SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (858) 451-6120
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No
The number of shares outstanding of the registrant's common stock as of November
22, 2002 was 93,777,896.
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2002 (unaudited) and June 30, 2002 (audited) 2
Consolidated Statements of Operations
Three months ended September 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows
Three months ended September 30, 2002 and 2001 (unaudited) 4
Notes to Consolidated Financial Statements. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES
PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
CERTIFICATION 24
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND JUNE 30, 2002
(in thousands, except share data)
ASSETS
9/30/02 6/30/02
Current assets. . . . . . . . . . . . . . . . . . . . . . . . (unaudited) audited
Cash $ 22 $ 43
Accounts receivable, net of allowance for doubtful
accounts of $306 and $280 255 629
Inventories, net 141 151
Prepaid expenses and other current assets 46 33
----------------- ---------------
Total current assets 464 856
Property and Equipment, net 183 212
Workers' compensation deposit and other assets 112 112
----------------- ----------------
Total assets $ 759 $ 1,180
================= ================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Borrowings under bank notes payable $ 3,295 $ 3,295
Short-term notes payable, including amounts due to
related parties 2,871 2,796
Convertible debentures 1,073 803
Accounts payable 7,583 7,343
PEO payroll taxes and other payroll deductions 1,213 690
PEO accrued worksite employee 350 644
Other accrued expenses 6,367 6,036
----------------- ----------------
Total current liabilities 22,752 21,607
----------------- ----------------
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; 30,580,013 shares issued and outstanding
at September 30, 2002; 21,929,365at June 30, 2002 153 110
Common stock warrants 475 475
Paid-in capital 79,935 79,492
Accumulated deficit (102,976) (100,924)
----------------- ----------------
Total shareholders' deficiency (21,993) (20,427)
----------------- ----------------
Total liabilities and shareholders' deficiency $ 759 $ 1,180
================= ================
See Notes to Consolidated Financial Statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(in thousands, except share data)
2002 2001
Revenues
Sales of products. . . . . . . . . . . . . . . . $ 486 $ 1,057
Software sales, licenses and royalties . . . . . 138 21
PEO services . . . . . . . . . . . . . . . . . . 2,822 -
--------------- ---------------
3,446 1,078
--------------- ---------------
Costs and expenses
Cost of products sold. . . . . . . . . . . . . . 235 598
Cost of software sales, licenses and royalties. 21 -
Cost of PEO services . . . . . . . . . . . . . . 2,572 -
--------------- ---------------
Total cost of revenues . . . . . . . . . . . . . . . 2,828 598
--------------- ---------------
Gross profit. . . . . . . . . . . . . . . . . . . . . 618 480
--------------- ---------------
Operating expenses:
Selling, general, and administrative . . . . . . 2,053 1,413
Research and development. . . . . . . . . . . . - 72
--------------- ---------------
2,053 1,485
--------------- ---------------
Loss from operations. . . . . . . . . . . . . . . . . (1,435) (1,005)
--------------- ---------------
Other income (expense):
Interest and finance costs, net. . . . . . . . . (621) (177)
Other. . . . . . . . . . . . . . . . . . . . . . 4 -
--------------- ---------------
(617) (177)
--------------- ---------------
Loss before income taxes. . . . . . . . . . . . . . . (2,052) (1,182)
Income tax benefit (expense). . . . . . . . . . . . . - -
--------------- ---------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (2,052) $ (1,182)
=============== ===============
Loss per common share
Basic. . . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.14)
=============== ===============
Diluted. . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.14)
=============== ===============
Weighted average common shares. . . . . . . . . . . . 24,662 8,549
=============== ===============
Weighted average common shares - assuming dilution. . 24,662 8,549
=============== ===============
See Notes to Consolidated Financial Statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(in thousands, except share data)
2002 2001
--------------- ---------------
Cash flows from operating activities
--------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (2,052) $ (1,182)
-------------------------------------------------------- --------------- ---------------
Adjustments to reconcile net loss to net
cash used by operating activities
--------------------------------------------------------
Depreciation and amortization. . . . . . . . . . 29 16
-------------------------------------------------------- --------------- ---------------
Common stock issued for services . . . . . . . . 295 73
-------------------------------------------------------- --------------- ---------------
Amortization of debt discount. . . . . . . . . . 200 -
-------------------------------------------------------- --------------- ---------------
Value of services for exercise price of warrants 166 -
-------------------------------------------------------- --------------- ---------------
Value attributed to warrants issued for services 70 -
-------------------------------------------------------- --------------- ---------------
Changes in operating assets and liabilities
--------------------------------------------------------
Accounts receivable . . . . . . . . . . . . . 374 (516)
-------------------------------------------------------- --------------- ---------------
Inventories . . . . . . . . . . . . . . . . . 10 (90)
-------------------------------------------------------- --------------- ---------------
Prepaid expenses and other. . . . . . . . . . (13) (14)
-------------------------------------------------------- --------------- ---------------
PEO liabilities . . . . . . . . . . . . . . . 229 -
-------------------------------------------------------- --------------- ---------------
Accounts payable and accrued expenses . . . . 571 787
-------------------------------------------------------- --------------- ---------------
Net cash used by operating activities . . (121) (926)
-------------------------------------------------------- --------------- ---------------
Cash flows from financing activities
--------------------------------------------------------
Net borrowings under bank notes payable . . . . . . . - (300)
-------------------------------------------------------- --------------- ---------------
Issuance of short term notes payable. . . . . . . . . 75 1,227
-------------------------------------------------------- --------------- ---------------
Net proceeds from issuance of common stock. . . . . . 25 -
-------------------------------------------------------- --------------- ---------------
Net cash from financing activities. . . . 100 927
-------------------------------------------------------- --------------- ---------------
Net increase (decrease) in cash. . . . . . . . . . . . . (21) 1
-------------------------------------------------------- --------------- ---------------
Cash, beginning of period . . . . . . . . . . . . . . 43 35
-------------------------------------------------------- --------------- ---------------
Cash, end of period . . . . . . . . . . . . . . . . . $ 22 $ 36
-------------------------------------------------------- =============== ===============
Supplemental disclosure of cash flow information
Cash paid during the period for interest. . . . . . . $ - $ -
-------------------------------------------------------- --------------- ---------------
Cash paid during the period for income taxes. . . . . $ - $ -
-------------------------------------------------------- --------------- ---------------
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended September 30, 2002, the Company rescinded the
$70,000 conversion of convertible notes payable into common stock. (See note 6)
See Notes to Consolidated Financial Statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Imaging
Technologies Corporation and Subsidiaries (the "Company" or "ITEC") have been
prepared pursuant to the rules of the Securities and Exchange Commission (the
"SEC") for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States of America. These consolidated financial
statements and notes herein are unaudited, but in the opinion of management,
include all the adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows for the periods presented. These consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the years ended June 30,
2002, 2001, and 2000 included in the Company's Annual Report on Form 10-K filed
with the SEC. Interim operating results are not necessarily indicative of
operating results for any future interim period or for the full year.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the three months ended
September 30, 2002, the Company experienced a net loss of $2,052,000 and as of
September 30, 2002, the Company had a negative working capital deficiency of
$22,288,000 and had a negative shareholders' deficiency of $21,993,000. 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.
On August 20, 1999, at the request of Imperial Bank, the Company's primary
lender, the Superior Court of San Diego appointed an operational receiver who
took control of the Company's day-to-day operations on August 23, 1999. On June
21, 2000, in connection with a settlement agreement reached with Imperial Bank,
the Superior Court of San Diego issued an order dismissing the operational
receiver.
On October 21, 1999, Nasdaq notified the Company that it no longer complied with
the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The Nasdaq SmallCap Market. At a hearing
on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public
interest concerns relating to the Company's financial viability. The Company's
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, 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." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of shareholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
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 past two fiscal
years the Company has raised approximately $3 million through the issuance of
convertible debentures. The Company is currently in the process of filing a
registration statement to register shares underlying the convertible debentures.
In order for the Company to raise additional funds through a convertible
debenture, the Company must get a registration statement filed and declared
effective with the SEC. 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.
Specifically, the Company has letters of intent to acquire a controlling
interest in Quik Pix, Inc., a controlling interest in Greenland Corporation and
has entered into an agreement to acquire Dream Canvas, Inc., a Japanese
corporation that has developed machines currently used for the automated
printing of custom stickers, popular in the Japanese consumer market. 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.
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) available to common shareholders (the
"numerator") by the weighted average number of common shares outstanding (the
"denominator") during the period. Diluted earnings (loss) per common share
("Diluted EPS") is similar to the computation of Basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back the after-tax amount of interest
recognized in the period associated with any convertible debt. The computation
of Diluted EPS does not assume exercise or conversion of securities that would
have an anti-dilutive effect on net earnings (loss) per share. The following is
a reconciliation of Basic EPS to Diluted EPS:
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (NUMERATOR) AMOUNT
---------------- ----------- -----------
SEPTEMBER 30, 2001
Net loss . . . . . . . $ (1,182,000)
Preferred dividends (6,000)
----------------
Basic and diluted EPS. $ (1,188,000) 8,549,250 $ (0.14)
================ =========== ===========
SEPTEMBER 30, 2002
Net loss . . . . . . . $ (2,052,000)
Preferred dividends (6,000)
----------------
Basic and diluted EPS. $ (2,058,000) 24,662,000 $ (0.08)
================ =========== ===========
NOTE 4. INVENTORIES
SEPT. 30, 2002 JUNE 30, 2002
----------------- -----------------
Materials and supplies. . . $ 256,000 $ 261,000
Finished goods. . . . . . . 160,000 165,000
Less inventory reserve (275,000) (275,000)
----------------- -----------------
$ 141,000 $ 151,000
================= =================
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141
supersedes Accounting Principles Board ("APB") No. 16 and requires that any
business combinations initiated after June 30, 2001 be accounted for as a
purchase; therefore, eliminating the pooling-of-interest method defined in APB
16. The statement is effective for any business combination initiated after June
30, 2001 and shall apply to all business combinations accounted for by the
purchase method for which the date of acquisition is July 1, 2001 or later. The
Company has implemented this pronouncement and has concluded that the adoption
has no material impact to the financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition; measurement and amortization of
intangible assets acquired individually or with a group of other assets (but
not those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or
intangibles acquired in a business combination. The statement is effective
for fiscal years beginning after December 15, 2001, and is effective July 1,
2001 for any intangibles acquired in a business combination initiated after June
30, 2001. The Company has implemented this pronouncement and has concluded that
the adoption has no material impact to the financial statements.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company has implemented this pronouncement and has
concluded that the adoption has no material impact to the financial statements.
..
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company has implemented this pronouncement and has concluded that
the adoption has no material impact to the financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect the adoption to have a
material impact to the Company's financial position or results of operations.
In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
Accounting for Certain Sales Incentives. EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
transaction. Sales incentives that fall within the scope of EITF Issue No. 00-14
include offers that a customer can use to receive a reduction in the price of a
product or service at the point of sale. The EITF changed the transition date
for Issue 00-14, concluding that a company should apply this consensus no later
than the company s annual or interim financial statements for the periods
beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor s Products, effective for periods beginning after
December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a
vendor to a reseller is (a) an adjustment of the selling prices of the vendor's
products and, therefore, should be deducted from revenue when recognized in the
vendor's statement of operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be included as a
cost or expense when recognized in the vendor s statement of operations. Upon
application of these EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the income statement
display requirements under these Issues. In September of 2001, the EITF issued
EITF Issue No. 01-09, Accounting for Consideration Given by Vendor to a Customer
or a Reseller of the Vendor's Products, which is a codification of EITF Issues
No. 00-14, No. 00-25 and No. 00-22 Accounting for Points and Certain Other
Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or
Services to be Delivered in the Future. The Company has adopted these issues in
fiscal year 2002 and during the three months ended September 30, 2002 which did
not have a material impact on the Company's financial statements.
NOTE 6. CONVERTIBLE NOTES PAYABLE
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the 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 2001, notes payable of
$675,000 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 our common stock. Interest is payable, at the option of the investor,
in cash or shares of our common stock. The note is convertible into such number
of shares of our 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, we issued a warrant to the investor to purchase
769,231 shares of our 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 we 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 our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our 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, we issued a warrant to the investor to
purchase 565,410 shares of our 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 and in the first quarter of fiscal 2003, the debenture holder requested
that the conversion be rescinded. The Company honored the request and shares
have been returned and the outstanding principal balance due under the note has
been increased to $300,000. 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 $194,000, respectively.
On November 7, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby we 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 our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our 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, we issued a warrant to the investor to
purchase 413,534 shares of our 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 we 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 our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our 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, we issued a warrant to the investor to
purchase 3,313,253 shares of our 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.
All the convertible debentures are shown as a current liability in the
accompanying consolidated balance sheets since each debenture is convertible
into common stock at any time.
NOTE 7. STOCK ISSUANCES
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 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.
During the quarter ended September 30, 2002, the Company issued a total of
8,859,688 shares of common stock. Of the shares issued, 2,830,000 were issued
for the exercise of warrants given to consultants for legal and business
services. The exercise price of these warrants totaled $191,000 of which
$25,000 was paid in cash and the remaining $166,000 was paid via services
rendered. The remaining 6,029,688 were shares issued to consultants for legal
and business services. The shares were valued based on the fair value of the
Company's stock at the date the agreements were signed with the consultants
which totaled $296,381. The Company also canceled 209,039 shares in connection
with the rescission of the conversion of $70,000 of debt (see Note 6)
During the quarter ended September 30, 2002, the Company issued 2,830,000
warrants to outside consultants. The Company recognized an expense of
$70,198for the fair value of the warrants. The Company used the Black-Scholes
option pricing model to value the warrants, with the following assumptions: (i)
no expected dividends; (ii) a risk-free rate of 3.5%; (iii) expected volatility
of 179% and (iv) an expected life of .25 years.
NOTE 8. SEGMENT INFORMATION
During the period ended September 30, 2002, the Company managed and internally
reported the Company's business as three (3) reportable segments: (1) imaging
products and accessories; (2) imaging software; and (3) professional employer
organization
PERIOD ENDED. . . . . . PEO IMAGING IMAGING
SEPT. 30, 2002. . . . . BUSINESS PRODUCTS SOFTWARE TOTAL
Revenues. . . . . . $2,822,000 $ 486,000 $ 138,000 $ 3,446,000
Cost of revenues. . 2,572,000 235,000 21,000 2,828,000
Operating expenses. 588,000 1,141,000 324,000 2,053,000
Operating (loss). . (338,000) (890,000) (207,000) (1,435,000)
Segment assets. . . . . $ 217,000 $ 447,000 $ 95,000 $ 759,000
Additional information regarding revenue by products and service groups is not
presented for the three months ended September 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 that enables the Company to report such information in the future.
As of and during the period ended September 30, 2002, no customer accounted for
more than 10% of consolidated accounts receivable or total consolidated
revenues.
NOTE 9. SUBSEQUENT EVENT
During the period from September 30, 2002 to November 15, 2002, the Company
issued 62,197,883 shares of its common stock as payment for debt and payment to
consultants. The stock issued to consultants was valued by multiplying the
number of shares issued times the market value of the Company's stock at the
date the shares were issued.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Quarterly Report on Form 10-Q. The statements contained in this Report on
Form 10-Q 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
Imaging Technologies Corporation develops and distributes imaging software
and distributes digital imaging products. The Company sells a range of imaging
products for use in graphics and publishing, digital photography, and other
niche business and technical markets. The Company's core technologies are
related to the design and development of software products that improve the
accuracy of color reproduction.
In November 2001, we embarked on an expansion program to provide more
services to help with tasks that have negatively impacted the business
operations of its existing and potential customers. To this end, the Company,
through strategic acquisitions, became a professional employer organization
("PEO").
ITEC now provides comprehensive personnel management services through its
wholly-owned SourceOne Group and EnStructure subsidiaries. Each of these
subsidiaries provides a broad range of services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, and employer liability management to small and medium-sized
businesses.
In May 2002, ITEC entered into an agreement to acquire Dream Canvas, Inc.,
a Japanese corporation that has developed machines currently used for the
automated printing of custom stickers, popular in the Japanese consumer market.
We expect to complete the acquisition in the second quarter of fiscal 2003.
In July 2002, ITEC 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. We anticipate closing this
transaction in the second quarter of fiscal 2003.
In August 2002, ITEC entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. We anticipate closing this transaction in
the second quarter of fiscal 2003.
As of the end of fiscal 2002, the Company's 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 potential acquisitions of new businesses, changes in product lines,
and the potential for discontinuing certain components of the business.
The Company's current strategy is: (1) to expand its PEO business; (2) to
commercialize its own technology, which is embodied in its ColorBlind Color
Management software and other products obtained through strategic acquisitions,
(3) to market imaging products, including products from other manufacturers to
its customers, and (4) to continue to operate and improve e-commerce sites in
order to sell imaging products to resellers and other imaging professionals.
To successfully execute its current strategy, the Company will need to
improve its working capital position. The report of the Company's independent
auditors accompanying the Company's June 30, 2002 financial statements includes
an explanatory paragraph indicating there is a substantial doubt about the
Company's ability to continue as a going concern, due primarily to the decreases
in the Company's working capital and net worth. The Company plans 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.
Since the removal of the court appointed operational receiver in June 2000,
the Company has been able to reestablish relationships with some past customers
and distributors and to establish relationships with new customers.
Additionally, the Company has been working to reduce costs though the reduction
in staff and the suspension of certain research and development programs, such
as the design and manufacture of controller boards and printers. The Company
began a program to reduce its debt through debt to equity conversions.
Management continues to pursue the acquisition of businesses that will grow the
Company's business.
There can be no assurance, however, that the Company will be able to
complete any additional debt or equity financings on favorable terms or at all,
or that any such financings, if completed, will be adequate to meet the
Company's capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to the Company's 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. Also see
"Liquidity and Capital Resources." and "Risks and Uncertainties - Future Capital
Needs."
RESTRUCTURING AND NEW BUSINESS UNITS
During fiscal 1999, the Company began the development of an e-commerce web
site designed to offer computer and imaging hardware, software, and consumables.
The Internet address is www.dealseekers.com. These operations are still in the
-------------------
development stage.
From August 20, 1999 until June 21, 2000, the Company had been under the
control of an operational receiver appointed by the Court pursuant to litigation
between the Company and Imperial Bank. The litigation has been dismissed, and
Company management has reassumed control. Accordingly, Company management did
not have operational control for nearly all of fiscal 2000.
In July 2001, the Company suspended its printer controller development and
manufacturing operations in favor of selling products from other companies to
its customers.
ACQUISITION AND SALE OF BUSINESS UNITS
In December 2000, the Company 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,
the Company began integrating EduAdvantage operations. However, these operations
have not been profitable and management is evaluating the future of this
business unit.
In October 2001, the Company acquired certain assets, for stock, related to
the Company's office products and services business activities, representing
$250,000 of inventories, fixed assets, and accounts receivable.
In November 2001, the Company acquired SourceOne Group, Inc. and operates
it as a wholly-owned subsidiary. SourceOne provides PEO services, including
benefits and payroll administration, health and workers' compensation insurance
programs, personnel records management, and employer liability management to
small and medium-sized businesses.
In March 2002, ITEC acquired all of the outstanding shares of EnStructure,
Inc. ("EnStructure), a PEO company, for restricted common stock of the Company.
The purchase price may be increased or decreased based upon EnStructure's
representations of projected revenues and profits, which are defined in the
acquisition agreement, which was exhibited as part of the Company's Form 8-K,
dated March 28, 2002. EnStructure is operated as a wholly-owned subsidiary.
In May 2002, ITEC entered into an agreement to acquire Dream Canvas, Inc.,
a Japanese corporation that has developed machines currently used for the
automated printing of custom stickers, popular in the Japanese consumer market.
We expect to complete the acquisition in the second quarter of fiscal 2003.
In July 2002, ITEC 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. We anticipate closing this
transaction in the second quarter of fiscal 2003.
In August 2002, ITEC entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. We anticipate closing this transaction in
the second quarter of fiscal 2003.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to allowance for doubtful accounts, value of intangible assets and valuation of
non-cash compensation. Management bases its estimates and judgments on
historical experiences and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts and estimated fair value of equity
instruments used for compensation. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
consolidated financial statements included in our Annual Report on Form l0-K for
the fiscal year ended June 30, 2002.
RESULTS OF OPERATIONS NET REVENUES
Revenues were $3.4 million and $1.1 million for the quarters ended
September 30, 2002 and 2001, respectively. The substantial (209%) increase in
sales was due primarily to the Company's PEO business, which was not present in
the prior year period.
Imaging Products
-----------------
Sales of imaging products, including software, were $624,000 and $1.1
million for the quarterly period ended September 30, 2002 and 2001,
respectively. Sales of imaging products declined by $486,000 or 54% in the
period ended September 30, 2002 as compared to the prior year period due to the
Company's lack of working capital to purchase inventory. The Company's lack of
sufficient working capital has had, and may continue to have, a negative adverse
effect on imaging products sales.
The Company had license fees or royalties of $138,000 in the period ended
September 30, 2002 compared to license fees and royalties of $21,000 in the
prior year period. These revenues, however, are expected to decline in the
future due to the Company's focus on product sales and the Company's PEO
operations as opposed to technology licensing activities.
PEO Services
-------------
PEO revenues were $2.8 million for the quarter ended September 30, 2002.
The Company entered this business segment through acquisitions in November 2001.
Consequently, there were no reported PEO revenues in the prior year period.
Shortly after the acquisition of SourceOne Group, we lost most of the
customer base, due to a number of factors, including increases in workers'
compensation insurance premiums and customers who elected to allow their
contracts with us to expire. Consequently, we have been rebuilding our PEO
business without the benefit of customers acquired in the acquisition of
SourceOne Group. (Also see "Risk Factors" related to the Company's PEO
business.)
COST OF PRODUCTS SOLD
Imaging Products
-----------------
Costs of imaging products sold, including software, were $256,000 (41%of
sales) and $598,000 (57% of sales) for the quarters ended September 30, 2002 and
2001, respectively. The increase in gross margin in 2002 as compared to 2001 was
primarily due to changes in the types of products sold. Notably, in the period
ended September 30, 2002 as compared with the prior year period, software sales
increased 557%.
PEO Services
-------------
Costs of PEO services were $2.6 million (91% of PEO revenues) for the
period ended September 30, 2002. The Company began providing these services
pursuant to acquisitions in the current fiscal year. Accordingly, there are no
comparative results for the prior year periods. (Also see "Risk Factors" related
to the Company's PEO business.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.1 million (60% of
total revenues) and $ 1.4 million (128% of total revenues) for the quarters
ended September 30, 2002 and 2001, respectively. While such expenses increased
by $700,000 (50%) for the period ended September 30, 2002 as compared to the
previous year, they have decreased as a percentage of total revenues. Selling,
general and administrative expenses consisted primarily of general corporation
functions, salaries, facilities, and fees for professional services, including
legal expenses. The increase in selling, general and administrative expenses in
the period ended September 30, 2002 as compared to the year-earlier period was
due primarily to costs associated with the Company's PEO business, including
promotional costs and salaries. However, management continues to pare its
overall operating expenses, including reductions in personnel and facilities.
RESEARCH AND DEVELOPMENT
There were no research and development expenses during the period ended
September 30, 2002 compared to $72,000 (7% of total revenues) for the quarter
ended September 30, 2001. The decrease in expenses in 2002 compared to 2001 was
due to ongoing shortages in working capital.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
cash generated from operations, debt financing, and from the sale of equity
securities.
In the near-term, the Company must rely on generating the majority of its
cash from borrowings and the sale of equity securities. To address these needs,
the Company has, and plans to continue to sell both equity and debt securities.
The Company continues to work toward producing profitable and cash-flow-positive
operations in order to reduce its dependence upon equity and debt financings.
During the period ended September 30, 2002, the Company issued
approximately $75,000 of notes payable in order to finance operations. Without
additional funding, through both equity and debt financing in the near future,
sufficient to satisfy the creditors of the Company, as well as providing working
capital for the Company, the Company will have to further curtail its operations
or cease to operate. The Company continues to actively work with entities
capable of providing such funding.
As of September 30, 2002, the Company had negative working capital of
approximately $22.3 million compared to $20.8 million of negative working
capital at June 30, 2002, a decrease of approximately $1.5 million. The decrease
is primarily due to the operating loss for the period.
Net cash used in operating activities was $121,000 during the quarter ended
September 30, 2002, compared to $926,000 during the quarter ended September 30,
2001, due primarily to increases in operating expenses associated with the
Company's PEO business.
No cash was used in investing activities during the quarter ended September
30, 2002, or in the prior year period.
Net cash from financing activities was $100,000 during the quarter ended
September 30, 2002, compared to $927,000 during the year-earlier quarter. The
decrease was due primarily to a reduction in the amount of debt and equity
securities sold during the period ended September 30, 2002 compared to the
year-earlier period, which has been the principal source of liquidity for the
Company.
The Company's 5% convertible preferred stock (which ranks prior to the
Company's common stock) carries cumulative dividends, when and as declared, at
an annual rate of $50.00 per share. The aggregate amount of such dividends in
arrears at September 30, 2002, was approximately $336,000.
The Company has no material commitments for capital expenditures.
The Company's capital requirements depend on numerous factors, including
market acceptance of the products we sell, the resources the Company devotes to
marketing and selling products and services, and other factors. The Company
anticipates that its capital requirements will increase in future periods as it
continues to increase its sales and marketing efforts. The report of the
Company's independent auditors accompanying the Company's June 30, 2002
financial statements includes an explanatory paragraph indicating there is a
substantial doubt about the Company's ability to continue as a going concern,
due primarily to the decreases in the Company's working capital and net worth.
If adequate funds are not available, the Company may be required to delay,
reduce or eliminate some or all of its planned activities. The Company's
inability to fund its capital requirements would have a material adverse effect
on the Company. See "Risks and Uncertainties--Future Capital Needs."
RISKS AND UNCERTAINTIES FUTURE CAPITAL NEEDS
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE OUR
OPERATIONS.
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.
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. The factors include: (1) the timing of product announcements and
subsequent introductions of new or enhanced products by us and by our
competitors; (2) the availability and cost of inventory; (3) the timing and mix
of shipments of our products; (4) the market acceptance of our new products; (5)
our ability to retain our existing PEO customers and to recruit new PEO
customers; (6) seasonality; (7) currency fluctuations; (8) changes in our prices
and in our competitors' prices; (9) the timing of expenditures for staffing and
related support costs; (10) the extent and success of advertising; (11) research
and development expenditures; and (12) changes in general economic conditions.
We may experience significant quarterly fluctuations in revenues and operating
expenses as we introduce new products. In addition, our inventory purchases and
spending levels are based upon our forecast of future demand for our products.
Accordingly, any inaccuracy in our forecasts could adversely affect our
financial condition and results of operations. Demand for our products could be
adversely affected by a slowdown in the overall demand for computer systems,
printer products or digitally printed images. 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. Our PEO business is dependent
upon the staffing levels of our clients. Reductions of our clients' staff could
have a negative impact on our future financial performance.
SINCE OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN WE DO,
WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for the products we sell are highly competitive and rapidly
changing. Some of our current and prospective competitors have significantly
greater financial, technical, manufacturing 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: (1) the frequency
and success of product introductions by us and by our competitors; (2) the
variety of PEO related services offered by us and by our competitors; (3) the
selling prices of our products and of our competitors' products; (4) the
performance of our products and of our competitors' products; (5) product
distribution by us and by our competitors; (6) our marketing ability and the
marketing ability of our competitors; and (7) the quality of customer support
offered by us and by our competitors.
A key element of our strategy is to provide competitively priced, quality
products. We cannot be certain that our products will continue to be
competitively priced. We have reduced prices on certain of our products in the
past and will likely continue to do so in the future. Price reductions, if not
offset by similar reductions in product costs, will reduce our gross margins and
may adversely affect our financial condition and results of operations.
IF WE ARE UNABLE TO OFFER OUR CUSTOMERS 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 offer competitive products and
achieve cost reductions for the products we sell. In addition, we monitor new
technology developments and coordinate with suppliers, distributors and dealers
to enhance our existing products and lower costs. Advances in technology will
require increased investment in ColorBlind product development to maintain our
market position. If we are unable to develop new, competitive products in a
timely manner, our financial condition and results of operations will be
adversely affected.
IF THE MARKET'S ACCEPTANCE OF OUR PRODUCTS AND SERVICES CEASES TO GROW, WE MAY
NOT GENERATE SUFFICIENT REVENUES TO CONTINUE OUR OPERATIONS.
The markets for our products are relatively new and are still developing. We
believe that there has been growing market acceptance for imaging products,
color management software, supplies and PEO services. We cannot be certain,
however, that these markets will continue to grow. Other technologies are
constantly evolving and improving. We cannot be certain that products based on
these other technologies will not have a material adverse effect on the demand
for our products and services. If our products are not accepted by the market,
we will not generate sufficient revenues to continue our operations.
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: (1) integrating acquired
products and technologies in a timely manner; (2) integrating businesses and
employees with our business; (3) managing geographically-dispersed operations;
(4) reductions in our reported operating results from acquisition-related
charges and amortization of goodwill; (5) potential increases in stock
compensation expense and increased compensation expense resulting from
newly-hired employees; (6) the diversion of management attention; (7) the
assumption of unknown liabilities; (8) potential disputes with the sellers of
one or more acquired entities; (9) our inability to maintain customers or
goodwill of an acquired business; (10) the need to divest unwanted assets or
products; and (11) the possible failure to retain key acquired personnel.
Client satisfaction or performance problems with an 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 are currently
facing all of these challenges and our ability to meet them over the long term
has not been established. As a result, 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 shareholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock. See "Future Capital Needs."
IF OUR VENDORS ARE NOT ABLE TO CONTINUE TO SUPPLY GOODS AND SERVICES AT
APPROPRIATE PRICES TO MEET THE MARKET DEMAND FOR OUR PRODUCTS, IT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE.
The terms of our supply contracts for goods and services are negotiated
separately in each instance. Any significant increase in prices or decrease in
availability of products we purchase for resale could have a material adverse
effect on our business and overall financial performance.
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 no patents. 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.
Competitors may assert that we infringe their patent rights. If we fail to
establish that we have not violated the asserted rights, we could be prohibited
from marketing the products that incorporate the technology and we could be
liable for damages. We could also incur substantial costs to redesign our
products or to defend any legal action taken against us. We have obtained U.S.
registration for several of our trade names or trademarks, including: PCPI,
NewGen, ColorBlind, LaserImage, ColorImage, ImageScript and ImageFont. These
trade names are used to distinguish our products in the marketplace.
IF OUR FOREIGN ACCOUNTS RECEIVABLE ARE NOT COLLECTIBLE, A NEGATIVE IMPACT ON OUR
CONTINUED OPERATIONS AND OVERALL FINANCIAL PERFORMANCE COULD RESULT.
We conduct business globally. Accordingly, our future results could be adversely
affected by a variety of uncontrollable and changing factors including: (1)
foreign currency exchange fluctuations; (2) regulatory, political or economic
conditions in a specific country or region; (3) the imposition of governmental
controls; (4) export license requirements; (5) restrictions on the export of
critical technology; (6) trade restrictions; (7) changes in tariffs; (8)
government spending patterns; (9) natural disasters; (10) difficulties in
staffing and managing international operations; and (11) difficulties in
collecting accounts receivable.
In addition, the laws of certain countries do not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
We intend to pursue international markets as key avenues for growth and to
increase the percentage of sales generated in international markets. In our
2002, 2001 and 2000 fiscal years, product, software, and licensing sales outside
the United States represented approximately 22%, 22%, and 2% of our net sales,
respectively. We expect product sales outside the United States to continue to
represent a significant portion of our sales. As we continue to expand our
international sales and operations, our business and overall financial
performance may be adversely affected by the factors stated above.
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.
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull, Stull &
Brody made a public announcement that they had filed a lawsuit against us and
certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. A motion to dismiss the lawsuit was granted on
February 16, 2001 on our behalf and those individual defendants that have been
served. However, on or about March 19, 2001, an amended complaint was filed on
behalf of Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and Michael S.
Taylor, on behalf of themselves and others similarly situated. On or about
March 20, 2001, we once again filed a motion to dismiss the case along with
certain other individual defendants. The motion was denied and an answer to the
complaint has been filed on behalf of the company and certain individual
defendants. We believe these claims are without merit and we intend to
vigorously defend against them on our behalf as well as on behalf of the other
defendants. The defense of this action has been tendered to our insurance
carriers.
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.
The Company is also a party to a lawsuit filed by Symphony Partners, L.P.
related to its acquisition of SourceOne Group, LLC. We have hired counsel to
represent us in this action and believe that the claims against the Company are
without merit.
The Company 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. We believe that any
amounts due in royalties or otherwise to the plaintiffs by the Company, should
the Company be in violation of said patent, would not be material.
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 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 fiscal quarter ended September
30, 2002, we had a net loss, negative working capital and a decline in net
worth, which raise substantial doubt about our ability to continue as a going
concern. Our losses have resulted primarily from an inability to achieve product
sales and contract revenue targets due to insufficient working capital. 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. Although we have reduced our work force and discontinued some of our
operations, if we are unable to achieve the necessary product sales or raise or
obtain needed funding, we may be forced to discontinue operations.
IF OUR WORLDWIDE 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 network of dealers and distributors in the United States
and Canada, in the European Community and on the European Continent, as well as
a growing number of resellers in Africa, Asia, the Middle East, Latin America,
and Australia. We support our worldwide distribution network and end-user
customers through distribution and support operations headquartered in San
Diego.
A large percentage 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 materially and 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. We believe that our future growth and success will
continue to depend in large part upon our distribution channels. Our business
could be materially and adversely affected if our distributors fail to pay
amounts to us that exceed reserves we have established.
IF HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS' COMPENSATION RATES
INCREASE, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE.
Health insurance premiums, state unemployment taxes and workers'
compensation rates are, in part, determined by our claims experience, and
comprise a significant portion of our PEO operations' 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 PEO operations' 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 (1) 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 costs and service fees; 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 our financial condition or results of operations.
IF CERTAIN FEDERAL, STATE AND LOCAL LAWS RELATED TO LABOR, TAX AND EMPLOYMENT
MATTERS ARE CHANGED, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR CONTINUED
PEO OPERATIONS AND ON OUR OVERALL FINANCIAL PERFORMANCE.
By entering into a co-employer relationship with employees assigned to work at
client company locations, we assume certain obligations and responsibilities as
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, twenty-one 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.
Our client service agreement establishes a contractual division of
responsibilities between us and our clients 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 WE ARE UNABLE TO RETAIN HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT
COVER WORKSITE EMPLOYEES ON FAVORABLE TERMS, IT COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR CONTINUED PEO OPERATIONS AND ON OUR OVERALL FINANCIAL PERFORMANCE.
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. Nevertheless, workers' compensation and
health insurance rates have been rising substantially over the past year and
have had a negative effect on us and on the PEO industry in general.
Accordingly, these rising costs have had a negative effect on our revenues and
results of operations.
IF WE ARE UNABLE TO RETAIN OR REPLACE OUR EXISTING PEO CUSTOMERS, IT COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR OVERALL FINANCIAL PERFORMANCE.
Our standard agreements with PEO clients are subject to cancellation on sixty
days written notice by either us or the client. Accordingly, the short-term
nature of these 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.
AS A COMPANY IN THE TECHNOLOGY INDUSTRY AND DUE TO THE VOLATILITY OF THE STOCK
MARKETS GENERALLY, OUR STOCK PRICE COULD FLUCTUATE SIGNIFICANTLY IN THE FUTURE.
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: (1) general stock market trends; (2) announcements of
developments related to our business; (3) fluctuations in our operating results;
(4) a shortfall in our revenues or earnings compared to the estimates of
securities analysts; (5) announcements of technological innovations, new
products or enhancements by us or our competitors; (6) general conditions in the
computer peripheral market and the imaging markets we serve; (7) general
conditions in the worldwide economy; (8) developments in patents or other
intellectual property rights; and (9) 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 stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
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 (now Comerica 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. Through further equity infusion, primarily in the form
of the exercise of warrants to purchase our common stock, operations have
continued, and 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. 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. The monthly payments
were reduced to $50,000 for the balance of calendar year 2002; and continue as
of the date of this report.
SINCE OUR COMMON STOCK IS NO LONGER LISTED ON THE NASDAQ SMALLCAP MARKET, IT HAS
BEEN MORE DIFFICULT TO RAISE FINANCING .
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.
Since we do not qualify to be listed on The Nasdaq SmallCap Market, shareholders
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 shareholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days of the filing
of this quarterly report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no significant changes to our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
PART II - OTHER INFORMATION
-------------------------------
ITEM 1. LEGAL PROCEEDINGS
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull,
Stull & Brody made a public announcement that they had filed a lawsuit against
us and certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. A motion to dismiss the lawsuit was granted on
February 16, 2001 on our behalf and those individual defendants that have been
served. However, on or about March 19, 2001, an amended complaint was filed by
Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and Michael S. Taylor, on
behalf of themselves and others similarly situated. On or about March 20, 2001,
we once again filed a motion to dismiss the case along with certain other
individual defendants. The motion was denied and an answer to the complaint has
been filed on behalf of the company and certain individual defendants. We
believe these claims are without merit and we intend to vigorously defend
against them on our behalf as well as on behalf of the other defendants. The
defense of this action has been tendered to our insurance carriers.
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.
The Company is also a party to a lawsuit filed by Symphony Partners, L.P.
related to its acquisition of SourceOne Group, LLC. We have hired counsel to
represent us in this action and believe that the claims against the Company are
without merit.
The Company 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. We believe that any
amounts due in royalties or otherwise to the plaintiffs by the Company, should
the Company be in violation of said patent, would not be material.
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 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.
Furthermore, from time to time, the Company may be involved in litigation
relating to claims arising out of its operations in the normal course of
business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During the period ended September 30, 2002, Philip Englund, the Company's
Senior Vice President and General Counsel resigned his positions with the
Company.
During the period ended September 30, 2002, Thomas Beener was elected by
the Board of Directors of the Company to serve as a Director, effective
September 1, 2002. Mr. Beener is also President and Chief Executive Officer of
Greenland Corporation.
In July 2002, the Company 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. The Company anticipates
closing this transaction in the second quarter of fiscal 2003.
In August 2002, ITEC entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. We anticipate closing this transaction in
the second quarter of fiscal 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350)
(b) Reports on Form 8-K
Form 8-K filed on September 17, 2002 related to the change if the Company's
certifying accountants.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 17, 2002
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /s/
_____________________________________
Brian Bonar
Chairman, Chief Executive Officer,
and Chief Accounting Officer
CERTIFICATION
-------------
I, Brian Bonar, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Imaging Technologies
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's certifying officers are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's certifying officers have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's certifying officers have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 17, 2002
/s/ Brian Bonar
_______________________________
Brian Bonar
Chief Executive Officer and
Principal Accounting Officer