/2002 . . . . . . . . . . . . . . . . . 420 - 475 110
Issuance of common
Cash - exercise of options and warrants (750,000) - - - 4
Business acquisition (12,500,000). . . . . . . . - - - 62
Compensation (4,190,000). . . . . . . . . . . . . - - - 21
Services (92,733,499) . . . . . . . . . . . . . . - - - 464
Conversion of liabilities (46,549,199). . . . . . - - - 233
Exercise of warrants for services (2,580,000) . . - - - 12
Beneficial conversion on notes . . . . . . . . . . . - - - -
Value of warrants issued for services. . . . . . . . - - - -
Sale of common stock of Greenland Corporation. . . . - - - -
Common stock and options of Greenland
Corporation issued for services. . . . . . . . . - - - -
Conversion of debt for common stock of
Greenland Corporation . . . . . . . . . . . . . . - - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - -
------------ -------------- ------------ -----------
BALANCE, 6/30/2003 . . . . . . . . . . . . . . . . . $ 420 $ - $ 475 $ 906
============ ============== ============ ===========
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
(in thousands, except share data)
CONTINUED
PAID
IN ACCUM.
CAPITAL LOANS DEFICIT TOTAL
------------ ----------- ---------- ---------
BALANCE, 6/30/2000 . . . . . . . . . . . . . . . . . 63,156 (105) (77,348) (13,851)
Issuance of common
Cash (2,185,910). . . . . . . . . . . . . . . . . 5,200 - - 5,211
Acquisition (187,500) . . . . . . . . . . . . . . 272 - - 273
Software (60,000) . . . . . . . . . . . . . . . . 225 - - 225
Services (219,333). . . . . . . . . . . . . . . . 372 - - 373
Conversion of liabilities (913,757) . . . . . . . 670 - - 675
Issuance of warrants . . . . . . . . . . . . . . . . - - - 508
Exercise of warrants . . . . . . . . . . . . . . . . 33 - - -
Beneficial conversion on notes . . . . . . . . . . . 364 - - 364
Net loss . . . . . . . . . . . . . . . . . . . . . . - - (9,888) (9,888)
------------ ----------- ---------- ---------
BALANCE, 6/30/2001 . . . . . . . . . . . . . . . . . 70,292 (105) (87,236) (16,110)
Issuance of common
Cash - exercise of options and warrants
(6,754,739) 1,635 - - 1,669
Business acquisition (500,000). . . . . . . . . . 299 - - 300
Asset purchase (250,000). . . . . . . . . . . . . 172 - - 173
Services (3,179,978). . . . . . . . . . . . . . . 1,359 - - 1,375
Conversion of liabilities (2,375,706) . . . . . . 1,281 - - 1,293
Exercise of warrants for services (323,889) . . . 105 - - 107
Re-priced warrants & Options . . . . . . . . . . . . 215 - - 215
Beneficial conversion on notes . . . . . . . . . . . 791 - - 791
Value of warrants issued with notes. . . . . . . . . 1,209 - - 1,209
Value of warrants issued for services. . . . . . . . 1,584 - - 1,584
Value of options granted below fair value. . . . . . 550 - - 550
Write-off of shareholder loan. . . . . . . . . . . . - 105 - 105
Net loss . . . . . . . . . . . . . . . . . . . . . . - - (13,688) (13,688)
------------ ----------- ---------- ---------
BALANCE, 6/30/2002 . . . . . . . . . . . . . . . . . 79,492 - (100,924) (20,427)
Issuance of common
Cash - exercise of options and warrants (750,000) 29 - - 33
Business acquisition (12,500,000). . . . . . . . 63 - - 125
Compensation (4,190,000). . . . . . . . . . . . . 21 - - 42
Services (92,733,499) . . . . . . . . . . . . . . 783 - - 1,247
Conversion of liabilities (46,549,199). . . . . . 46 - - 279
Exercise of warrants for services (2,580,000) . . 121 - - 133
Beneficial conversion on notes . . . . . . . . . . . 273 - - 273
Value of warrants issued for services. . . . . . . . 70 - - 70
Sale of common stock of Greenland Corporation. . . . 25 - - 25
Common stock and options of Greenland
Corporation issued for services. . . . . . . . . 127 - - 127
Conversion of debt for common stock of
Greenland Corporation . . . . . . . . . . . . . . 27 - - 27
Net loss . . . . . . . . . . . . . . . . . . . . . . - - _(6,855) _(6,855)
------------ ----------- ---------- ---------
BALANCE, 6/30/2003 . . . . . . . . . . . . . . . . . $ 81,077 $ - $(107,779) $(24,901)
============ =========== ========== =========
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
FOR THE YEARS ENDED JUNE 30,
------------------------------
2003
------------------------------
Cash flows used for operating activities
- ----------------------------------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,855)
- ---------------------------------------------------------------------------------------- ------------------------------
Adjustments to reconcile net loss to net
cash used for operating activities
- ----------------------------------------------------------------------------------------
Impairment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
- ---------------------------------------------------------------------------------------- ------------------------------
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 217
- ---------------------------------------------------------------------------------------- ------------------------------
Inventory reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Change in allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Bad debt expense - shareholder loan. . . . . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Stock issued for services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,416
- ---------------------------------------------------------------------------------------- ------------------------------
Value of services for exercise price of warrants . . . . . . . . . . . . . . . . 133
- ---------------------------------------------------------------------------------------- ------------------------------
Value attributed to warrants issued for services . . . . . . . . . . . . . . . . 70
- ---------------------------------------------------------------------------------------- ------------------------------
Value of options granted below fair value. . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Value of re-priced options and warrants. . . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Amortization from beneficial conversion feature. . . . . . . . . . . . . . . . . 380
- ---------------------------------------------------------------------------------------- ------------------------------
Amortization of warrants issued with notes . . . . . . . . . . . . . . . . . . . 477
- ---------------------------------------------------------------------------------------- ------------------------------
Gain on settlement of liabilities. . . . . . . . . . . . . . . . . . . . . . . . (2,370)
- ---------------------------------------------------------------------------------------- ------------------------------
Changes in operating assets and liabilities
- ----------------------------------------------------------------------------------------
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390
- ---------------------------------------------------------------------------------------- ------------------------------
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
- ---------------------------------------------------------------------------------------- ------------------------------
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . 29
- ---------------------------------------------------------------------------------------- ------------------------------
Worker's compensation deposit and other . . . . . . . . . . . . . . . . . . . (25)
- ---------------------------------------------------------------------------------------- ------------------------------
PEO liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,929
- ---------------------------------------------------------------------------------------- ------------------------------
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . 834
- ---------------------------------------------------------------------------------------- ------------------------------
Net cash provided by (used for)
operating activities. . . . . . . . . . . . . . . . . . . . . . . . . 1,112
- ---------------------------------------------------------------------------------------- ------------------------------
Cash flows provided by (used for) investing activities
- ----------------------------------------------------------------------------------------
Cash (paid for) acquired in acquisition . . . . . . . . . . . . . . . . . . . . . . . (45)
- ---------------------------------------------------------------------------------------- ------------------------------
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Net cash provided by (used for)
investing activities. . . . . . . . . . . . . . . . . . . . . . . . . (45)
- ---------------------------------------------------------------------------------------- ------------------------------
Cash flows provided by financing activities
- ----------------------------------------------------------------------------------------
Cash overdraft, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
- ---------------------------------------------------------------------------------------- ------------------------------
Payments under bank notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . (125)
- ---------------------------------------------------------------------------------------- ------------------------------
Issuance of short term notes payable. . . . . . . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Net proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . . 58
- ---------------------------------------------------------------------------------------- ------------------------------
Proceeds from convertible debentures. . . . . . . . . . . . . . . . . . . . . . . . . 100
- ---------------------------------------------------------------------------------------- ------------------------------
Payment on capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . (7)
- ---------------------------------------------------------------------------------------- ------------------------------
Repayment of short term notes payable . . . . . . . . . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------------------------------------- ------------------------------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . . . . . . . . . . . 113
- ---------------------------------------------------------------------------------------- ------------------------------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,180
- ---------------------------------------------------------------------------------------- ------------------------------
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . 43
- ---------------------------------------------------------------------------------------- ------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,223
- ---------------------------------------------------------------------------------------- ==============================
The accompanying notes are an integral part of these consolidated financial statements.
2002 2001
------------- ---------------
Cash flows used for operating activities
- ----------------------------------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13,688) $ (9,888)
- ---------------------------------------------------------------------------------------- ------------- ---------------
Adjustments to reconcile net loss to net
cash used for operating activities
- ----------------------------------------------------------------------------------------
Impairment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 274 806
- ---------------------------------------------------------------------------------------- ------------- ---------------
Inventory reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Change in allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . (37) -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Bad debt expense - shareholder loan. . . . . . . . . . . . . . . . . . . . . . . 105 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Stock issued for services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 373
- ---------------------------------------------------------------------------------------- ------------- ---------------
Value of services for exercise price of warrants . . . . . . . . . . . . . . . . 107 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Value attributed to warrants issued for services . . . . . . . . . . . . . . . . 1,584 508
- ---------------------------------------------------------------------------------------- ------------- ---------------
Value of options granted below fair value. . . . . . . . . . . . . . . . . . . . 550 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Value of re-priced options and warrants. . . . . . . . . . . . . . . . . . . . . 215 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Amortization from beneficial conversion feature. . . . . . . . . . . . . . . . . 261 364
- ---------------------------------------------------------------------------------------- ------------- ---------------
Amortization of warrants issued with notes . . . . . . . . . . . . . . . . . . . 437 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Gain on settlement of liabilities. . . . . . . . . . . . . . . . . . . . . . . . - -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Changes in operating assets and liabilities
- ----------------------------------------------------------------------------------------
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628 117
- ---------------------------------------------------------------------------------------- ------------- ---------------
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326) 153
- ---------------------------------------------------------------------------------------- ------------- ---------------
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . 281 303
- ---------------------------------------------------------------------------------------- ------------- ---------------
Worker's compensation deposit and other . . . . . . . . . . . . . . . . . . . 112 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
PEO liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . 3,602 1,924
- ---------------------------------------------------------------------------------------- ------------- ---------------
Net cash provided by (used for)
operating activities. . . . . . . . . . . . . . . . . . . . . . . . . (2,540) (5,340)
- ---------------------------------------------------------------------------------------- ------------- ---------------
Cash flows provided by (used for) investing activities
- ----------------------------------------------------------------------------------------
Cash (paid for) acquired in acquisition . . . . . . . . . . . . . . . . . . . . . . . 215 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (171)
- ---------------------------------------------------------------------------------------- ------------- ---------------
Net cash provided by (used for)
investing activities. . . . . . . . . . . . . . . . . . . . . . . . . 197 (171)
- ---------------------------------------------------------------------------------------- ------------- ---------------
Cash flows provided by financing activities
- ----------------------------------------------------------------------------------------
Cash overdraft, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Payments under bank notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . (1,023) (1,447)
- ---------------------------------------------------------------------------------------- ------------- ---------------
Issuance of short term notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 555 1,491
- ---------------------------------------------------------------------------------------- ------------- ---------------
Net proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . . 1,669 5,211
- ---------------------------------------------------------------------------------------- ------------- ---------------
Proceeds from convertible debentures. . . . . . . . . . . . . . . . . . . . . . . . . 1,400 -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Payment on capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . - -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Repayment of short term notes payable . . . . . . . . . . . . . . . . . . . . . . . . (250) -
- ---------------------------------------------------------------------------------------- ------------- ---------------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . . . . . . . . . . . 2,351 5,255
- ---------------------------------------------------------------------------------------- ------------- ---------------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (256)
- ---------------------------------------------------------------------------------------- ------------- ---------------
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . 35 291
- ---------------------------------------------------------------------------------------- ------------- ---------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 43 $ 35
- ---------------------------------------------------------------------------------------- ============= ===============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(in thousands, except share data)
NON-CASH FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------
FOR THE YEARS ENDED JUNE 30,
2003 2002
------------------------------ --------
Conversion of convertible debentures into
common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164 $ 70
Conversion of notes payable into common stock . . . . . . . . . . . . . . . . . . - 1,043
Conversion of accounts payable and accrued
liabilities into common/preferred stock . . . . . . . . . . . . . . . . . . . 115 160
Stock issued for purchase of assets. . . . . . . . . . . . . . . . . . . . . . . . - 173
Net assets acquired in business combinations
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 215
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 1,162
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 206
Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 21
Goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . . 4,736 1,337
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . (4,186) (1,493)
Notes payable and capital lease . . . . . . . . . . . . . . . . . . . . . . . (846) (200)
Supplemental disclosure of cash flow information
Cash paid during the year for interest. . . . . . . . . . . . . . . . . . . . - -
Cash paid during the year for income taxes. . . . . . . . . . . . . . . . . . - -
The accompanying notes are an integral part of these consolidated financial statements.
NON-CASH FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------
2001
------
Conversion of convertible debentures into
common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 675
Conversion of notes payable into common stock . . . . . . . . . . . . . . . . . . -
Conversion of accounts payable and accrued
liabilities into common/preferred stock . . . . . . . . . . . . . . . . . . . -
Stock issued for purchase of assets. . . . . . . . . . . . . . . . . . . . . . . . 225
Net assets acquired in business combinations
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Goodwill and other intangible assets. . . . . . . . . . . . . . . . . . . . . 686
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . (495)
Notes payable and capital lease . . . . . . . . . . . . . . . . . . . . . . . -
Supplemental disclosure of cash flow information
Cash paid during the year for interest. . . . . . . . . . . . . . . . . . . . 283
Cash paid during the year for income taxes. . . . . . . . . . . . . . . . . . -
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
Basis of Presentation
- -----------------------
The accompanying consolidated financial statements include the accounts of
Imaging Technologies Corporation, ("ITEC" or the "Company") formerly Personal
Computer Products, Inc., incorporated under the laws of the state of California
during March 1982 and subsequently reincorporated under the laws of the state of
Delaware during May 1983, and its following active majority owned subsidiaries
(there are eight inactive subsidiaries not listed):
a) SourceOne Group, Inc., ("SourceOne"), incorporated under the laws of the
state of Delaware on November 9, 2001 (owned 100% by the Company);
b) EnStructure, Inc. ("EnStructure"), incorporated under the laws of the
state of Nevada on May 10, 2001 (owned 100% by the Company);
c) Dealseekers.com, Inc., ("Dealseekers"), incorporated under the laws of
the state of Delaware on May 7, 1999 (owned 71.4% by the Company);
d) Quik Pix, Inc. ("QPI"), incorporated under the laws of the state of
California in 1980 and, as a result of a merger, reincorporated as a Delaware
corporation in March 2000 (owned 85% by the Company); and
e) Greenland Corporation ("Greenland"), incorporated under the laws of the
state of Nevada as Zebu, Inc. in July 1986, and renamed Greenland in September
1994 (approximately 88% owned by the Company). ). Greenland also has two
wholly-owned subsidiaries that are included in the consolidated financial
statements.
All significant inter-company accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended June 30,
2003, the Company experienced a net loss of $6,855,000 and as of June 30, 2003,
the Company had a negative working capital deficiency of $28,446,000 and had a
negative shareholders' deficiency of $24,901,000. In addition, the Company is
in default on certain note payable obligations and is being sued by numerous
trade creditors for nonpayment of amounts due. The Company is also delinquent
in its payments relating to payroll tax liabilities. These conditions raise
substantial doubt about its ability to continue as a going concern.
On August 20, 1999, at the request of Imperial Bank, the Company's primary
lender, the Superior Court of San Diego appointed an operational receiver who
took control of the Company's day-to-day operations on August 23, 1999. On June
21, 2000, in connection with a settlement agreement reached with Imperial Bank
(see Note 8), the Superior Court of San Diego issued an order dismissing the
operational receiver.
On October 21, 1999, NASDAQ notified the Company that it no longer complied with
the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The NASDAQ SmallCap Market. At a hearing
on December 2, 1999, a NASDAQ Listing Qualifications Panel also raised public
interest concerns relating to the Company's financial viability. The Company's
common stock was delisted from The NASDAQ Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The NASDAQ
SmallCap Market, shareholders may find it more difficult to sell common stock.
This lack of liquidity also may make it more difficult to raise capital in the
future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule,
broker/dealers who recommend these securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities are exempt from this rule if the market
price is at least $5.00 per share.
The Securities and Exchange Commission adopted regulations that generally define
a "penny stock" as any equity security that has a market price of less than
$5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the NASDAQ and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." The Company's common stock does constitute a penny stock
because the Company's common stock has a market price less than $5.00 per share,
the Company's common stock is no longer quoted on NASDAQ and the Company's net
tangible assets do not exceed $2,000,000. As the Company's common stock falls
within the definition of penny stock, these regulations require the delivery,
prior to any transaction involving the Company's common stock, of a disclosure
schedule explaining the penny stock market and the risks associated with it.
Furthermore, the ability of broker/dealers to sell the Company's common stock
and the ability of shareholders to sell the Company's common stock in the
secondary market would be limited. As a result, the market liquidity for the
Company's common stock would be severely and adversely affected. The Company's
management can provide no assurance that trading in the Company's common stock
will not be subject to these or other regulations in the future, which would
negatively affect the market for the Company's common stock.
In order for the Company to continue in existence, it must obtain additional
funds to provide adequate working capital to finance operations, and begin to
generate positive cash flows from its operations. During the years ended June
30, 2003, 2002 and 2001, the Company has raised an aggregate of $2,950,000
through the issuance of convertible debentures. However, there can be no
assurance 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 including
compliance with the Imperial Bank settlement agreement. Any additional equity
or convertible debt financings could result in substantial dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
required to delay, reduce or eliminate some or all of its planned activities,
including any potential mergers or acquisitions. The Company's inability to
fund its capital requirements would have a material adverse effect on the
Company. The Company is also looking at making strategic acquisitions of
companies that have positive cash flows. The Company has also reduced is
personnel and moved its corporate office in an effort to reduce operating costs.
The financial statements do not include any adjustments that might result from
the outcome of this going concern uncertainty.
Nature of Business
- --------------------
The Company business operations are as follows:
a) The Company is a financial services provider and a professional employer
organization (PEO) that provides comprehensive personnel management services
including benefits and payroll administration, medical and workers' compensation
insurance programs, personnel records management, and employer liability
management;
b) The Company also develops and mounts photographic and digital images for
use in display advertising for tradeshows, building interiors, and other
point-of-sale locations; and
c) The Company designs, develops and sells digital imaging solutions and
color management software products for use in graphics, publishing, digital
photography, and other business and technical markets.
Use of Estimates
- ------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 reported periods. Significant estimates made by the Company's
management include but are not limited to recoverability of property and
equipment and proprietary products through future operating profits. Actual
results could materially differ from those estimates.
Revenue Recognition
- --------------------
PEO Service Fees and Worksite Employee Payroll Costs
The Company recognizes its revenues associated with its PEO business pursuant to
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." The
Company's revenues are reported net of worksite employee payroll cost (net
method). Pursuant to discussions with the Securities and Exchange Commission
staff, the Company changed its presentation of revenues from the gross method to
an approach that presents its revenues net of worksite employee payroll costs
(net method) primarily because the Company is not generally responsible for the
output and quality of work performed by the worksite employees.
In determining the pricing of the markup component of the gross billings, the
Company takes into consideration its estimates of the costs directly associated
with its worksite employees, including payroll taxes, benefits and workers'
compensation costs, plus an acceptable gross profit margin. As a result, the
Company's operating results are significantly impacted by the Company's ability
to accurately estimate, control and manage its direct costs relative to the
revenues derived from the markup component of the Company's gross billings.
Consistent with its revenue recognition policy, the Company's direct costs do
not include the payroll cost of its worksite employees. The Company's direct
costs associated with its revenue generating activities are comprised of all
other costs related to its worksite employees, such as the employer portion of
payroll-related taxes, employee benefit plan premiums and workers' compensation
insurance premiums.
Sales of Products
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales to
and through distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. When the revenue recognition criteria required for distributor
and reseller arrangements are not met, revenue is recognized as payments are
received. Provisions are recorded for returns and bad debts. The Company's
software arrangements do not contain multiple elements, and the Company does not
offer post contract support.
Contingent Liabilities
The Company accrues and discloses contingent liabilities in its consolidated
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5, Accounting for Contingencies. SFAS No. 5 requires
accrual of contingent liabilities that are considered probable to occur and that
can be reasonably estimated. For contingent liabilities that are considered
reasonably possible to occur, financial statement disclosure is required,
including the range of possible loss if it can be reasonably determined. The
Company has disclosed in its audited financial statements several issues that it
believes are reasonably possible to occur, although it cannot determine the
range of possible loss in all cases. As these issues develop, the Company will
continue to evaluate the probability of future loss and the potential range of
such losses. If such evaluation were to determine that a loss was probable and
the loss could be reasonably estimated, the Company would be required to accrue
its estimated loss, which would reduce net income in the period that such
determination was made.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
Cash and Cash Equivalents
- ----------------------------
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
- -------------------------------
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances may exceed FDIC and SPIC insured levels at
various times during the year.
Financial instruments that could potentially subject the Company to
concentration of credit risk include accounts receivable. The Company generally
requires clients to pay invoices for service fees no later than one day prior to
the applicable payroll date. As such, the Company generally does not require
collateral.
Allowance Method Used to Record Bad Debts
- -----------------------------------------------
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $725,000 and $280,000 at June 30, 2003, and June 30, 2002,
respectively.
Inventory
- ---------
Inventory are valued at the lower of cost or market; cost being determined by
the first-in, first-out method.
Long-Lived Assets
- ------------------
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.
The Company reviews the carrying value of property and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair value
of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, and the effects of
obsolescence, demand, competition, and other economic factors. Based on this
assessment, there was an impairment charge recorded of $64,000 at June 30, 2003.
Goodwill and Intangible Assets
Long-lived assets are reviewed whenever indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the related asset
carrying amount. At June 30, 2003, intangible assets included the excess of the
investment in Greenland Corporation over the fair market of the net assets
acquired of approximately $2,822,000. The intangible assets were reviewed
during 2003, in light of the Company's acquisition of Greenland Corp. and the
resultant decline in the market value of Greenland's stock. This review
indicated that the goodwill recorded as a result of the Greenland acquisition
was impaired. Consequently, the carrying value of the Greenland goodwill
totaling $296,000 was written off as a component of operating expenses during
2003.
At June 30, 2002, the Company wrote off $1,750,000 of related to intangible
assets as the Company determined that such intangible assets have been impaired.
The write off consisted of $569,000 of goodwill that was recorded as a result of
the Company's acquisition of Eduadvantage.com in December 2000 and $1,181,000 of
the customer list recorded as a result of the Company's acquisition of SourceOne
Group in November 2001. The underlying businesses of both Eduadvantage.com and
SourceOne Group lost a significant amount of the revenue base that was
originally purchased by the Company and therefore, a write down of the
intangible assets purchased in these acquisition is necessary since the
performance on an undiscounted cash flow basis of the assets purchased is not
sufficient to recover the intangible assets.
Patent Costs
- -------------
Patent costs include direct costs of obtaining the patent. Costs for new
patents are capitalized and amortized over the estimated useful life of the
patent, generally over the life of the patent on a straight-line method. The
cost of patents in process is not amortized until issuance. In the event of a
patent being superseded, the unamortized costs are written off immediately.
Accumulated amortization relating to the patent was approximately $60,000 at
June 30, 2003, and none for 2002 and 2001
Other Intangible Assets - Purchased PEO Contracts
- -------------------------------------------------------
Other intangible assets consist of purchased PEO contracts. Other intangible
assets are recorded at cost and amortized on a straight-line basis over their
estimated useful life, generally over the shorter of the definitive terms of the
related agreements or five years. Accumulated amortization was $49,000 at June
30, 2003, and none for 2002 and 2001.
Advertising Costs
- ------------------
The Company expenses advertising and promotion costs as incurred. During fiscal
2003, 2002 and 2001, the Company incurred advertising and promotion costs of
approximately $22,000, $66,000 and $224,000, respectively.
Research and Development
- --------------------------
Research and development costs are charged to expense as incurred.
Loss Per Common Share
- ------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share have not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect. The following potential
common shares have been excluded from the computation of diluted net loss per
share for the year ended June 30, 2003: warrants - 6,002,356 and stock options -
34,158,100.
Offering Costs
- ---------------
Offering 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 principally the values attributed to the detachable
warrants issued in connection with the convertible debentures and the value of
the preferential conversion feature associated with the convertible debentures.
These debt issuance costs are accounted for in accordance with Emerging Issues
Task Force ("EITF") 00-27 issued by the Financial Accounting Standards Board
("FASB").
Income Taxes
- -------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the 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 this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The Company recognizes the amount of taxes payable or refundable for the current
year and recognizes deferred tax liabilities and assets for the expected future
tax consequences of events and transactions that have been recognized in the
Company's financial statements or tax returns. The Company currently has
substantial net operating loss carryforwards. The Company has recorded a 100%
valuation allowance against net deferred tax assets due to uncertainty of their
ultimate realization.
Stock-Based Compensation
- -------------------------
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees". Under APB 25, the Company does not recognize compensation expense
related to options issued under the Company's employee stock option plans,
unless the option is granted at a price below market price on the date of grant.
In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became
effective for the Company. SFAS No. 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if certain pro forma disclosures
are made assuming hypothetical fair value method, for which the Company uses the
Black-Scholes option-pricing model.
For non-employee stock based compensation, the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards, the value
is based on the market value for the stock on the date of grant and if the stock
has restrictions as to transferability, a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. The Company has opted
under SFAS No. 123 to disclose its stock-based compensation with no financial
effect. The pro forma effects of applying SFAS No. 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
No. 123, the Company's pro forma net loss and net loss per share would have been
as follows for the years ended June 30:
(In thousands, except share amounts). . . . 2003 2002 2001
- ------------------------------------------- --------------- ----------------- ----------------
Net income (loss)
- -------------------------------------------
As reported. . . . . . . . . . . . . . . $ (6,876) $ (13,709) $ (9,909)
- ------------------------------------------- --------------- ----------------- ----------------
Compensation recognized under APB No. 25. . - - -
- ------------------------------------------- --------------- ----------------- ----------------
Compensation recognized under SFAS No. 123. (425) (942) -
- ------------------------------------------- --------------- ----------------- ----------------
Pro forma . . . . . . . . . . . . . . . . . $ (7,301) $ (14,651) $ (9,909)
- ------------------------------------------- =============== ================= ================
Basic earnings (loss) per share
- -------------------------------------------
As reported. . . . . . . . . . . . . . . $ (0.07) $ (1.12) $ (1.51)
- ------------------------------------------- =============== ================= ================
Pro forma. . . . . . . . . . . . . . . . $ (0.08) $ (1.20) $ (1.51)
- ------------------------------------------- =============== ================= ================
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
The weighted average fair value of the options granted during fiscal years 2003
and 2002 is estimated on the date of grant using the Black-Scholes
option-pricing model. No options were granted in fiscal 2001. The weighted
average fair values and weighted average assumptions used in calculating the
fair values were as follows for the years ended June 30:
2003 2002 2001
------- ------ ----
Fair value of options granted. $0.015 $0.56 N/A
- ------------------------------ ------- ------ ----
Risk-free interest rate. . . . 3.5% 3.5% N/A
- ------------------------------ ------- ------ ----
Expected life (years). . . . . 3 1 N/A
- ------------------------------ ------- ------ ----
Expected volatility. . . . . . 431% 179% N/A
- ------------------------------ ------- ------ ----
Expected dividends . . . . . . - - N.A
- ------------------------------ ------- ====== ====
Fair Value of Financial Instruments
- ---------------------------------------
For certain of the Company's financial instruments, including accounts
receivable, bank overdraft, accounts payable, and accrued expenses, the carrying
amounts approximate fair value, due to their relatively short maturities. The
amounts owed for long-term debt also approximate fair value because current
interest rates and terms offered to the Company are at current market rates.
Comprehensive Loss
- -------------------
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting other comprehensive income and its
components in a financial statement. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did not have
any of the items of other comprehensive income in any period presented.
Minority Interest in Consolidated Subsidiary
- ------------------------------------------------
"Minority interest in consolidated subsidiary" represents the minority
stockholders' proportionate share of the equity of QPI. At June 30, 2003 the
Company owned 88% of Greenland's capital stock, and has voting control. The
Company's 88% controlling interest requires that Greenland's operations be
included in the consolidated financial statements. The outstanding preferred
stock of Greenland that is not owned by the Company is shown as "Preferred Stock
- - minority interest in subsidiary" in the 2003 and 2002 Consolidated Balance
Sheet.
Segment Disclosure
- -------------------
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," was issued, which changes the way public companies report
information about segments. SFAS No. 131, which is based on the selected
segment information, requires quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues.
Recent Accounting Pronouncements
- ----------------------------------
In April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to both existing contracts and new contracts entered
into after June 30, 2003. The Company does not participate in such
transactions, however, is evaluating the effect of this new pronouncement, if
any, and will adopt FASB 149 within the prescribed time.
In May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The Company is evaluating the effect of this new
pronouncement and will adopt FASB 150 within the prescribed time.
2. ACCOUNTS RECEIVABLE
--------------------
Accounts receivable consisted of the following as of:
(In thousands). . . . . . . . . . . . JUNE 30,
- ------------------------------------- ----------
2003 2002
---------- ------
Accounts receivable . . . . . . . . . $ 1,232 $ 909
- ------------------------------------- ---------- ------
Less allowance for doubtful accounts. (725) (280)
- ------------------------------------- ---------- ------
Accounts receivable, net . . . . $ 507 $ 629
- ------------------------------------- ========== ======
The Company reviews accounts receivable periodically during the year for
collectibility. An allowance for doubtful accounts and sales returns is
established for any receivables whose collection is in doubt or for estimated
returns.
3. INVENTORY
The Company wrote down its inventory during the year ended June 30, 2003.
Inventory consisted of the following as of:
(In thousands). . . . . . . . JUNE 30,
- ----------------------------- -----------------
2003 2002
----------------- --------------
Inventory
- -----------------------------
Materials and supples. . $ - $ 261
- ----------------------------- ----------------- --------------
Finished goods . . . . . 308 165
- ----------------------------- ----------------- --------------
308 426
----------------- --------------
Less: Inventory reserve. (293) (275)
- ----------------------------- ----------------- --------------
Inventory, net. . . . . . . . $ 15 $ 151
- ----------------------------- ================= ==============
4. RELATED PARTY TRANSACTIONS
Transactions with a Director of the Company
- -------------------------------------------------
A director of the Company is a majority shareholder in a consulting firm that
provides management and public relations services to the Company. The Company
accrued consulting fees and expenses to this consulting firm in the amount of
approximately $120,000 and $60,000 in 2003 and 2002, respectively.
Transactions with Officers and Key Executives
- --------------------------------------------------
During 2003 and 2002, common stock with an aggregate fair market value of
$60,000 and $444,000, respectively, was awarded to key executives as
compensation and advances.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
(In thousands) . . . . . . . . . . . JUNE 30,
- ------------------------------------ ---------------
2003 2002
--------------- -----
Property and equipment, net
- ------------------------------------
Computers and other equipment . $ 150 $ 155
- ------------------------------------ --------------- -----
Office furniture and equipment. - 57
- ------------------------------------ --------------- -----
Leasehold improvements. . . . . - -
- ------------------------------------ --------------- -----
$ 150 $ 212
=============== =====
Depreciation and amortization expense for the years ended June 30, 2003, 2002,
and 2001, was approximately, $200,000, $118,000 and $806,000, respectively.
6. ACQUISITIONS
ExpertHR of Oklahoma
- ----------------------
Effective April 1, 2003, the Company formed a wholly-owned subsidiary of
Greenland Corporation, ExpertHR Oklahoma. Subsequent to its formation, the new
Company purchased a group of PEO clients for $921,000 of convertible preferred
stock of Greenland Corporation. ExpertHR of Oklahoma, Inc., at that time, was a
newly formed corporation whose only asset was the PEO contracts purchased by
Greenland. The entire purchase price of the purchased contracts of $921,000 has
been allocated to contracts in the accompanying consolidated balance sheet and
is being amortized over the expected life of the contracts of 5 years
Greenland Corporation
- ----------------------
On January 14, 2003, the Company completed the acquisition of shares,
representing controlling interest, of Greenland Corporation ("Greenland").
Under the terms of the Greenland acquisition, ITEC acquired 19,183,390 shares of
common stock of Greenland and received warrants to purchase an additional
95,319,510 shares of Greenland common stock contingent upon the contribution of
certain PEO contracts to Greenland. The payment of the exercise price of the
warrants was made via the contribution of the required PEO contracts. The
purchase price was $2,225,000 in the form of a promissory note payable to
Greenland and is convertible into shares of ITEC common stock, the number of
which will be determined by a formula applied to the market price of the shares
at the time that the promissory note is converted. The promissory note of
$2,225,000 is payable to Greenland and is eliminated during the consolidation.
The Company contributed the required PEO contracts to Greenland resulting in the
warrants being exercised. 115.1 million Greenland common shares were issued to
ITEC and delivered pursuant to the terms of the Closing Agreement. The
conditions of the exercise of warrants pursuant to the Closing Agreement were
met. Accordingly, ITEC holds voting rights to 115.1 million shares of Greenland
common stock, representing approximately 85% of the total outstanding Greenland
common shares.
On January 14, 2003, four new directors were elected to serve on Greenland's
Board of Directors as nominees of ITEC. As of the date of this report, ITEC
holds four seats of seven. Greenland's Chief Executive Officer, Thomas Beener,
remains in his position. Brian Bonar, ITEC's CEO serves as Chairman of
Greenland's Board of Directors.
The purchase price was determined through analysis of Greenland's financial
reports as filed with the Securities and Exchange Commission and the potential
future performance of Greenland's ExpertHR subsidiary. The total purchase price
was arrived at through negotiations.
Greenland's ExpertHR subsidiary provides professional employer services (PEO) to
niche markets. Greenland's Check Central subsidiary is an information
technology company that has developed the Check Central Solutions' transaction
processing system software and related MAXcash Automated Banking Machine (ABM
kiosk designed to provide self-service check cashing and ATM-banking
functionality. Greenland's common stock trades on the OTC Bulletin Board under
the symbol GRLC.
Pursuant to the terms of the Agreement, the actual purchase price was $0, based
on the stated purchase price of $2,225,000 per the agreement less promissory
note payable to $2,225,000 to Greenland, which was eliminated in the
consolidation.
The operating results of Greenland beginning January 14, 2003 are included in
the accompanying consolidated statements of operations.
The total purchase price was valued at approximately $0 and is summarized and
allocated as follows in accordance with SFAS No. 141 and 142:
(In thousands)
- ---------------------------------------
Other current assets. . . . . . . . . . $ 4
- --------------------------------------- ---------------------
Property and equipment. . . . . . . . . 90
- --------------------------------------- ---------------------
Other non-current assets. . . . . . . . 18
- --------------------------------------- ---------------------
Accounts payable and accrued expenses,
and other current liabilities. . . . (3,202)
- --------------------------------------- ---------------------
Other long-term liabilities . . . . . . (28)
- --------------------------------------- ---------------------
Goodwill. . . . . . . . . . . . . . . . 3,118
- --------------------------------------- ---------------------
Purchase price. . . . . . . . . . . . . $ -
- --------------------------------------- =====================
The excess purchase price was allocated to goodwill, as there were no other
identifiable intangible assets of Greenland in which to allocate part of the
purchase price.
Quik Pix, Inc.
- ----------------
On January 14, 2003, ITEC completed its acquisition of approximately 85% of the
issued and outstanding shares of common stock of Quik Pix, Inc. ("QPI"). The
purchase price was 12,500,000 shares of ITEC restricted common stock valued at
$125,000. In addition, ITEC agreed to pay $45,000 to a shareholder of QPI.
Established in 1982, QPI is a visual marketing support firm. Its principal
product, PhotoMotion, is patented. PhotoMotion is a unique color medium that
uses existing originals to create the illusion of movement and allows for three
to five distinct images to be displayed with an existing light box. QPI visual
marketing products are sold to a range of clientele including advertisers and
their agencies.
The purchase price was determined through analysis of QPI's financial condition
and the potential future performance of its business operations. The total
purchase price was arrived at through negotiations.
Pursuant to the terms of the Agreement, the actual purchase price was $170,000
based on the fair value of the common stock issued of $125,000 and the payable
of $45,000 to a shareholder of QPI.
The operating results of QPI beginning January 14, 2003 are included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $170,000 and is summarized
as follows in accordance with SFAS No. 141 and 142:
(In thousands)
- ---------------------------------------
Other current assets. . . . . . . . . . $ 280
- --------------------------------------- -------
Property and equipment. . . . . . . . . 11
- --------------------------------------- -------
Other non-current assets. . . . . . . . 18
- --------------------------------------- -------
Accounts payable and accrued expenses,
and other current liabilities. . . . (865)
- --------------------------------------- -------
Other long-term liabilities . . . . . . (892)
- --------------------------------------- -------
Patent. . . . . . . . . . . . . . . . . 1,618
- --------------------------------------- -------
Purchase price. . . . . . . . . . . . . $ 170
- --------------------------------------- =======
The excess purchase price of $1,618,000 was allocated to QPI's patent. QPI has
a patent related to Photomotion images, which expires in July 2020. This
intangible asset is being amortized over the remaining life of the patent.
Dream Canvas Technology, Inc.
- --------------------------------
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40,000 with the issuance of 100,000 shares of
its common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75,000 in cash. The Company reported this transaction on Form 8-K,
filed on December 19, 2002, which is incorporated by reference.
SourceOne, Inc.
- ----------------
On November 12, 2001, the Company acquired all of the outstanding shares of
SourceOne, Inc. ("SourceOne") from Neotactix, Inc. for 500,000 shares (valued at
$300,000) of the Company's common stock and the assumption of $750,000 of
payments due SourceOne from Neotactix. The Company paid $250,000 in cash at
closing. The balance of $500,000 is payable in cash or stock on a quarterly
payment schedule beginning in April 2002. If the Company chooses to pay this
debt in stock, the stock issued must be registered with the SEC and the price
per share will be the best bid price on the day the payment is made. As of June
30, 2002, the Company has not made any additional payments, as there is
currently a dispute over certain liabilities that have arisen since the purchase
date.
SourceOne is a professional employer organization ("PEO") that provides
comprehensive personnel management services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, and employer liability management.
The following summarized the fair market values net assets acquired:
(In thousands)
- -------------------------------------------
ASSETS
- -------------------------------------------
Cash and cash equivalents. . . . . . . . $ 215
- ------------------------------------------- -----------------
Accounts receivable. . . . . . . . . . . 1,162
- ------------------------------------------- -----------------
Equipment. . . . . . . . . . . . . . . . 21
- ------------------------------------------- -----------------
Other assets . . . . . . . . . . . . . . 206
- ------------------------------------------- -----------------
Total assets. . . . . . . . . . . . . 1,604
- ------------------------------------------- -----------------
LIABILITIES
- -------------------------------------------
Accounts payable . . . . . . . . . . . . (99)
- ------------------------------------------- -----------------
Payroll liabilities. . . . . . . . . . . (1,379)
- ------------------------------------------- -----------------
Notes payable. . . . . . . . . . . . . . (200)
- ------------------------------------------- -----------------
Other liabilities. . . . . . . . . . . . (213)
- ------------------------------------------- -----------------
Total liabilities . . . . . . . . . . (1,891)
- ------------------------------------------- -----------------
Excess of liabilities over assets acquired. 287
- ------------------------------------------- -----------------
Total consideration given . . . . . . . . . 1,050
- ------------------------------------------- -----------------
Customer list. . . . . . . . . . . . $ 1,337
- ------------------------------------------- =================
The customer list purchased in the above acquisition was being amortized over a
period of five years. The value of the customer list at the date of acquisition
was greater than the excess purchase price so the entire excess purchase was
allocated to the customer list.
EduAdvantage
Effective December 1, 2000, the Company acquired all of the outstanding shares
of Eduadvantage.com in exchange for 175,000 of the Company's common stock.
EduAdvantage.com is a California corporation that is primarily engaged in a
web-based business. The acquisition has been accounted for as a purchase
transaction. The following summarized the net assets acquired.
(In thousands)
- -------------------------------
Assets
- -------------------------------
Receivables. . . . . . . . . $ 78
- ------------------------------- ------
Equipment. . . . . . . . . . 3
- ------------------------------- ------
Goodwill . . . . . . . . . . 687
- ------------------------------- ------
768
------
Less assumption of liabilities. (495)
- ------------------------------- ------
Net assets acquired . . . . . . $ 273
- ------------------------------- ======
Asset Acquisition
On March 1, 2003, the Company purchased certain PEO contracts from Staff Pro
Leasing 2 and Staff Pro Leasing, Inc. for $269,483. The purchase price was paid
via an initial cash payment of $44,915 and the remainder of the purchase price
is in the form of a promissory note to be paid over 24 months. The entire
purchase price is shown as contracts in the accompanying consolidated balance
sheet and is being amortized over the expected life of the contracts of 5 years.
On October 25, 2001, the Company acquired certain assets from three related
parties. These assets related to the Company's office products and services
business activities, and represent an aggregate of $250,000, which included
inventory, fixed assets and accounts receivable. The purchase price of the
assets was 375,000 shares of the Company's common stock that was determined by
the market price of the Company's common stock at the date of acquisition. -
The number of shares issued in this transaction was subsequently reduced to
$250,000 thus reducing the purchase price to $173,333.
The following unaudited pro forma financial information presents the
consolidated operations of the Company as if the above-mentioned acquisitions
had occurred as of the beginning of the periods presented. This information is
provided for illustrative purposes only, and is not necessarily indicative of
the operating results that would have occurred had the acquisitions been
consummated at the beginnings of the periods presented, nor is it necessarily
indicative of any future operating results.
(In thousands, except per share data) YEAR ENDED JUNE 30,
- ------------------------------------- ---------------------
2003 2002 2001
--------------------- --------- ---------
Net revenue, as reported. . . . . . . $ 4,190 $ 7,408 $ 3.452
- ------------------------------------- --------------------- --------- ---------
Net revenue, pro forma. . . . . . . . $ 4,473 $ 10,862 $ 7,104
- ------------------------------------- --------------------- --------- ---------
Net loss, as reported . . . . . . . . $ (6,855) $(13,688) $ (9,888)
- ------------------------------------- --------------------- --------- ---------
Net loss, pro forma . . . . . . . . . $ (9,059) $(20,877) $(18,811)
- ------------------------------------- --------------------- --------- ---------
Loss per share, as reported . . . . . $ (0.07) $ (1.12) $ (1.51)
- ------------------------------------- --------------------- --------- ---------
Loss per share, pro forma . . . . . . $ (0.11) $ (0.84) $ (0.96)
- ------------------------------------- --------------------- --------- ---------
7. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following as of:
(In thousands). . . . . . . . . . . . . . . . JUNE 30,
2003 2002
------------ ---------
Compensation and employee benefits. $ 2,130 $ 1,542
Interest. . . . . . . . . . . . . . 5,134 3,858
Payroll and sales tax payable . . . 993 -
IRS levy payable . . . . . . . . . . 105 -
Penalties. . . . . . . . . . . . . . 1,886 -
Commissions. . . . . . . . . . . . . 503 -
Other . . . . . . . . . . . . . . . 1,084 356
------------ ---------
$ 11,835 $ 5,756
============ =========
8. DEBT
Borrowings Under Banks Notes Payable
- ----------------------------------------
On June 6, 2000, the Company entered into a settlement agreement with Imperial
Bank ("Imperial"). Under this agreement, the Company would pay $150,000 per
month until the balance was paid in full. Payments have been reduced to
$100,000 per month through January 2002 and further reduced to $50,000
subsequent to January 2002. During the year ended June 30, 2002, the Company
paid $1,023,000 toward this obligation. Due to the uncertainty regarding the
Company's ability to meet its obligations and certain defaults under this
agreement, the debt has been classified as current. The debt is accruing
interest at 12.9% per annum, which will be waived if all principal payments are
made timely. Accrued interest related to these notes due Imperial totaling
$1,375,000 at June 30, 2003 is included in other accrued expenses. The debt is
collateralized by substantially all assets of the Company. The balance due to
Imperial at June 30, 2003 and 2002 was $1,490,000 and $1,615,000, respectively.
As of June 30, 2003 and 2002, the Company owed Export-Import Bank ("ExIm")
$1,680,000 plus interest under a Working Capital Guarantee Facility whereby
Imperial made a demand upon ExIm who responded by making a claim payment to
Imperial. The note bears interest at 10% per annum. ExIm has made a demand for
immediate payment and note is currently in default.
The following is a summary of the borrowings under bank notes payable:
(In thousands). . . JUNE 30,
2003 2002
------------- -------------
Imperial. . . . . . $ 1,490 $ 1,615
Export-Import Bank. 1,680 1,680
------------- -------------
Total. . . . . . $ 3,170 $ 3,295
============= =============
Notes Payable, including amounts due to related parties
- --------------------------------------------------------------
The following summarizes short-term notes payable, which are in default, and due
on demand:
(In thousands). . . . . . . . . . . . . . . . . . . . JUNE 30,
2003 2002
---------- --------
Payable to suppliers, 10% . . . . . . . . . . . . . . $ - $ 41
Payable to shareholders, 8% . . . . . . . . . . . . . 150 515
Payable in connection with SourceOne acquisition, 10% - 700
Payable in connection with QPI acquisition. . . . . . 575 -
Payable in connection with Greenland acquisition. . . 427 -
Payable in connection with acquisition of SraffPro. . 87 -
Payable to individual, 10%. . . . . . . . . . . . . . 14 40
Payable to related party. . . . . . . . . . . . . . . 250 -
Payable to a former directors, 16%. . . . . . . . . . 1,500 1,500
---------- --------
3,003 2,796
Less current portion. . . . . . . . . . . . . . . . . (2,097) (2,796)
---------- --------
Long-term portion . . . . . . . . . . . . . . . . . . $ 906 $ -
========== ========
Notes payable mature as follows:
(In thousands)
During the years ended June 30,
2004. . . . . . . . . . . . . . . $2,097
2005. . . . . . . . . . . . . . . 906
2006. . . . . . . . . . . . . . . -
2007. . . . . . . . . . . . . . . -
------
3,003
=================================
Convertible Debentures
- -----------------------
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the Company sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850,000
bearing interest at the rate of eight percent (8%) per annum, due December 12,
2003, each convertible into shares of the Company's common stock. Interest
shall be payable, at the option of the purchasers, in cash or shares of common
stock. At any time after the issuance of the notes, each note is convertible
into such number of shares of common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note as of the date of
conversion by (b) the lesser of (x) an amount equal to seventy percent (70%) of
the average closing bid prices for the three (3) trading days prior to December
12, 2000 and (y) an amount equal to seventy percent (70%) of the average closing
bid prices for the three (3) trading days having the lowest closing bid prices
during the thirty (30) trading days prior to the conversion date. The Company
has recognized interest expense of $364,000 relating to the beneficial
conversion feature of the above notes. Additionally, the Company issued a
warrant to each of the purchasers to purchase 502,008 shares of the Company's
common stock at an exercise price equal to $1.50 per share. The purchasers may
exercise the warrants through December 12, 2005. During fiscal 2003, 2002 and
2001, notes payable of $0, $0 and $675,000, respectively, was converted into the
Company's common stock.
On July 26, 2001, the Company entered into a convertible note purchase agreement
with certain investors whereby the Company sold to the investors a convertible
debenture in the aggregate principal amount of $1,000,000 bearing interest at
the rate of eight percent (8%) per annum, due July 26, 2004, convertible into
shares of the Company's common stock. Interest is payable, at the option of the
investor, in cash or shares of the Company's common stock. The note is
convertible into such number of shares of the Company's common stock as is
determined by dividing (a) that portion of the outstanding principal balance of
the note by (b) the conversion price. The conversion price equals the lesser of
(x) $1.30 and (y) 70% of the average of the 3 lowest closing bid prices during
the 30 trading days prior to the conversion date. Additionally, the Company
issued a warrant to the investor to purchase 769,231 shares of the Company's
common stock at an exercise price equal to $1.30 per share. The investor may
exercise the warrant through July 26, 2006. In accordance with EITF 00-27, the
Company first determined the value of the note and the fair value of the
detachable warrants issued in connection with this convertible debenture. The
proportionate value of the note and the warrants is $492,000 and $508,000,
respectively. The value of the note was then allocated between the note and the
preferential conversion feature, which amounted to $0 and $492,000,
respectively.
On September 21, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $300,000
bearing interest at the rate of eight percent (8%) per annum, due September 21,
2004, convertible into shares of the Company's common stock. Interest is
payable, at the option of the investor, in cash or shares of the Company's
common stock. The note is convertible into such number of shares of the
Company's common stock as is determined by dividing (a) that portion of the
outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.532 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. Additionally, the Company issued a warrant to the investor to
purchase 565,410 shares of the Company's common stock at an exercise price equal
to $0.76 per share. The investor may exercise the warrant through September 21,
2006. In December 2001, $70,000 of this note was converted into 209,039 shares
of common stock. In accordance with EITF 00-27, the Company first determined
the value of the note and the fair value of the detachable warrants issued in
connection with this convertible debenture. The proportionate value of the note
and the warrants is $106,000 and $194,000, respectively. The value of the note
was then allocated between the note and the preferential conversion feature,
which amounted to $0 and $106,000, respectively.
On November 7, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $200,000
bearing interest at the rate of eight percent (8%) per annum, due November 7,
2004, convertible into shares of the Company's common stock. Interest is
payable, at the option of the investor, in cash or shares of the Company's
common stock. The note is convertible into such number of shares of the
Company's common stock as is determined by dividing (a) that portion of the
outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.532 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. Additionally, the Company issued a warrant to the investor to
purchase 413,534 shares of the Company's common stock at an exercise price equal
to $0.76 per share. The investor may exercise the warrant through November 7,
2006. In accordance with EITF 00-27, the Company first determined the value of
the note and the fair value of the detachable warrants issued in connection with
this convertible debenture. The proportionate value of the note and the
warrants is $92,000 and $108,000, respectively. The value of the note was then
allocated between the note and the preferential conversion feature, which
amounted to $0 and $92,000, respectively.
On January 22, 2002, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $500,000
bearing interest at the rate of eight percent (8%) per annum, due January 22,
2003, convertible into shares of the Company's common stock. Interest is
payable, at the option of the investor, in cash or shares of the Company's
common stock. The note is convertible into such number of shares of the
Company's common stock as is determined by dividing (a) that portion of the
outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.332 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. Additionally, the Company issued a warrant to the investor to
purchase 3,313,253 shares of the Company's common stock at an exercise price
equal to $0.332 per share. The investor may exercise the warrant through
January 22, 2009. In accordance with EITF 00-27, the Company first determined
the value of the note and the fair value of the detachable warrants issued in
connection with this convertible debenture. The proportionate value of the note
and the warrants is $101,000 and $399,000, respectively. The value of the note
was then allocated between the note and the preferential conversion feature,
which amounted to $0 and $101,000, respectively.
On August 5, 2002, the Company entered into a convertible note purchase
agreement with an investor in the aggregate principal amount of $100,000 bearing
interest at the rate of eight percent (8%) per annum, due August 5, 2005,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock.
The note is convertible into such number of shares of the Company's common stock
as is determined by dividing (a) that portion of the outstanding principal
balance of the note by (b) the conversion price. The conversion price equals
the lesser of (x) $0.03 and (y) 70% of the average of the 3 lowest closing bid
prices during the 30 trading days prior to the conversion date. In accordance
with EITF 00-27, the value of the note was allocated between the note and the
preferential conversion feature, which amounted to $57,000 and $43,000,
respectively.
On January 31, 2003, the Company entered into a convertible note purchase
agreement with an investor whereby the Company converted a previous advance from
the investor into a convertible promissory note in the aggregate principal
amount of $150,000 bearing interest at the rate of eight percent (8%) per annum,
due January 31, 2005, convertible into shares of the Company's common stock.
Interest is payable, at the option of the investor, in cash or shares of the
Company's common stock. The note is convertible into such number of shares of
the Company's common stock as is determined by dividing (a) that portion of the
outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.0226 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. In accordance with EITF 00-27, the value of the note was
allocated between the note and the preferential conversion feature, which
amounted to $86,000 and $64,000, respectively.
On April 1, 2003, the Company entered into a convertible note purchase
agreements with three investors whereby the Company converted a previous
advances from the investors into a convertible promissory notes in the aggregate
principal amount of $390,000 bearing interest at the rate of eight percent (8%)
per annum, due April 1, 2005, convertible into shares of the Company's common
stock. Interest is payable, at the option of the investor, in cash or shares of
the Company's common stock. The note is convertible into such number of shares
of the Company's common stock as is determined by dividing (a) that portion of
the outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.0226 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. In accordance with EITF 00-27, the value of the note was
allocated between the note and the preferential conversion feature, which
amounted to $223,000 and $167,000, respectively.
Below is a roll-forward schedule of the convertible debentures:
(In thousands)
- ---------------------------------------------------------
Balance at June 30, 2001. . . . . . . . . . . . . . . . . $ 175
- --------------------------------------------------------- ---------------
Issuance of convertible debentures during the year. . . . 2,000
- --------------------------------------------------------- ---------------
Converted into common stock . . . . . . . . . . . . . . . (70)
- --------------------------------------------------------- ---------------
Value of warrants issued with convertible debentures. . . (1,209)
- --------------------------------------------------------- ---------------
Value of preferential conversion feature. . . . . . . . . (791)
- --------------------------------------------------------- ---------------
Amortization of value of warrants . . . . . . . . . . . . 437
- --------------------------------------------------------- ---------------
Amortization of value of preferential conversion feature. 261
- --------------------------------------------------------- ---------------
Balance at June 30, 2002. . . . . . . . . . . . . . . . . $ 803
- --------------------------------------------------------- ---------------
Issuance of convertible debentures during the year. . . . 640
- --------------------------------------------------------- ---------------
Converted into common stock . . . . . . . . . . . . . . . (164)
- --------------------------------------------------------- ---------------
Value of preferential conversion feature. . . . . . . . . (274)
- --------------------------------------------------------- ---------------
Amortization of value of warrants . . . . . . . . . . . . 477
- --------------------------------------------------------- ---------------
Amortization of value of preferential conversion feature. 375
- --------------------------------------------------------- ---------------
Balance at June 30, 2003. . . . . . . . . . . . . . . . . $ 1,857
- --------------------------------------------------------- ===============
The weighted average interest rate on notes payable outstanding at June 30, 2003
and 2002, was 8.7% and 9.7% respectively.
9. SHAREHOLDERS' DEFICIENCY
Amendment To The Certificate Of Incorporation.
- ---------------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any shareholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
On September 28, 2001, the Company's shareholders approved a Board proposal to
amend the Certificate of Incorporation to increase the number of shares of
common stock that the Company is authorized to issue from 200,000,000 to
500,000,000 shares.
On August 9, 2002, the Company's board of directors approved and effected a 1
for 20 reverse stock split. All share and per share data have been
retroactively restated to reflect this stock split.
5% Series A Convertible, Redeemable 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
shareholders 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 2003, 2002 and 2001. As of June 30,
2003, the accumulated dividend in arrears was approximately $381,000 on the
Series A.
Private Equity Line Of Credit Agreement
- --------------------------------------------
On July 5, 2000, the Company entered into a Private Equity Line of Credit
Agreement with Impany Investment Limited ("Impany"). Pursuant to this
agreement, the Company has the right, subject to certain conditions, to sell up
to $36,000,000 of common stock over the next two years to Impany, which Impany
may resell to the public under a registration statement filed with the SEC in
September 2000. (The SEC has not yet declared this registration statement
effective). Beginning on the date the registration statement is declared
effective by the SEC, and continuing for two years thereafter, the Company may
in its sole discretion sell, or put, shares of the Company's common stock to
Impany. From time to time during the two-year term, the Company may make 18
monthly draw downs, by giving notice and requiring Impany to purchase shares of
the Company's common stock, for the draw down amount. Impany's purchase price
will be based upon the average of the three lowest closing bid prices of the
common stock over the period of five (5) trading days during which the purchase
price of the common stock is determined with respect to the put date, which
period shall begin two (2) trading days prior to the put date and end two (2)
trading days following the put date. During fiscal 2001, the Company sold
$750,000 of common stock under this agreement. Funding under this agreement is
not currently available to the Company since the Company has not been able to
get its registration statement declared effective by the SEC.
Common Stock Warrants
- -----------------------
In August 2000, the Company issued "retention" warrants to employees that allow
the purchase of up to 166,050 shares of common stock at a purchase price of
$0.20 per share. These warrants became exercisable in January 2001 for those
employees who have remained employed by the Company through that period. The
Company took a charge of approximately $175,000 since the exercise price of the
warrants was less than the value of the Company's common stock at the date of
issuance.
In August 2000, the Company issued warrants to officers and key employees that
allow the purchase of 106,800 shares of common stock at a purchase price of
$6.00 per share. These warrants are exercisable immediately.
In December 2000 in connection with the issuance of a convertible note payable,
the Company issued warrants to purchase 502,000 shares of the Company's common
stock at an exercise price equal to $1.50 per share. The purchasers may
exercise the warrants through December 12, 2005. The value of these warrants
was estimated at $123,000 using the Black-Scholes option-pricing model. The
following assumptions were used: average risk-free interest rate of 4.0%;
expected life of 1 year; dividend yield of 0%; and expected volatility of 30%.
In connection with the Private Equity Line of Credit Agreement, the Company
issued a warrant on July 5, 2000 to Impany to purchase up to 100,000 shares of
its common stock at an exercise price equal to $11.40 per share. Impany may
exercise the warrant through January 5, 2003. The value of these warrants was
estimated at $145,000 using the Black-Scholes option-pricing model. The
following assumptions were used: average risk-free interest rate of 4.0%;
expected life of 1 year; dividend yield of 0%; and expected volatility of 30%.
In connection with certain convertible debentures issued during fiscal 2002, the
Company issued to the debenture holders warrants to purchase up to 5,061,450
shares of its common stock at an exercise prices ranging from $0.0332 to $1.30.
The warrants expire between July 26, 2006 and January 22, 2009. The value of
these warrants was estimated at $1,209,000. The Black-Scholes option-pricing
model was used to determine the value of these warrants. The following
assumptions were used: average risk-free interest rate of 3.5%; expected life of
5 years; dividend yield of 0%; and expected volatility of 179%. The value was
then compared to the value of the underlying convertible debenture and the
proportionate value was assigned to the detachable warrants and the underlying
convertible debenture. The value of the warrants of $1,209,000 is being
amortized over the term of the underlying convertible debenture. The
amortization expense for fiscal 2002 was $437,000.
In fiscal 2002, the Company also issued 4,750,300 warrants to certain
consultants. The exercise prices of the warrants range from $0.10 to $0.80.
All these warrants were exercised during fiscal 2002. The value of these
warrants was estimated at $1,584,000 using the Black-Scholes option-pricing
model. The following assumptions were used: average risk-free interest rate of
3.5%; expected life of 1 year; dividend yield of 0%; and expected volatility of
179%.
In fiscal 2003, the Company also issued 2,830,300 warrants to certain
consultants. The exercise prices of the warrants range from $0.05 to $0.10.
All these warrants were exercised during fiscal 2003. The value of these
warrants was estimated at $70,000 using the Black-Scholes option-pricing model.
The following assumptions were used: average risk-free interest rate of 3.5%;
expected life of 0.25 years; dividend yield of 0%; and expected volatility of
179%.
The following is a summary of the warrant activity:
UNDERLYING
COMMON
PRICE PER SHARE SHARES
---------------- -----------
JUNE 30, 2000. . . . . . . . $ 8.20 - $1.50 517,900
Granted . . . . . . . . $ 0.20 - $11.40 874,850
Exercised . . . . . . . $ 0.20 - $8.00 (317,950)
Canceled. . . . . . . . $20.00 - $125.00 (33,850)
-----------
JUNE 30, 2001. . . . . . . . $ 0.20 - $11.40 1,040,950
Granted . . . . . . . . $ 0.102 - $1.30 9,811,700
Exercised . . . . . . . $ 0.20 - $8.00 (4,750,300)
Canceled. . . . . . . . -
----------------
JUNE 30, 2002. . . . . . . . $ 0.20 - $11.40 6,102,350
Granted . . . . . . . . $ 0.05 - $0.10 2,830,000
Exercised . . . . . . . $ 0.05 - $0.10 (2,830,000)
Canceled. . . . . . . . $ 11.40 (100,000)
-----------
Exercisable at June 30, 2003 $ 0.20 - $10.00 6,002,350
===========
The weighted average remaining contractual life of warrants outstanding at June
30, 2003 is 4.2 years. Of the warrants exercisable at June 30, 2003, 4,565,010
have an exercise price ranging from $0.20 to $0.76 and the remaining 1,437,340
have an exercise price ranging from $1.30 to $10.00.
For warrants granted during the year ended June 30, 2003 where the exercise
price was less than the stock price at the date of the grant, the
weighted-average fair value of such options was $0.025 and the weighted-average
exercise price of such options was $0.0558. In connection with the issuance of
these warrants, the Company recognized an expense of $70,000. The fair value of
these warrants was determined using the Black-Scholes pricing model.
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 10,600 and 50,000 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, 1999, options to acquire 100
shares were outstanding under the 1984 Plan and options to acquire 33,500 shares
remained available for grant under the 1988 and 1997 Plans.
In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans
("Outside Plan"), granted to employees, directors and other key persons of ITEC
or its subsidiaries options to purchase shares of the Company's common stock, at
an exercise price equal to no less than the fair market value of such stock on
the date of grant. Options are exercisable in installments at dates typically
ranging from one to not more than ten years after the date of grant.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the current market value.
Accordingly, the exercise price on an aggregate of 911 and 13,750 options under
the 1988 and Outside Plans, respectively, were canceled and reissued at an
exercise price of $20.00 per share.
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 25,000 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.
2001 Stock Option and Stock Purchase Plans.
- -------------------------------------------------
The Company's shareholders approved the 2001 Stock Option Plan, pursuant to
which 5,000,000 shares of common stock are reserved for issuance to eligible
employees and directors of, and consultants to, the Company or any of its
subsidiaries. Upon expiration, cancellation or termination of unexercised
options, the shares of the Company's Common Stock subject to such options will
again be available for the grant of options under the 2001 Stock Option Plan.
Options granted under the 2001 Stock Option Plan may either be incentive or
nonqualified stock options.
The Company's shareholders approved the 2001 Stock Purchase Plan, as amended,
which enables eligible employees to purchase in the aggregate up to 2,500,000
shares of common stock.
Stock Option Activity
- -----------------------
The following is a summary of the stock option activity:
STOCK OPTION PLANS
--------------------
UNDERLYING
PRICE PER COMMON
SHARE SHARES
--------------------
JUNE 30, 2000. . . . . . . . $ 18.20 - $169.00 11,750
Granted . . . . . . . . $ 2.80 - $6.80 -
Exercised . . . . . . . $ 2.80 - $23.80 -
Canceled. . . . . . . . $ 18.20 - $169.00 (3,650)
-----------
JUNE 30, 2001. . . . . . . . $ 6.80 - $150.00 8,100
Granted . . . . . . . . $ 0.60 - $0.60 2,750,000
Exercised . . . . . . . $ 0.20 - $2.00 (2,744,500)
Canceled. . . . . . . . -
--------------------
JUNE 30, 2002. . . . . . . . $ 0.60 - $150.00 13,600
Granted . . . . . . . . $ 0.01 - $0.015 34,150,000
Exercised . . . . . . . -
Canceled. . . . . . . . (5,500)
--------------------
EXERCISABLE AT JUNE 30, 2003 $ 0.01 - $28.20 34,158,100
===========
The weighted average remaining contractual life of options outstanding issued
under the Stock Option Plans is 2.6 years at June 30, 2003.
For options granted during the year ended June 30, 2003 where the exercise price
was less than the stock price at the date of the grant, the weighted-average
fair value of such options was $0.012 and the weighted-average exercise price of
such options was $0.0124. In connection with the issuance of these options, the
Company recognized an expense of $0 related since the exercise price was equal
to the value of the Company's stock at the date of issuance.
Common stock issued for services and compensation
- -------------------------------------------------------
The table below shows all the issuances of common stock for services during the
year ended June 30, 2003, 2002 and 2001. The value of the services was derived
by multiplying the market value of the Company's common stock at the date a
transaction for services was entered into by the number of shares issued.
Common stock issued for services and compensation
- -------------------------------------------------------
The table below shows all the issuances of common stock for services during the
year ended June 30, 2003, 2002 and 2001. The value of the services was derived
by multiplying the market value of the Company's common stock at the date a
transaction for services was entered into by the number of shares issued.
FISCAL 2003
-----------------------------
ISSUE DATE. . . . . DESCRIPTION SHARES ISSUED VALUE
- ------------------- ----------------------------- ------------- --------
7/01/02 . . . . . . Strategic planning/marketing 450,000 $ 72,000
- ------------------- ----------------------------- ------------- --------
7/08/02 . . . . . . Strategic planning/marketing 79,688 12,431
- ------------------- ----------------------------- ------------- --------
8/15/02 . . . . . . Strategic planning/marketing 500,000 25,000
- ------------------- ----------------------------- ------------- --------
8/19/02 . . . . . . Strategic planning/marketing 150,000 7,500
- ------------------- ----------------------------- ------------- --------
9/09/02 . . . . . . Strategic planning/marketing 1,500,000 79,500
- ------------------- ----------------------------- ------------- --------
9/18/02 . . . . . . Strategic planning/marketing 3,000,000 93,000
- ------------------- ----------------------------- ------------- --------
9/23/02 . . . . . . Strategic planning/marketing 100,000 2,200
- ------------------- ----------------------------- ------------- --------
9/24/02 . . . . . . Strategic planning/marketing 250,000 4,750
- ------------------- ----------------------------- ------------- --------
10/10/02. . . . . . Strategic planning/marketing 2,310,900 23,109
- ------------------- ----------------------------- ------------- --------
10/10/02. . . . . . Strategic planning/marketing 3,000,000 30,000
- ------------------- ----------------------------- ------------- --------
10/29/02. . . . . . Strategic planning/marketing 15,000,000 150,000
- ------------------- ----------------------------- ------------- --------
11/12/02. . . . . . Strategic planning/marketing 937,500 18,750
- ------------------- ----------------------------- ------------- --------
12/13/02. . . . . . Strategic planning/marketing 400,000 12,000
- ------------------- ----------------------------- ------------- --------
12/17/02. . . . . . Professional Services 1,000,000 10,000
- ------------------- ----------------------------- ------------- --------
12/17/02. . . . . . Strategic planning/marketing 4,000,000 40,000
- ------------------- ----------------------------- ------------- --------
1/03/03 . . . . . . Strategic planning/marketing 45,000,000 450,000
- ------------------- ----------------------------- ------------- --------
1/03/03 . . . . . . Strategic planning/marketing 500,000 5,000
- ------------------- ----------------------------- ------------- --------
1/07/03 . . . . . . Strategic planning/marketing 686,667 10,300
- ------------------- ----------------------------- ------------- --------
1/08/03 . . . . . . Strategic planning/marketing 2,000,000 30,000
- ------------------- ----------------------------- ------------- --------
2/10/03 . . . . . . Professional services 533,333 8,000
- ------------------- ----------------------------- ------------- --------
3/03/03 . . . . . . Strategic planning/marketing 300,000 3,000
- ------------------- ----------------------------- ------------- --------
4/10/03 . . . . . . Strategic planning/marketing 1,000,000 10,000
- ------------------- ----------------------------- ------------- --------
6/10/03 . . . . . . Strategic planning/marketing 4,333,333 65,000
- ------------------- ----------------------------- ------------- --------
6/23/03 . . . . . . Strategic planning/marketing 5,702,079 85,531
- ------------------- ----------------------------- ------------- --------
92,733,500 $ 1,247,071
=================== =============================
FISCAL 2002
-----------------------------
ISSUE DATE . . . DESCRIPTION SHARES ISSUED VALUE
- ---------------- ----------------------------- ------------- --------
7/09/01. . . . . Strategic planning/marketing 250,000 $350,000
- ---------------- ----------------------------- ------------- --------
10/16/01 . . . . Legal services 21,600 13,000
- ---------------- ----------------------------- ------------- --------
11/1/01. . . . . Legal services 16,666 10,000
- ---------------- ----------------------------- ------------- --------
11/1/01. . . . . Strategic planning/marketing 400,000 240,000
- ---------------- ----------------------------- ------------- --------
11/14/01 . . . . Legal services 6,667 5,000
- ---------------- ----------------------------- ------------- --------
12/17/01 . . . . Employee compensation 6,500 1,000
- ---------------- ----------------------------- ------------- --------
1/8/02 . . . . . Legal services 14,306 9,000
- ---------------- ----------------------------- ------------- --------
3/12/02. . . . . Strategic planning/marketing 31,487 6,000
- ---------------- ----------------------------- ------------- --------
3/14/02. . . . . Strategic planning/marketing 300,000 60,000
- ---------------- ----------------------------- ------------- --------
4.24.02. . . . . Compensation 10,000 5,000
- ---------------- ----------------------------- ------------- --------
5/2/02 . . . . . Strategic planning/marketing 1,250,000 250,000
- ---------------- ----------------------------- ------------- --------
5.21.02. . . . . Strategic planning/marketing 200,000 80,000
- ---------------- ----------------------------- ------------- --------
6/3/02 . . . . . Strategic planning/marketing 339,369 68,000
- ---------------- ----------------------------- ------------- --------
6/18/02. . . . . Employee compensation 333,383 278,000
- ---------------- ----------------------------- ------------- --------
3,179,978 $ 1,375,000
================ =============================
FISCAL 2001
-----------------------------
ISSUE DATE . . . . DESCRIPTION SHARES ISSUED VALUE
- ------------------ ----------------------------- ------------- -------
12/4/2000. . . . . Strategic planning/marketing 35,000 $66,000
- ------------------ ----------------------------- ------------- -------
12/4/2000. . . . . Legal services 4,000 8,000
- ------------------ ----------------------------- ------------- -------
12/18/2000 . . . . Strategic planning/marketing 50,000 94,000
- ------------------ ----------------------------- ------------- -------
1/17/2000. . . . . Strategic planning/marketing 15,000 18,000
- ------------------ ----------------------------- ------------- -------
1/26/2000. . . . . Legal services 3,250 8,000
- ------------------ ----------------------------- ------------- -------
1/22/2000. . . . . Compensation 1,000 -
- ------------------ ----------------------------- ------------- -------
1/31/2001. . . . . Strategic planning/marketing 10,000 14,000
- ------------------ ----------------------------- ------------- -------
1/31/2001. . . . . Compensation 9,250 30,000
- ------------------ ----------------------------- ------------- -------
2/5/2001 . . . . . Compensation 5,500 16,000
- ------------------ ----------------------------- ------------- -------
2/14/2001. . . . . Strategic planning/marketing 10,000 25,000
- ------------------ ----------------------------- ------------- -------
3/6/2001 . . . . . Compensation 9,000 11,000
- ------------------ ----------------------------- ------------- -------
3/12/2001. . . . . Strategic planning/marketing 30,000 6,000
- ------------------ ----------------------------- ------------- -------
1/19/2001. . . . . Legal services 13,333 8,000
- ------------------ ----------------------------- ------------- -------
1/12/2001. . . . . Strategic planning/marketing 10,000 50,000
- ------------------ ----------------------------- ------------- -------
4/4/2001 . . . . . Legal services 4,000 7,000
- ------------------ ----------------------------- ------------- -------
5/3/2001 . . . . . Legal services 6,667 8,000
- ------------------ ----------------------------- ------------- -------
6/7/2001 . . . . . Legal services 3,333 4,000
- ------------------ ----------------------------- ------------- -------
219,333 $ 373,000
================== =============================
10. SEGMENT AND GEOGRAPHIC INFORMATION
-------------------------------------
During fiscal 2003, the Company managed and internally reported the Company's
business as three (3) reportable segments as follows:
(1) imaging products;
(2) imaging software;
(3) professional employer organization
Segment information for the fiscal year ended June 30, 2003, 2002, and 2001 was
as follows:
IMAGING
PEO BUSINESS PRODUCTS IMAGING SOFTWARE TOTAL
(In thousands)
Selected statement of operations activity:
FISCAL YEAR ENDED JUNE 30, 2003
Revenues. . . . . . . . . . . . . . . . $ 2,899 $ 924 $ 367 $ 4,190
Cost of revenues. . . . . . . . . . . . (1,813) (396) (90) (2,290)
Operating income. . . . . . . . . . . . 1,086 528 277 1,891
FISCAL YEAR ENDED JUNE 30, 2002
Revenues. . . . . . . . . . . . . . . . $ 3,254 $ 3,574 $ 580 $ 7,408
Cost of revenues. . . . . . . . . . . . (2,389) (2,868) (99) (5,356)
Operating income (loss) . . . . . . . . 865 706 481 2,052
FISCAL YEAR ENDED JUNE 30, 2001
Revenues. . . . . . . . . . . . . . . . $ - $ 2,897 $ 555 $ 3,454
Cost of revenues. . . . . . . . . . . . - (2,742) - (2,742)
Operating income. . . . . . . . . . . . - 155 555 710
Information regarding revenue by products and service groups is not presented
for the fiscal year ended June 30, 2001 because it is currently impracticable to
do so due to various reorganizations of the Company's accounting systems. A
comprehensive accounting system was implemented during fiscal 2002.
As of and during the years ended June 30, 2003, 2002, and 2001, no customer
accounted for more than 10% of consolidated accounts receivable or total
consolidated revenues.
Net sales from principal geographic areas were as follows:
(In thousands) . . 2003 2002 2001
------ --------- --------
Europe. . . . . . . $ 367 $ 299 $ 82
Asia. . . . . . . . - 328 633
Others. . . . . . . - 295 34
------ --------- --------
Total export sales. 367 922 749
Domestic sales. . . 3,823 6,486 2,703
------ --------- --------
Total sales. . . . $4,190 $ 7,408 $ 3,452
====== ========= ========
11. INCOME TAXES
The Company's provision for income taxes is accounted for in accordance with
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 that are more likely than not to not be realized.
The provision (benefit) for income taxes is as follows for the years ended June
30:
2003 2002 2001
-------------- -------------- --------------
Current - State. $ - $ - $ -
Deferred benefit - - -
-------------- -------------- --------------
$ - $ - $ -
============== ============== ==============
The components of deferred income taxes are as follows at June 30:
(In thousands) . . . . . . . . . . . . 2003 2002 2001
--------------- --------------- ---------------
Deferred tax assets
Net operating loss carryforwards. $ 37,100 $ 34,500 $ 30,000
Other . . . . . . . . . . . . . . 500 500 500
--------------- --------------- ---------------
37,600 35,000 30,500
Valuation allowance. . . . . . . . . . (37,600) (35,000) (30,500)
--------------- --------------- ---------------
$ - $ - $ -
=============== =============== ===============
The Company's federal and state net operating loss carryforwards expire in
various years through 2017. The Company has made numerous equity issuances that
could result in limitations on the annual utilization of the Company's net
operating loss carryforwards. The Company has not performed an analysis to
determine the effect of such changes.
The provision for income taxes results in an effective rate that differs from
the federal statutory rate. Reconciliation between the actual tax provision and
taxes computed at the statutory rate is as follows for the years ended June 30:
(In thousands) . . . . . . . . . . . . . . . . . . . . . 2003 2002 2001
--------------------- --------------------- ---------------------
Benefit (provision) at federal statutory income tax rate. $ 2,600 $ 4,500 $ 2,808
Losses for which no current benefit is available. . . . . (2,600) (4,500) (2,808)
State income taxes. . . . . . . . . . . . . . . . . . . . - - -
--------------------- --------------------- ---------------------
$ - $ - $ -
===================== ===================== =====================
12. COMMITMENTS AND CONTINGENCIES
-------------------------------
Lease Commitment
- -----------------
The Company leases its operating facilities under a lease agreement that expires
in March 2006. Subsequent to June 30, 2002, the Company signed a new a new
lease for its corporate facility that expires in October 2005 that is included
in the future minimum lease payments in that table below. In addition, the
Company leases other facilities and equipment under operating and capital
short-term leases.
Total rental expense was approximately $228,000, $492,000 and $457,000 for the
years ended June 30, 2003, 2002 and 2001, respectively.
Future minimum lease payments under non-cancelable capital and operating leases
with initial or remaining terms of one year or more are as follows:
(In thousands) . . . . . . . . . . . . . . . CAPITAL LEASES OPERATING LEASES
- -------------------------------------------- ------------------- -----------------
YEAR ENDING JUNE 30,
- --------------------------------------------
2003 . . . . . . . . . . . . . . . . . . . . $ 481 $ 296
- -------------------------------------------- ------------------- -----------------
2004 . . . . . . . . . . . . . . . . . . . . 29 197
- -------------------------------------------- ------------------- -----------------
2005 . . . . . . . . . . . . . . . . . . . . 11 116
- -------------------------------------------- ------------------- -----------------
2006 . . . . . . . . . . . . . . . . . . . . 9 -
- -------------------------------------------- ------------------- -----------------
2007 . . . . . . . . . . . . . . . . . . . . - -
- -------------------------------------------- ------------------- -----------------
Net minimum lease payments . . . . . . . . . $ 530 $ 609
- -------------------------------------------- ------------------- =================
Less: Amounts representing interest. . . . . (97)
- -------------------------------------------- -------------------
Present value of net minimum lease payments. 433
- -------------------------------------------- -------------------
Less: current portion. . . . . . . . . . . . (405)
- -------------------------------------------- -------------------
Long-term portion. . . . . . . . . . . . . . $ 28
- -------------------------------------------- ===================
Legal Matters
- --------------
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody made
a public announcement that they had filed a lawsuit against the Company and
certain current and past officers and/or directors, alleging violation of
federal securities laws and, in November 1999, the lawsuit, filed in the name of
Nahid Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on the Company. In January 2003, the Company entered into
a Stipulation of Settlement with the plaintiffs. It agreed to pay the
plaintiffs 5,000,000 shares of common stock and $200,000 in cash. The Parties
have accepted the settlement. ITEC has issued the shares, and its insurance
carrier has paid the $200,000 cash payment. Pursuant to a hearing in May 2003
the Court provided approval to the settlement.
On August 22, 2002, the Company was sued by its former landlord, Carmel Mountain
#8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127.
ITEC was a party to a lawsuit filed by Symphony Partners, L.P. related to its
acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July 22,
2003, the plaintiffs sought payment of $702 thousand. In June 2003, the Company
entered into a settlement with the plaintiffs for a cash payment of $274
thousand, which has been paid.
ITEC is one of dozens of companies sued by The Massachusetts Institute of
Technology, et al., related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, the Company entered into a settlement
with the plaintiffs who have agreed to dismiss their claims against ITEC with
prejudice in exchange for a settlement fee payment of $10,000, which has been
paid.
The Company has been sued in Illinois state court along with AIA/Mirriman, its
insurance brokers by the Arena Football League-2 ("AFS"). Damages payable to
AF2, should they win the suit, could exceed $700,000. The Company expects to
defend its position and rely on representations of its insurance brokers.
Throughout fiscal 2001, 2002 and 2003, and through the date of this filing,
approximately fifty trade creditors have made claims and/or filed actions
alleging the failure of the Company to pay its obligations to them in a total
amount exceeding $3.0 millions which has been reduced to $1.8 million during the
2003. These actions are in various stages of litigation, with many resulting in
judgments being entered against the Company. Several of those who have obtained
judgments have filed judgment liens on the Company's assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars.
In connection with ITEC's acquisition of controlling interest of Greenland
Corporation, the following are the outstanding legal matters for Greenland
Corporation:
Greenland, along with Seren Systems ("Seren"), its then current and primary
software developer and supplier for its own ABM terminals, was in the process of
completing development of the check cashing service interface to the Mosaic
Software host system being implemented to support a large network of V.com
terminals. In September 2000, Seren unilaterally halted testing and effectively
shutdowns any further check cashing development for the V.com project. The
parties participating in this project may have been financially damaged, related
to the delay in performance by Greenland and Seren. None of the parties have
brought suit against Greenland and/or Seren at this time. There is no
assurance, however, that such suit(s) will not be brought in the future.
On May 23, 2001 Greenland filed a Complaint in San Diego County naming Michael
Armani as the defendant. The Complaint alleges breach of contract by Michael
Armani in connection with two separate stock purchase agreements. Greenland
seeks damages in the amount of $474,595. On August 7, 2001 Greenland filed a
request for Entry of Default against Mr. Armani in the amount of $474,595 and
the court granted entry of default. Subsequently Mr. Armani filed a motion to
set aside the entry of default and on October 26, 2001 the court granted said
motion and the entry of default was set aside. Greenland and Mr. Armani
participated in mediation and as a result entered into a settlement agreement
whereby Mr. Armani agreed to make certain cash payments to Greenland and the
parties entered into mutual release of all claims. Mr. Armani defaulted in his
obligation to make the first cash payment and consequently, Greenland obtained a
judgment against Mr. Armani for $100,000. Greenland is continuing its efforts
to collect on the judgment.
On May 23, 2001 Arthur Kazarian, Trustee for the General Wood Investment Trust
(the "Landlord") filed a Complaint in San Diego County naming Greenland as a
defendant. The Complaint alleges breach of contract pursuant to the terms of
the lease agreement between the Company and the Landlord for the real property
located at 1935 Avenida Del Oro, Oceanside, California and previously occupied
by Greenland. The Complaint seeks damages in the amount of approximately
$500,000. Although Greenland remains liable for the payments remaining for the
term of the lease, the Landlord has a duty to mitigate said damages. Greenland
recorded a lease termination liability of $275,000 during the year ended
December 31, 2001. Greenland entered into a settlement agreement with Arthur
Kazarian, Trustee for the General Wood Investment Trust (the "Landlord") whereby
Greenland agreed to pay the sum of $220,000 to the Landlord in installments
payments of $20,000 in May 2002, $50,000 in October 2002 and the remaining
balance in December 2002. In the event Greenland defaults in any or all
scheduled payments, the Landlord is entitled to a stipulated judgment of
approximately $275,000. Greenland was unable to make the scheduled payments and
as a result, on July 8, 2002, the Landlord has entered a judgment lien against
Greenland in the amount of $279,654.
Greenland entered into an agreement with Intellicorp, Inc. ("Intellicorp")
whereby Intellicorp agreed to invest $3,000,000 in exchange for seats on the
board of directors and restricted shares of common stock of Greenland. After
making the initial payment of $500,000, Intellicorp defaulted on the balance.
Greenland sued for recovery of the unpaid $2,500,000. Greenland had issued
46,153,848 shares of common stock for the investment, which were returned to
Greenland and cancelled. A default judgment was entered against defendant
IntelliCorp, IntelliGroup, and Isaac Chang. In June 2003, a judgment was
entered in the Superior Court of the State of California, County of San Diego,
against the defendants in favor of Greenland. The amount of the judgment was
$3,950,640.02 and was comprised of an award of $2,950,640.02 for compensatory
damages and an award of $1,000,000.00 for punitive damages. The Court found, by
clear and convincing evidence that the Defendants acted maliciously and with the
intent to defraud Greenland when they entered into a private placement
transaction to fund Greenland. The defendant's ability to pay is unknown. The
appeal period has expired and the Company is beginning the collection process.
Max Farrow, a formal officer of Greenland, filed a Complaint in San Diego County
naming Greenland, Thomas J. Beener, Intelli-Group, Inc., Intelli-Group LLC and
Intelli-Corp, Inc. as defendants. The Complaint alleges breach of contract in
connection with Mr. Farrow's resignation as an officer and director of the
Company in January 2001. Greenland and Mr. Thomas Beener, entered into a
settlement agreement with Max Farrow whereby Mr. Farrow agreed to release Mr.
Beener from all claims, obligations etc., in exchange for the issuance of 8
million restricted shares of Greenland common stock. The good faith settlement
was approved by the court and the agreed upon consideration was delivered to Mr.
Farrow. Greenland entered into a settlement with Farrow whereby Greenland
agreed to a judgment of $125,000. However, the judgment will not be enforced
until such time as efforts to collect against IntelliCorp et al have been
exhausted. In the event funds are collected from IntelliCorp. Mr. Farrow will
receive the first $125,000 plus 50% of the next $200,000 collected. Greenland
will retain all amounts collected thereafter.
Fund Recovery, a temporary staffing services filed a complaint against Greenland
alleging breach of contract. A summary judgment motion is pending. Greenland
recorded the liability amount of $14,000 in the consolidated financial
statements.
John Ellis has filed a demand for arbitration in San Diego County against
Greenland seeking damages of approximately $70,000 for an alleged breach of
contract action. Greenland believes it has valid defenses to the allegations.
Mr. Ellis appears to have abandoned this action in arbitration and has elected
to pursue a civil suit. Ellis has appeared to have abandoned arbitration.
However, arbitration action is proceeding and the parties are attempting
mediation to avoid the cost and time of an arbitration proceeding.
NKS Enterprises, Inc. commenced a legal action against Greenland in San Diego
Superior Court in Vista California seeking damages in connection with the
purchase and operation of a MaxCash ABM. The case was settled in December 2002.
The maximum amount to be paid under the settlement is $100,000. In exchange,
Greenland will receive the MaxCash ABM sold to NKS Enterprises. This amount was
recorded as a liability in the consolidated financial statements.
In connection with the Company's controlling interest of Quik Pix, Inc., the
Company is not aware of any pending litigation.
From time to time, Greenland and QPI may be involved in litigation relating to
claims arising out of their operations in the normal course of business.
13. GAIN ON EXTINGUISHMENT OF DEBT
----------------------------------
During the year ended June 30, 2003, the Company recognized a gain on
extinguishment of debt of $2,370,000. This gain resulted primarily from the
write off of stale accounts payable as discussed below, as well as a gain on a
settlement of a long-term note payable of $702,000, which was settled for
$274,000 in cash resulting in a gain of $428,000. With respect to the write-off
of accounts payable, the Company reviewed its accounts payable and determined
that $1,942,000 was associated with unsecured creditors. The Company, based
upon an opinion provided by independent legal counsel, has been released as the
obligator of these liabilities. Accordingly, management has elected to adjust
its accounts payable and to classify such adjustments as extinguishment of debt.
14. SUBSEQUENT EVENTS
------------------
From July 1, 2003 to November 6, 2003, the Company issued 109,963,339 shares of
its common stock to consultants, for warrant exercises, for conversion of
convertible debt, and for the reduction of debt.
SELECTED QUARTERLY FINANCIAL DATA
- ------------------------------------
(unaudited) (in thousands, except per share amounts)
(In thousands) . . . . . . . . . . . . . . . . QUARTERS ENDED
- ---------------------------------------------- ----------------
SEPT. 30, 2002 DEC. 31, 2002 MAR. 31, 2003 JUNE 30, 2003
---------------- --------------- --------------- ---------------
Net revenues . . . . . . . . . . . . . . . . . $ 1.106 $ 397 $ 576 $ 2,111
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Net income (loss) before cumulative effect of
accounting change . . . . . . . . . . . . . (2,052) (652) 42 (4,193)
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Cumulative effect of accounting change . . . . - - - -
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Net income (loss). . . . . . . . . . . . . . . $ (2,052) $ (652) $ 42 $ (4,193)
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Net income (loss) per share before cumulative
effect of accounting change - basic . . . . $ (0.08) $ (0.01) $ (0.00) $ (0.03)
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Cumulative effect of accounting change per
share - basic . . . . . . . . . . . . . . . $ (0.08) $ (0.01) $ (0.00) $ (0.03)
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Net income (loss) per share - basic. . . . . . $ (0.08) $ (0.01) $ (0.00) $ (0.03)
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Net income (loss) per share - diluted. . . . . $ (0.08) $ (0.01) $ (0.00) $ (0.03)
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Shares used in per share calculation (basic) . 24,662 66,284 140,754 157,744
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
Shares used in per share calculation (diluted) 24,662 66,284 140,754 157,744
- ---------------------------------------------- ---------------- --------------- --------------- ---------------
(In thousands). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QUARTERS ENDED
- ----------------------------------------------------------------------------------- ----------------
SEPT. 30, 2001 DEC. 31, 2001
---------------- ---------------
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.078 $ 2,122
- ----------------------------------------------------------------------------------- ---------------- ---------------
Net income (loss) before cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,182) (1,854)
- ----------------------------------------------------------------------------------- ---------------- ---------------
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . . . . . - -
- ----------------------------------------------------------------------------------- ---------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,182) $ (1,854)
- ----------------------------------------------------------------------------------- ---------------- ---------------
Net income (loss) per share before cumulative
effect of accounting change - basic. . . . . . . . . . . . . . . . . . . . . . . $ (0.14) $ (0.19)
- ----------------------------------------------------------------------------------- ---------------- ---------------
Cumulative effect of accounting change per
share - basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
- ----------------------------------------------------------------------------------- ---------------- ---------------
Net income (loss) per share - basic . . . . . . . . . . . . . . . . . . . . . . . . $ (0.14) $ (0.19)
- ----------------------------------------------------------------------------------- ---------------- ---------------
Net income (loss) per share before cumulative effect of accounting change- diluted. $ (0.14) $ (0.19)
- ----------------------------------------------------------------------------------- ---------------- ---------------
Shares used in per share calculation (basic). . . . . . . . . . . . . . . . . . . . 8,549 9,952
- ----------------------------------------------------------------------------------- ---------------- ---------------
Shares used in per share calculation (diluted). . . . . . . . . . . . . . . . . . . 8,549 9,952
- ----------------------------------------------------------------------------------- ---------------- ---------------
(In thousands)
- -----------------------------------------------------------------------------------
MAR. 31, 2002 JUNE 30, 2002
--------------- ---------------
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,527 $ 1,681
- ----------------------------------------------------------------------------------- --------------- ---------------
Net income (loss) before cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,128) (9,524)
- ----------------------------------------------------------------------------------- --------------- ---------------
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . . . . . - -
- ----------------------------------------------------------------------------------- --------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,128) $ (9,524)
- ----------------------------------------------------------------------------------- --------------- ---------------
Net income (loss) per share before cumulative
effect of accounting change - basic. . . . . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.55)
- ----------------------------------------------------------------------------------- --------------- ---------------
Cumulative effect of accounting change per
share - basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
- ----------------------------------------------------------------------------------- --------------- ---------------
Net income (loss) per share - basic . . . . . . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.55)
- ----------------------------------------------------------------------------------- --------------- ---------------
Net income (loss) per share before cumulative effect of accounting change- diluted. $ (0.09) $ (0.55)
- ----------------------------------------------------------------------------------- --------------- ---------------
Shares used in per share calculation (basic). . . . . . . . . . . . . . . . . . . . 13,166 17,178
- ----------------------------------------------------------------------------------- --------------- ---------------
Shares used in per share calculation (diluted). . . . . . . . . . . . . . . . . . . 13,166 17,178
- ----------------------------------------------------------------------------------- --------------- ---------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and our Principal Accounting
Officer, of the effectiveness of our disclosure controls and procedures pursuant
to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, the Chief Executive Officer and the Principal Accounting
Officer concluded that our disclosure controls and procedures are effective, in
all material respects, with respect to the recording, processing, summarizing,
and reporting, within the time periods specified in the Securities and Exchange
Commission's rules and forms, of information required to be disclosed by us in
the reports that we file or submit under the Exchange Act.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation referred to above.
PART III
=========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- --------------------------------------------------------
DIRECTORS
The directors and executive officers of the Company, their ages and
positions with the Company as of June 30, 2003 are as follows:
Name . . . . . . . Age Since Director Title
Brian Bonar. . . . 56 1995 Chief Executive Officer
Richard H. Green . 67 2000 Director
Robert A. Dietrich 58 2000 Director
Eric W. Gaer . . . 55 2000 Director
Stephen J. Fryer . 65 2000 Director
Brian Bonar has served as a director of the Company since August 1995 and
became the Company's Chairman of the Board in December 1999. From August 1992
through April 1994, Mr. Bonar served as the Company's Director of Technology
Sales and from April 1994 through September 1994 as the Company's Vice
President, Sales and Marketing. In September 1994, Mr. Bonar became the
Company's Executive Vice President and, in July 1997, was appointed as the
Company's President and Chief Operating Officer. In April 1998 Mr. Bonar assumed
the post of CEO. From 1991 to 1992, Mr. Bonar was Vice President of Worldwide
Sales and Marketing for Bezier Systems, Inc., a San Jose, California-based
manufacturer and marketer of laser printers. From 1990 to 1991, he was Worldwide
Sales Manager for Adaptec, Inc., a San Jose-based laser printer controller
developer. From 1988 to 1990, Mr. Bonar was Vice President of Sales and
Marketing for Rastek Corporation, a laser printer controller developed located
in Huntsville, Alabama. From 1984 to 1988, Mr. Bonar was employed as Executive
Director of Engineering at QMS, Inc., an Alabama-based developer and
manufacturer of high-performance color and monochrome printing solutions. Prior
to these positions, Mr. Bonar was employed by IBM, U.K. Ltd. for approximately
17 years.
Dr. Richard H. Green has served as a director since September 2000. He is
currently the President of International Power & Environmental Company (IPEC), a
consulting company located in San Diego, California. From 1993 through 1995, he
served as Deputy Secretary of the State of California Environmental Protection
Agency (Cal/EPA). From 1988 through 1993 Dr. Green served as Manager of Program
Engineering and Review Office in the Office of Technology and Applications at
the Jet Propulsion Laboratory (JPL) in Pasadena, California, where he had held
various management positions since 1967. From 1965 through 1967, Dr. Green
served as Senior Engineer for The Boeing Company, Space Division. From 1983
through 1985, Dr. Green held the Corwin D. Denny Chair as Professor of Energy
and Director of the Energy Institute at the University of LaVerne, and from 1961
through 1964 served as Assistant Professor of Civil Engineering (Environmental
Sciences) at Washington State University. Dr. Green currently is a member of
the Governing Board of Pasadena City College. Dr. Green completed his
bachelor's degree at Whitman College in 1958, his Master of Science at
Washington State University in 1961, and his Ph.D. at Washington State
University, under a United States Public Health Services Career Development
Award, in 1965.
Robert A. Dietrich has served as a director of the Company since January
2000. Mr. Dietrich is President and CEO of Cyberair Communications Inc., a
privately-held telecommunications company with strategic interests in Internet
communications and "bandwidth" expansion technologies, as well as domestic and
international telephone services, in Irvine, California. Recently, Mr. Dietrich
was named President and CEO of Semper Resources Corporation, a public natural
resources holding company in Irvine, California. From 1996 to 2000, Mr. Dietrich
was Managing Director and CFO of Ventana International, Ltd., Irvine,
California, a venture capital and private investment-banking firm. From 1990 to
1994, Mr. Dietrich was Vice President and Chief Financial Officer of CEI, Inc.,
in Santa Ana, California, a commercial furnishings firm, prior to joining
Ventana. Mr. Dietrich is a graduate of the University of Notre Dame, with a
bachelor's degree in accounting, and the University of Detroit, with a master's
degree in finance. He served as a lieutenant in the U.S. Navy's Atlantic Command
Operations Control Center.
Eric W. Gaer has served as a director since March 2000. Since 1998, Mr. Gaer
has been the President and CEO of Arroyo Development Corporation, a
privately-held, San Diego-based management consulting company. From 1996 to
1998, he was Chairman, President and CEO of Greenland Corporation, a
publicly-held high technology company in San Diego, California. In 1995, he was
CEO of Ariel Systems, Inc., a privately-held engineering development company in
Vista, California. Over the past 25 years, Mr. Gaer has served in executive
management positions at a variety of high-technology companies, including ITEC,
Daybreak Technologies, Inc., Venture Software, Inc., and Merisel, Inc. In 1970,
he received a Bachelor of Arts degree in mass communications from California
State University, Northridge.
Stephen J. Fryer has served as a director of the Company since March 2000. He
is currently Chairman of the Board and CEO of Pen Interconnect, Inc. ("Pen"), a
---
high technology company in Irvine, California. He began his employment service
at Pen in 1997 as Senior Vice President of Sales and Marketing. At Pen, he
became a director in 1995 and was appointed President and CEO in 1998. From
1989 to 1996, Mr. Fryer was a principal in Ventana International, Ltd., a
venture capital and private investment-banking firm in Irvine, California. He
has over 28 years experience in the computer industry in the United States, Asia
and Europe. Mr. Fryer graduated from the University of California in 1960 with
a bachelor's degree in mechanical engineering.
EXECUTIVE OFFICERS
The executive officers of the Company as of June 30, 2003, are as follows:
NAME. . . . . . . . . . . . . . . AGE POSITION
- ---------------------------------- ---------------------------------- ----------------------------
Chairman of the Board of Directors
Brian Bonar. . . . . . . . . . . . 56 and Chief Executive Officer
Chief Operating Officer
James R. Downey, Jr. . . . . . . . 55 and Chief Accounting Officer
Senior Vice President, General
Philip J. Englund. . . . . . . . . 59 Counsel and Secretary
Brian Bonar is also a director of the Company. See above for a discussion
of Mr. Bonar's business experience.
James R. Downey, Jr. joined the Company in January 2003 and was appointed
Chief Operating Officer and Chief Accounting Officer by the Board of Directors
on February 25, 2003. Mr. Downey has over 33 years of operational and financial
experience in a wide range of industries and firms. From 1999 to 2003, he was an
owner/manager of his own businesses. From 1992 through 1999 he served as the
Chief Financial Officer of a primary metals multi-plant manufacturer and a high
technology manufacturer of sheet metal components used in jet engines and other
aerospace applications. From 1987 to 1992 he was the Director of Manufacturing
Consulting for western New England for the firm of Coopers & Lybrand. From 1981
to 1987, he was the Chief Financial Officer and Vice President of Instrument
Manufacturing for Zygo Corporation, a manufacturer of non-contact test and
measurement instrumentation and precision optical components. From 1971 to 1981
he was both an audit and consulting manager for Price Waterhouse & Co. and Peat
Marwick, Mitchell and Co. He graduated from the University of Colorado in 1970
with a degree in Business Administration and is a Certified Public Accountant.
Philip J. Englund was Senior Vice President, General Counsel and Secretary
of the Company since February 1999. He resigned his positions with the Company
on August 23, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------- ------------- --------------------
FISCAL OTHER ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION. . . . YEAR SALARY BONUS COMPENSATION SARS (#) OTHER COMP
--------- -------------
Brian Bonar. . . . . . . . . . . . 2003 $ 275,000 $ -- $ 76,814 15,000,000 $ --
Chairman, Board of Directors,. . . 2002 $ 230,000 -- -- 1,750,000 --
President and C.E.O. . . . . . . . 2001 243,333 -- -- 31,250 --
Christopher W. McKee (1) 2002 $ 17,625 $ -- $ -- -- $ --
Senior Vice President. . . . . . . 2001 175,000 -- -- 20,763 --
Philip J. Englund (2) 2002 $ 135,000 $ -- $ -- -- $ --
Senior Vice President, General . . 2001 165,000 -- -- 18,000 --
Counsel and Secretary
James R. Downey, Jr. 2003 $ 79,000 $ -- $ -- 5,500,000 $ --
Chief Operating Officer and Chief
Accounting Officer
(1) Mr. McKee resigned effective August 3, 2001
(2) Mr. Englund resigned effective August 23, 2002.
(3) Mr. Downey joined the Company effective January 6, 2003
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on Options/SARs granted in the
2003 Fiscal Year to the Named Officers.
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SECURITIES TOTAL VALUE AT ASSUMED
UNDERLYING OPTIONS/SARS ANNUAL RATES OF
OPTIONS/SARS GRANTED TO EXERCISE OR STOCK PRICE
GRANTED (#) EMPLOYEES IN BASE PRICE EXPIRATION APPRECIATION FOR
NAME . . . . . . . . . . (3) FISCAL YEAR ($/SHARE) DATE OPTION TERM (4)
- ------------------------ ------------- ------------------
5% ($) 10% ($)
-------------
Brian Bonar. . . . . . . 15,000,000 73 $ 0.01 2/1/12 $ 675,000 $1,350,000
Christopher W. McKee (1) --- --- --- --- --- ---
Philip J. Englund (2). . 300,000 10 0.40 11/15/03 6,000 12,000
James R. Downey, Jr. . . 5,500,000 24 0,01 2/1/12 247,500 495,000
(1) Mr. McKee resigned effective August 3, 2001
(2) Mr. Englund resigned effective August 23, 2002.
(3) Warrants/options become exercisable monthly over a 3-year period from date
of grant. Adjusted for 1-for-20
reverse stock split at August 9, 2002.
(4) Calculated based on the closing price of the Company's common stock on
October 15, 2003 ($0.03).
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information on option exercises in the 2003
Fiscal Year by the Named Officers and the value of such Named Officers'
unexercised options at June 30, 2003. Warrants to purchase Common Stock are
included as options. No stock appreciation rights were held by them at the end
of the 2003 Fiscal Year.
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SAR
NAME . . . . . . . . . . EXERCISE (#) REALIZED ($) OPTIONS/SARS AT FY-END (#) AT FISCAL YEAR END ($) (4)
- ------------------------
EXERCISABLE UNEXERCISABL EXERCISABLE UNEXERCISABL
------------
Brian Bonar 4,000,000 $ 40,000 19,007,500 --- $190,075
Christopher W. McKee (1) --- --- --- --- ---
Philip J. Englund (2) --- --- --- --- ---
James R. Downey, Jr. (3) --- --- 5,500,000 --- $ 55,000
NAME
- ------------------------
Brian Bonar ---
Christopher W. McKee (1) ---
Philip J. Englund (2) ---
James R. Downey, Jr. (3) ---
(1) Mr. McKee resigned effective August 3, 2001
(2) Mr. Englund resigned effective August 23, 2002.
(3) Mr. Downey joined the Company on January 6, 2003
(4) At the 2003 Fiscal Year end, the closing price of the Common Stock on that
date as quoted by the
NASD Electronic Bulletin Board was $0.01. Share amounts have been
adjusted for the 1-for-20 reverse split at
August 9, 2002
COMPENSATION OF DIRECTORS
Each member of the Board of Directors of the Company receives a fee of $500
from the Company for each meeting attended.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
None
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Gaer and Green.
Neither of these individuals was an officer or employee of the Company at any
time during the 2003 Fiscal Year. Mr. Gaer owns a company that receives
consulting fees from the Company.
AUDIT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Audit Committee currently consists of Messrs. Green and Dietrich.
Neither of these individuals was an officer or employee of the Company at any
time during the 2003 Fiscal Year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------
The following table sets forth certain information known to the best of the
Company's knowledge with respect to the beneficial ownership of Common Stock as
of October 15, 2003, by (i) all persons who are beneficial owners of five
percent (5 percent) or more of the Common Stock, (ii) each director, and (iii)
all current directors and executive officers individually and as a group. Unless
otherwise indicated, each of the shareholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws, where applicable.
NAME . . . . . . . . . . . NO. SHARES PERCENT OF CLASS (1)
- -------------------------- ---------- --------------------
Brian Bonar (2). . . . . . 19,007,500 6.53%
Robert A. Dietrich (3) . . 11,637,500 4.00%
Stephen J. Fryer (4) . . . 7,453,250 2.56%
Eric W. Gaer (5) . . . . . 9,936,000 3.41%
Richard Green (5). . . . . 9,969,500 3.42%
All current directors and
executive officers
(group of 5) (6) . . . . . 58,003,750 19.92%
(1) Percentage of ownership is based on 291,195,402 shares of Common Stock
outstanding on October 15, 2003. Shares of Common Stock subject to stock
options, warrants and convertible securities which are currently exercisable or
convertible or will become exercisable or convertible within 60 days after
October 15, 2003 are deemed outstanding for computing the percentage of the
person or group holding such options, warrants or convertible securities but are
not deemed outstanding for computing the percentage of any other person or
group.
(2) Includes 12,000,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after October
15, 2003.
(3) Includes 9,125,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after October
15, 2003.
(4) Includes 4,875,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after October
15, 2003.
(5) Includes 7,375,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after October
15, 2003.
(6) Includes 40, 750,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after October
15, 2003.
ITEM13. CERTAINRELATIONSHIPSANDRELATEDTRANSACTIONS.
- ------ ------------------------------------------
During the year ended June 30, 2003, the Company accrued consulting
expenses of $110,000 due Arroyo Development Corporation, owned by Mr. Eric Gaer,
a member of the Board of Directors. There was no officer or director
indebtedness to the Company.
ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- ------ ------------------------------------------
(1) Audit Fees - The aggregate fees billed for each of the last two fiscal
years by our principal accountants, Stonefield Josephson, Inc. and Pohl,
McNabola, Berg & Company, LLP, for professional services rendered for the audit
of our annual financial statements and review of financial statements included
in our Form 10-Qs or services that are normally provided by the accountants in
connection with statutory and regulatory filings or engagements for those fiscal
years were as follows:
2003 2002
------- -------
Stonefield Josephson, Inc.. . . . . $ - $64,500
Pohl, McNabola, Berg & Company, LLP $65,000 $ -
(2) Audit-Related Fees - The aggregate fees billed for each of the last
two fiscal years for assurance and related services by our principal
accountants, Stonefield Josephson, Inc. and Pohl, McNabola, Berg & Company, LLP,
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported in the preceding paragraph were as
follows:
2003 2002
----- -------
Stonefield Josephson, Inc.. . . . . $ - $36,600
Pohl, McNabola, Berg & Company, LLP $ - $ -
(3) Tax Fees - There were no fees billed for each of the last two fiscal
years for professional services provided by our principal accountants Stonefield
Josephson, Inc. and Pohl, McNabola, Berg & Company, LLP, for tax compliance, tax
advice, and tax planning.
(4) All Other Fees - There were no fees billed for each of the last two
fiscal years for the products and services provided by our principal
accountants, Stonefield Josephson, Inc. and Pohl, McNabola, Berg & Company, LLP,
other than the services reported in paragraphs (1), (2), and (3) above.
(5) Our audit committee's pre-approval policies and procedures described in
paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee
pre-approve all accounting related activities prior to the performance of any
services by any accountant or auditor.
(6) The percentage of hours expended on the principal accountant's
engagement to audit our financial statements for the most recent fiscal year
that were attributable to work performed by persons other than the principal
accountant's full-time, permanent employees was approximately 10%
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 23.
(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.
Form 8-K filed September 17, 2002
Form 8-K filed December 19, 2002
Form 8-K filed January 21, 2003
Form 8-K filed March 14, 2003
Form 8-K filed May 27, 2003
Form 8-K filed July 22,3003
(c) EXHIBITS.
The following exhibits are filed as part of, or incorporated by reference into,
this Form 10-K.
3(a) Certificate of Incorporation of the Company, as amended, and currently
in effect. See also below (Incorporated by reference to Exhibit 3(a) to 1988
Form 10-K) *
3(b) Certificate of Amendment of Certificate of Incorporation of the
Company, filed February 8, 1995, as amended, and currently in effect
(Incorporated by reference to Exhibit 3(b) to 1995 Form 10-K) *
3(c) Certificate of Amendment of Certificate of Incorporation of the
Company, filed May 23, 1997, as amended, and currently in effect (Incorporated
by reference to 1997 Form 10-K) *
3(d) Certificate of Amendment of Certificate of Incorporation, filed January
12, 1999, as amended and currently in effect (Incorporated by reference to Form
10-Q for the period ended December 31, 1998) *
3(e) Certificate Eliminating Reference to Certain Series of Shares of Stock
from the Certificate of Incorporation, filed January 12, 1999, as amended and
currently in effect (Incorporated by reference to Form 10-Q for the period ended
December 31, 1998) *
3(f) By-Laws of the Company, as amended, and currently in effect
(Incorporated by reference to Exhibit 3(b) to 1987 Form 10-K) *
3(g) Certificate of Amendment of Certificate of Incorporation, filed May 12,
2000, as amended and currently in effect (Incorporated by reference to Exhibit
3(g) to 2001 Form 10-K) *
4(a) Amended Certificate of Designation of Imaging Technologies Corporation
with respect to the 5% Convertible Preferred Stock (Incorporated by reference
to Exhibit 4(d) to 1987 Form 10-K) *
4(b) Amended Certificate of Designation of Imaging Technologies Corporation
with respect to the 5% Series B Convertible Preferred Stock (Incorporated by
reference to Exhibit 4(b) to 1988 Form 10-K) *
4(c) Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of Imaging Technologies Corporation (Incorporated
by reference to Exhibit 4(c) to 1998 Form 10-K) *
4(d) Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series D Convertible Preferred
Stock, filed January 13, 1999 (Incorporated by reference to Form 10-Q for the
period ended December 31, 1998) *
4(e) Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock to be Designated Series E Convertible Preferred
Stock, filed January 28, 1999 (Incorporated by reference to Form 10-Q for the
period ended December 31, 1998) *
10(a) Private Equity Line of Credit Agreement by and among certain Investors
and the Company (Incorporated by reference to Form 8-K, filed July 26, 2000) *
10(b) Convertible Note Purchase Agreement dated December 12, 2000 between
the Company and Amro International, S.A., Balmore Funds, S.A., and Celeste
Trust Reg. (Incorporated by reference to Form 8-K, filed January 19, 2001. *
10(c) Convertible Note Purchase Agreement dated July 26, 2001 between the
Company and Balmore Funds, S.A. (Incorporated by reference to Form 8-K filed
August 2, 2001. *
10(d) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc. (Incorporated by reference to Form 10-Q for the period
ended September 30, 2000) *
10(e) Agreement to Acquire Shares, dated December 1, 2000, between ITEC and
Quik Pix, Inc. (Incorporated by reference to Form 10-Q for the period ended
September 30, 2000) and subsequently cancelled. *
10(f) Agreement to Acquire Shares, dated December 17, 2000, between ITEC and
Pen Internconnect, Inc. (Incorporated by reference to Form 10-Q for the period
ended September 30, 2000) and subsequently cancelled. *
10(g) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc. (Incorporated by reference to Form 10-Q for the period
ended September 30, 2000) *
10(h) Convertible Promissory Note dated September 21, 2001 between the
Company and Stonestreet Limited Partnership. (Incorporated by reference to
Exhibit 10(u) of 2001 Form 10-K) *
10(i) Convertible Note Purchase Agreement dated September 21, 2001 between
the Company and Stonestreet Limited Partnership. (Incorporated by reference to
Exhibit 10(v) of 2001 Form 10-K) *
10(j) Registration Rights Agreement dated September 21, 2001 between the
Company and Stonestreet Limited Partnership. (Incorporated by reference to
Exhibit 10(w) of 2001 Form 10-K) *
10(k) Form of Warrant to Purchase 11,278,195 Shares of Common Stock of ITEC,
dated September 21, 2001, between ITEC and Stonestreet Limited Partnership.
(Incorporated by reference to Exhibit 10(x) of 2001 Form 10-K) *
10(l) Asset Purchase Agreement, dated October 25, 2001, among the Company
and Lisa Lavin, Gary J. Lavin, and Roland A. Fernando. (Incorporated by
reference to Exhibit 10(a) to September 2001 Form 10-Q) *
10(m) Audited Financial Statements of SourceOne Group, LLC. (Incorporated by
reference to Form 8-K filed on January 25, 2002) *
10(n) Secured Convertible Debenture issued by the Company to Bristol
Investment Fund, Ltd., dated January 22, 2002. (Incorporated by reference to
Exhibit 10(a) of December 2001 Form 10-Q) *
10(o) Securities Purchase Agreement between the Company and Bristol
Investment Fund, Ltd., dated January 22, 2002. (Incorporated by reference to
Exhibit 10(b) of December 2001 Form 10-Q) *
10(p) Registration Rights Agreement between the Company and Bristol
Investment Fund, Ltd., dated January 22, 2002. (Incorporated by reference to
Exhibit 10(c) of December 2001 Form 10-Q) *
10(q) Transaction Fee Agreement between the Company and Alexander Dunham
Securities, Inc., dated January 22, 2002. (Incorporated by reference to Exhibit
10(d) of December 2001 Form 10-Q) *
10(r) Stock Purchase Warrant issued to Alexander Dunham Securities, Inc.,
dated January 22, 2002. (Incorporated by reference to Exhibit 10(e) of December
2001 Form 10-Q) *
10(s) Stock Purchase Warrant issued to Bristol Investment Fund, Ltd., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(f) of December 2001
Form 10-Q) *
10(t) Security Agreement between the Company and Bristol Investment Fund,
Ltd., dated January 22, 2002. (Incorporated by reference to Exhibit 10(g) of
December 2001 Form 10-Q) *
10(u) Convertible Promissory Note between the Company and Stonestreet
Limited Partnership, dated November 7, 2001. (Incorporated by reference to
Exhibit 10(h) of December 2001 Form 10-Q) *
10(v) Convertible Note Purchase Agreement between the Company and
Stonestreet Partnership, dated November 7, 2001. (Incorporated by reference to
Exhibit 10(i) of December 2001 Form 10-Q) *
10(w) Registration Rights Agreement between the Company and Stonestreet
Limited Partnership, dated November 7, 2001. (Incorporated by reference to
Exhibit 10(j) of December 2001 Form 10-Q) *
10(x) Stock Purchase Warrant issued to Stonestreet Limited Partnership,
dated November 7, 2001 . (Incorporated by reference to Exhibit 10(k) of December
2001 Form 10-Q *
10(y) Acquisition Agreement between the Company and Dream Canvas, Inc.,
dated May 17, 2002; subject to completion of its terms. (Incorporated by
reference to Exhibit 10(y) of Form 10-K filed November 18, 2002.) *
10(z) Closing Agreement between the Company and Quik Pix, Inc., dated July
23, 2002, subject to completion of its terms. (Incorporated by reference to
Exhibit 10(z) of Form 10-K filed November 18, 2002.) *
10(aa) Agreement to Acquire Shares between the Company and Greenland
Corporation, dated August 5, 2002, subject to completion of its
terms.(Incorporated by reference to Exhibit 10(aa) to Form 10-K filed November
18, 2002.) *
10(ab) Acquisition Agreement, dated December 13, 2002, between the Company
and Baseline Worldwide, Limited. (Incorporated by reference to Exhibit 99.3 of
Form 8-K filed December 19, 2002.) *
10(ac) Secured Promissory Note in the amount of $2,250,000 issued by the
Company to Greenland Corporation, dated January 7, 2003. (Incorporated by
reference to Exhibit 99.1 of Form 8-K filed January 21, 2003.) *
10(ad) Security Agreement, dated January 7, 2003, between the Company and
Greenland Corporation. (Incorporated by reference to Exhibit 99.2 of Form 8-K
filed January 21, 2003.) *
10(ae) Agreement to Acquire Shares, dated August 9, 2002 between the Company
and Greenland Corporation. (Incorporated by reference to Exhibit 99.3 of Form
8-K filed January 21, 2003.) *
10(af) Closing Agreement, dated January 7, 2003, between the Company and
Greenland Corporation. (Incorporated by reference to Exhibit 99.4 of Form 8-K
filed January 21, 2003.) *
10(ag) Share Acquisition Agreement, dated June 12, 2002, between the Company
and Quik Pix, Inc. (Incorporated by reference to Exhibit 99.5 of Form 8-K filed
January 21, 2003.) *
10(ah) Closing Agreement, dated July 23, 2002, between the Company and Quik
Pix, Inc. (Incorporated by reference to Exhibit 99.6 of Form 8-K filed January
21, 2003.) *
10(ai) Stock Purchase Agreement among the Company, Greenland Corporation,
and ExpertHR-Oklahoma, dated March 18, 2003. (Incorporated by reference to
Exhibit 10(j) to Form 10-Q filed May 20, 3003). *
10(aj) Assignment of Patent between John Capezzuto and Quik Pix, Inc. dated
January 14, 2003. **
10(ak) Promissory Note between the Company and John Capezzuto dated June 1,
2003 (signed June 9, 2003)**
10(al) Promissory Note between the Company and John Capezzuto dated June 9,
2003 **
10(am) Agreement and Assignment of Rights, dated February 1, 2003, between
Accord Human Resources, Inc. and Greenland Corporation, and Imaging
Technologies. (Incorporated by reference to Exhibit 10(k) of Form 10-KSB filed
April 7, 2003 by Greenland Corporation.) *
10(an) Agreement and Assignment of Rights, dated March 1, 2003, between
StaffPro Leasing 2, Greenland Corporation, and ExpertHR. (Incorporated by
reference to Exhibit 10(l) of Form 10-KSB filed April 7, 2003 by Greenland
Corporation.) *
10(ao) Promissory Note, dated March 1, 2003, payable to StaffPro Leasing 2
by Greenland Corporation. (Incorporated by reference to Exhibit 10(k) of Form
10-KSB filed April 7, 2003 by Greenland Corporation.) *
10(op) Agreement to Acquire Shares between the Company and The Christensen
Group, et al, dated
April 1, 2003. **
21 List of Subsidiaries of the Company **
23.1 Consent of Independent Accountants - Boros & Farrington **
23.2 Consent of Independent Accountants - Stonefield Josephson, Inc. **
23.3 Consent of Independent Accountants - Pohl, McNabola, Berg and Company
**
99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 **
99.2 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 **
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: November 12, 2003 IMAGING TECHNOLOGIES CORPORATION
By:/s/ BRIAN BONAR
-----------------
Brian Bonar
Chief Executive Officer
By:/s/ JAMES R. DOWNEY, JR.
----------------------------
James R. Downey, Jr.
Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, Brian Bonar as his attorney-in-fact, each
with full power of substitution and resubstitution, for him or her in any and
all capacities, to sign any and all amendments to this Annual Report on Form
10-K (including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-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 that said
attorney-in-fact, or his 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 Annual
Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE. . . . . . . . . . . . . . . TITLE DATE
- -------------------------------------- ------------------------------ ----
Chairman of the Board of Directors,. November 12, 2003
/s/ Brian Bonar. . . . . . . . . . . . Chief Executive Officer, and
- --------------------------------------
Brian Bonar. . . . . . . . . . . . . . Acting Chief Financial Officer
(Principal Executive Officer)
/s/ Robert A. Dietrich . . . . . . . . November 12, 2003
- --------------------------------------
Robert A. Dietrich
Director
/s/ Eric W. Gaer . . . . . . . . . . . November 12, 2003
- --------------------------------------
Eric W. Gaer
Director
/s/ Stephen J. Fryer . . . . . . . . . November 12, 2003
- --------------------------------------
Stephen J. Fryer
Director
/s/ Richard H. Green . . . . . . . . . November 12, 2003
- --------------------------------------
Richard H. Green
Director