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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 2002
COMMISSION FILE NO.: 333-55874
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM S-2 ON
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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IMAGING TECHNOLOGIES CORPORATION
(Exact Name of Registrant As Specified In Its Charter)
Delaware 5045 33-0021693
(State of Incorporation) (Primary Standard Industrial IRS Employer I.D. Number)
Classification Code Number)
15175 INNOVATION DRIVE
SAN DIEGO, CALIFORNIA 92128
(858) 613-1300
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(Address, including zip code and telephone number,
including area code of registrant's principal
executive offices)
BRIAN BONAR, CHIEF EXECUTIVE OFFICER
IMAGING TECHNOLOGIES CORPORATION
15175 INNOVATION DRIVE
SAN DIEGO, CALIFORNIA 92128
(858) 613-1300
(Name, address and telephone number of Agent for Service)
Copy to:
CHRISTOPHER S. AUGUSTE, ESQ.
JENKENS & GILCHRIST PARKER CHAPIN LLP
405 LEXINGTON AVENUE, 9TH FLOOR
NEW YORK, NEW YORK 10174
TEL: (212) 704-6000
FAX: (212) 704-6288
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE (1) (2) OFFERING PRICE (1) REGISTRATION FEE (4)
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Common Stock, par value $0.005 115,000,000 shares $.0125 $1,437,500 $132.25
per share....................
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(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933, as amended.
(2) Estimate based on the average of the high and low prices of the
Registrant's common stock as reported by the OTC Bulletin Board on April
30, 2002 pursuant to Rule 457(c) promulgated under the Securities Act of
1933, as amended.
(3) This Registration Statement shall also cover any additional shares of
common stock which become issuable in connection with the shares registered
for sale hereby as a result of any stock dividend, stock split,
recapitalization or other similar transaction which results in an increase
in the number of the Registrant's outstanding shares of common stock.
(4) $816.20 was paid on February 20, 2001 for 22,000,000 shares to be
registered. $65.25 was paid on May 1, 2001 for an additional 3,000,000
shares that were registered. No additional registration fee was required
for the additional 20,000,000 shares registered herein on September 9, 2001
as the Registrant withdrew a Form S-2 Registration Statement on August 28,
2001 and paid a registration fee in connection therewith in an amount of
$586.00 with a proposed maximum offering price per share of $.1172. $132.25
is the amount of the registration fee required to be paid in connection
with the additional 70,000,000 shares registered herein for a total of
115,000,000 shares.
WE WILL AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY WHICH MAY DELAY ITS EFFECTIVE DATE UNTIL WE FILE A FURTHER AMENDMENT
WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933
OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING ACCORDING TO SECTION 8(A), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SEEKING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY __, 2002
PROSPECTUS
IMAGING TECHNOLOGIES CORPORATION
115,000,000 SHARES OF COMMON STOCK
o The shares of common stock offered by this prospectus are being sold by
the stockholders listed in the section of this prospectus called
"Selling Security Holders". We will not receive any proceeds from the
sale of these shares.
o Our common stock is traded on the OTC Bulletin Board under the symbol
"ITEC".
o On April 30, 2002, the closing price of our common stock on the OTC
Bulletin Board was $.012.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING
"RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is May __, 2002
-i-
TABLE OF CONTENTS
Forward-Looking Statements...............................................................................1
Prospectus Summary.......................................................................................1
The Offering.............................................................................................3
Risk Factors.............................................................................................4
Use of Proceeds.........................................................................................12
Selling Security Holders................................................................................12
Plan of Distribution....................................................................................15
Description of Securities...............................................................................17
Information With Respect to the Registrant..............................................................17
Description of Business.................................................................................17
Description of Property.................................................................................20
Legal Proceedings.......................................................................................21
Market for Registrant's Common Equity and Related Stockholder Matters...................................21
Financial Statements for the Period Ending December 31, 2001............................................23
Notes to Financial Statements for the Period Ending December 31, 2001...................................30
Management's Discussion & Analysis of Financial Condition and Results of Operations
for the Period Ending December 31, 2001........................................................34
Financial Statements for the Period Ending June 30, 2001................................................37
Notes to Financial Statements for the Period Ending June 30, 2001.......................................42
Selected Financial Data for the Period Ending June 30, 2001.............................................59
Management's Discussion & Analysis of Financial Condition and Results of Operations
for the Period Ending June 30, 2001............................................................60
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................63
Quantitative and Qualitative Disclosures about Market Risk..............................................63
Directors and Executive Officers........................................................................63
TABLE OF CONTENTS (CONT'D)
Executive Compensation..................................................................................64
Security Ownership of Certain Beneficial Owners and Management..........................................66
Certain Relationships and Related Transactions..........................................................67
Where You Can Find More Information.....................................................................67
Disclosure of Commission Position on Indemnification for Securities and Liabilities.....................67
Experts ...............................................................................................67
Legal Opinions..........................................................................................67
FORWARD-LOOKING STATEMENTS
This prospectus contains some forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified by the use of forward-looking words like "may," "will,"
"expect," "anticipate," "intend," "estimate," "continue," "believe" or other
similar words. Similarly, statements that describe our future expectations,
objectives and goals or contain projections of our future results of operations
or financial condition are also forward-looking statements. Our future results,
performance or achievements could differ materially from those expressed or
implied in these forward-looking statements as a result of certain factors,
including those listed under the heading "Risk Factors" and in other cautionary
statements in this prospectus.
PROSPECTUS SUMMARY
This summary highlights information in this document. You should
carefully review the more detailed information and financial statements included
in this document. The summary is not complete and may not contain all of the
information you may need to consider before investing in our common stock. We
urge you to carefully read this document, including the "Risk Factors" and the
financial statements and their accompanying notes.
THE COMPANY
We distribute high-quality digital imaging solutions and color
management software products for use in graphics, publishing, digital
photography, and other business and technical markets. We sell a range of
printer and imaging products for use in graphics and publishing, digital
photography, and other niche business and technical markets. In the 1980's, we
began the development of core technologies related to the design and development
of controllers for non-impact printers and multifunction peripheral devices,
such as copiers, scanners, and facsimile machines. However, we have suspended
the development and manufacture of its own, branded printers and controllers.
During the past few years, we have expanded our product offerings to
software to improve the accuracy of color reproduction. Our ColorBlind(R) color
management software is a suite of applications, utilities and tools designed to
create, edit, and apply industry standard International Color Consortium ("ICC")
profiles that produce accurate color rendering across a wide range of peripheral
devices.
In order to capitalize on its existing systems integration expertise,
we have begun to provide more services to help with tasks that have negatively
impacted the business operations of our exiting and potential customers. To this
end, we have begun to pursue strategic acquisitions in personnel and employment
practice management. We believe that there is considerable synergy between
providing office systems solutions with administrative services.
We provide comprehensive personnel management services through our
wholly-owned SourceOne and EnStructure subsidiaries. Each of these subsidiaries
is a professional employer organization ("PEO") that provides benefits and
payroll administration, health and workers' compensation insurance programs,
personnel records management and employer liability management.
Our wholly-owned direct and indirect subsidiaries include SourceOne,
Inc., a Delaware corporation, EnStructure, Inc., a Nevada corporation,
EduAdvantage.com, Inc., a Delaware corporation, DealSeekers.com, Inc., a
Delaware corporation, Personal Computer Products, Inc., a California
corporation, NewGen Imaging Systems, Inc., a California corporation, Prima Inc.,
a California corporation, Color Solutions, Inc., a California corporation,
McMican Corporation, a California corporation, ITEC Europe, Ltd., a company
registered under the laws of the United Kingdom and Advanced Matrix Technology
Accel UK Ltd., a company registered under the laws of the United Kingdom.
EduAdvantage.com, Inc., Personal Computer Products, Inc., NewGen Imaging
Systems, Inc., Prima, Inc., McMican Corporation, ITEC Europe, Ltd., and Advanced
Matrix Technology Accel UK, Ltd. are currently inactive.
In November of 2000, we entered into an agreement to acquire a majority
interest in Quality Photographic Imaging (formerly known as Quick Pix, Inc.), a
Nevada corporation that is primarily engaged in the business of
offering services to produce final color visuals. This transaction remains
pending as it is subject to the approval of Quality Photographic Imaging's
shareholders. However, the management of Quality Photographic Imaging has
announced its intention to withdraw its recommendation to its shareholders that
they approve our acquisition of a majority interest in their company. Effective
December 1, 2000, we acquired all of the outstanding shares of
Eduadvantage.com., a California corporation that is primarily engaged in an
internet-based business. In December of 2000, we also signed a definitive
agreement to purchase 75% of the stock of Pen Interconnect, Inc. However, in
February of 2001, we terminated the transaction and retained a $75,000
convertible note which is convertible into common stock of Pen Interconnect,
Inc. On November 12, 2001, we acquired all of the outstanding shares of
SourceOne, Inc. from Neotactix, Inc. for $750,000. We paid $250,000 in cash at
closing. $200,000 of these funds were provided by outside investors in the form
of a promissory note convertible into shares of our common stock, the number of
which will be determined by a formula applied to the market price of the shares
at the time that the promissory note is converted. The balance is payable in
cash or stock on a quarterly payment schedule beginning in April 2002. On March
11, 2002, we acquired all of the outstanding shares of EnStructure, Inc. for
$250,000, payable in shares of our common stock, subject to certain performance
provisions related to future revenues.
We were incorporated in March, 1982 under the laws of the State of
California, and reincorporated in May, 1983 under the laws of the State of
Delaware. Our principal executive offices are located at 15175 Innovation Drive,
San Diego, California 92128. Our main phone number is (858) 613-1300.
PCPI, NewGen, ColorBlind, LaserImage, ColorImage, ImageScript and
ImageFont are trademarks of ours. This Prospectus also includes names and
trademarks of companies other than us.
GOING CONCERN CONSIDERATIONS
At December 31, 2001, and for the three months then ended, we had a net
loss, negative working capital and a decline in net worth, which raises
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, if any, from future operations and
on our ability to raise additional funds through equity or debt financing. We
have reduced and/or discontinued some of our operations and, if we are unable to
raise or obtain needed funding, we may be forced to discontinue operations. At
December 31, 2001, our net loss was $1,854,000, our negative working capital was
$19,699,000 and our decrease in net worth was $1,363,000. Specific steps that we
have taken to address these problems include obtaining working capital through
the issuance and sale of the convertible debenture, of which this registration
statement relates, reduction in overhead costs through such actions as a recent
reduction in our work force, the restructuring of our lease to reduce rent
payments, transferring some parts production offshore and rebuilding our
distribution channels.
Furthermore, we plan to overcome the circumstances that impact our
ability to remain a going concern through a combination of increased revenues
and decreased costs with interim cash flow deficiencies being addressed through
additional equity financing. Since the removal of the operational receiver, we
have been able to re-establish relationships with some of our past customers and
distributors and establish relationships with new customers. These actions have
increased revenues as reflected in our recent quarterly reports. At the same
time, we have been able to reduce our costs by reducing our number of employees
and terminating unprofitable operations, such as the design and fabrication of
controller boards as an OEM supplier to other computer printer manufacturers,
which had greatly diminished revenues over the past three years. We commenced a
program to reduce our debt, which we will address more aggressively in the third
and fourth quarters of our current fiscal year, partially through debt-to-equity
conversions. Finally, we continue to pursue the acquisition of business units
that will be consistent with these measures. We anticipate that all of these
initiatives will be carried out throughout the fiscal year ending June 30, 2002.
-2-
THE OFFERING
CONVERTIBLE NOTE PURCHASE AGREEMENT DATED DECEMBER 12, 2000
We entered into a convertible note purchase agreement on December 12,
2000 with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust Reg.
Pursuant to this agreement, we 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 our common stock. Interest shall be payable, at the
option of the purchasers, in cash or shares of our common stock. Each 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) $.059
and (y) 70% of the average of the 3 lowest closing bid prices during the 30
trading days prior to the conversion date. See the section entitled "Selling
Security Holders" for examples of how this formula works at various prices and
the dilutive effect on our stockholders.
Additionally, we issued a warrant to each of the purchasers to purchase
an aggregate of 19,000,000 shares of our common stock at an exercise price equal
to $.0887 per share. The purchasers may exercise the warrants through December
12, 2005. Shares issuable upon exercise of any of the warrants by the purchasers
are not being registered under the registration statement of which this
prospectus is a part and may not be resold to the public through this
prospectus.
Amro International, S.A., Balmore Funds, S.A. and Celeste Trust Reg.
are "underwriters" within the meaning of the Securities Act in connection with
their resale of shares of our common stock under this prospectus.
CONVERTIBLE NOTE PURCHASE AGREEMENT DATED JULY 26, 2001
We entered into a convertible note purchase agreement on July 26, 2001
with Balmore Funds, S.A. Pursuant to this agreement, we sold to Balmore a
convertible promissory note 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 shall be payable, at the
option of Balmore, 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) $.065
and (y) 70% of the average of the 3 lowest closing bid prices during the 30
trading days prior to the conversion date. See the section entitled "Selling
Security Holders" for examples of how this formula works at various prices and
the dilutive effect on our stockholders.
Additionally, we issued a warrant to Balmore to purchase 15,384,615
shares of our common stock at an exercise price equal to $.065 per share.
Balmore may exercise the warrant through July 26, 2006. Shares issuable upon
exercise of the warrant by Balmore are not being registered under the
registration statement of which this prospectus is a part and may not be resold
to the public through this prospectus.
Balmore Funds, S.A. is an "underwriter" within the meaning of the
Securities Act in connection with its resale of shares of our common stock under
this prospectus.
AGREEMENT WITH ARTIFEX SOFTWARE, INC.
On October 25, 2000, we entered into a second OEM amendment with
Artifex Software, Inc. on October 25, 2000. Pursuant to this agreement, we
agreed to issue to Artifex 1,200,000 shares of our common stock as a one-time
license fee for the distribution of Artifex's products.
-3-
SECURITIES OFFERED BY SELLING SECURITY HOLDERS
COMMON STOCK(1), (3) 115,000,000
EQUITY SECURITIES OUTSTANDING2
COMMON STOCK 349,032,249(2)
PREFERRED STOCK 420.5
WARRANTS 149,330,798(4)
OPTIONS 682,185(4)
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(1) 1,200,000 shares of common stock being registered and included in this
prospectus is in connection with the agreement with Artifex Software,
Inc. According to the terms of the convertible note purchase agreements
between the various investors and us, the remaining shares of common
stock being registered and included in this prospectus is such number
of shares of common stock needed to effect conversion of all of the
notes as of April 29, 2002 under the convertible note purchase
agreements.
(2) The total number of equity shares outstanding as of April 29, 2002.
(3) The total number of shares of common stock does not include shares of
common stock issuable upon the exercise of warrants associated with
series D convertible preferred stock and series E convertible preferred
stock.
(4) The warrants were issued to employees, consultants and private
placement investors. The exercise prices of the warrants range from
$.01 to $6.25. The options were issued in connection with our stock
option plans and/or in connection with some of our employment
agreements. The exercise prices of the options range from $.35 to $8.45
per share.
RISK FACTORS
AN INVESTMENT IN SHARES OF ITEC COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING ANY ITEC
SHARES.
EXCEPT FOR HISTORICAL INFORMATION, THE INFORMATION CONTAINED IN THIS
PROSPECTUS AND IN OUR SEC REPORTS ARE "FORWARD-LOOKING" STATEMENTS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN SUCH
FORWARD-LOOKING STATEMENTS. THE RISKS DESCRIBED BELOW ADDRESS SOME OF THE
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS AND FINANCIAL PERFORMANCE.
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:
-4-
o the timing of product announcements and subsequent introductions of new
or enhanced products by us and by our competitors,
o the availability and cost of inventory,
o the timing and mix of shipments of our products,
o the market acceptance of our new products,
o our ability to retain our existing PEO customers and to recruit new PEO
customers,
o seasonality,
o currency fluctuations,
o changes in our prices and in our competitors' prices,
o the timing of expenditures for staffing and related support costs,
o the extent and success of advertising,
o research and development expenditures, and
o 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:
o the frequency and success of product introductions by us and by our
competitors,
o the variety of PEO related services offered by us and by our
competitors,
o the selling prices of our products and of our competitors' products,
o the performance of our products and of our competitors' products,
o product distribution by us and by our competitors,
o our marketing ability and the marketing ability of our competitors, and
o the quality of customer support offered by us and by our competitors.
-5-
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 OUR SUPPLIERS CEASE LICENSING THEIR PRODUCTS TO US, WE MAY HAVE TO REDUCE OUR
WORK FORCE OR CEASE OPERATIONS.
At present, many of our products use technology licensed from outside
suppliers. We rely heavily on these suppliers for upgrades and support. In the
case of our font products, we license the fonts from outside suppliers, who also
own the intellectual property rights to the fonts. Our reliance on third-party
suppliers involves many risks, including our limited control over potential
hardware and software incompatibilities among the products we sell. Furthermore,
we cannot be certain that all of the suppliers of products we market will
continue to license their products to us, or that these suppliers will not
license their products to other companies simultaneously.
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:
o integrating acquired products and technologies in a timely manner;
o integrating businesses and employees with our business;
o managing geographically-dispersed operations;
o reductions in our reported operating results from acquisition-related
charges and amortization of goodwill;
-6-
o potential increases in stock compensation expense and increased
compensation expense resulting from newly-hired employees;
o the diversion of management attention;
o the assumption of unknown liabilities;
o potential disputes with the sellers of one or more acquired entities; o
our inability to maintain customers or goodwill of an acquired
business; o the need to divest unwanted assets or products; and o 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 stockholders 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 PROJECTED MARKET DEMAND FOR OUR PRODUCTS, IT
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE.
The terms of our supply contracts for good 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:
o foreign currency exchange fluctuations;
o regulatory, political or economic conditions in a specific country or
region;
o the imposition of governmental controls;
o export license requirements;
o restrictions on the export of critical technology;
o trade restrictions;
o changes in tariffs;
-7-
o government spending patterns;
o natural disasters;
o difficulties in staffing and managing international operations; and
o 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
2001, 2000 and 1999 fiscal years, sales outside the United States represented
approximately 22%, 2% and 56% of our net sales, respectively. We expect 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.
Throughout fiscal 1999, 2000 and 2001, 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
December 31, 2001, we had a net loss, negative working capital and a decline in
net worth which raises 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, if any,
from future operations and on our ability to raise additional funds through
equity or debt financing. Although we have reduced our work force 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
-8-
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 centralized distribution and support operations
headquartered in San Diego. As of April 19, 2002, we directly employed 14
individuals involved in marketing and sales activities.
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 (a) payment of
the salaries and wages for work performed by worksite employees, regardless of
whether the client company makes timely payment to us of the associated service
fee; and (2) providing benefits to worksite employees even if the costs incurred
by us to provide such benefits exceed the fees paid by the client company. If a
client company does not pay us, or if the costs of benefits provided to worksite
employees exceed the fees paid by a client company, our ultimate liability for
worksite employee payroll and benefits costs could have a material adverse
effect on 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 or an employer under these laws. However, many of these laws
(such as the Employee Retirement Income Security Act ("ERISA") and federal and
state employment tax laws) do not specifically address the obligations and
responsibilities of non-traditional employers such as PEOs; and the definition
of "employer" under these laws is not uniform. Additionally, some of the states
in which we operate have not addressed the PEO relationship for purposes of
compliance with applicable state laws governing the employer/employee
relationship. If these other federal or state laws are ultimately applied to our
PEO relationship with our worksite employees in a manner adverse to us, such an
application could have a material adverse effect on our financial condition or
results of operations.
While many states do not explicitly regulate PEOs, 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
-9-
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.
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:
o general stock market trends;
o announcements of developments related to our business;
o fluctuations in our operating results;
o a shortfall in our revenues or earnings compared to the estimates of
securities analysts;
o announcements of technological innovations, new products or
enhancements by us or our competitors,
o general conditions in the computer peripheral market and the imaging
markets we serve;
o general conditions in the worldwide economy;
o developments in patents or other intellectual property rights; and
o 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
-10-
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 have been reduced to $50,000 for the balance of calendar year 2002.
UPON THE CONVERSION OF THE OUTSTANDING NOTES AND OUTSTANDING PREFERRED STOCK AND
UPON EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS, THE ISSUANCE OF COMMON STOCK
WILL RESULT IN MUCH DILUTION, OR A LOWER BOOK VALUE PER SHARE, TO ANY INVESTOR
FOLLOWING THIS OFFERING.
The issuance of our reserved shares would dilute the equity interest of
existing stockholders and could have an adverse effect on the market price of
our common stock. As of April 29, 2002, we had 36,000,000 shares of common stock
reserved for possible future issuances upon, among other things, conversion of
preferred stock and exercise of outstanding options and warrants.
Under the convertible note purchase agreements to which this
registration statement relates, the amount of common stock issuable to each of
the purchasers upon conversion of the notes is based on a formula that is tied
to the market price of our common stock prior to the date of conversion of the
notes. Accordingly, the issuance of some or all of the common stock upon
conversion of the notes could result in dilution of the per share value of our
common stock held by current investors. The lower the average trading price of
our common stock at the time of conversion, the greater the number of shares of
common stock that can be issued. Accordingly, this causes a greater risk of
dilution. The perceived risk of dilution may cause the purchasers under the
convertible note purchase agreements as well as other ITEC stockholders to sell
their shares, which would contribute to the downward movement in the stock price
of our common stock.
We may seek additional financing, which would result in the issuance of
additional shares of our capital stock and/or rights to acquire additional
shares of our capital stock. Additional issuances of capital stock would result
in a reduction of current stockholders' percentage interest in ITEC.
Furthermore, if the exercise price of any outstanding or issuable options or
warrants or the conversion ratio of any preferred stock is lower than the price
per share of common stock at the time of the exercise or conversion, then the
price per share of common stock would decrease because the number of shares of
common stock outstanding would increase without a corresponding increase in the
dollar amount assigned to stockholders' equity.
The addition of a substantial number of shares of common stock into the
market or by the registration of any other of our securities under the
Securities Act may significantly and negatively affect the prevailing market
price for our common stock. Furthermore, future sales of shares of common stock
issuable upon the exercise of outstanding warrants and options may have a
depressive effect on the market price of the common stock, as these warrants and
options would be more likely to be exercised at a time when the price of the
common stock is in excess of the applicable exercise price.
The sale or issuance of any shares of preferred stock having rights
superior to those of the common stock may result in a decrease in the value or
market price of the common stock. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of ownership without
further vote or action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock.
Our board of directors currently is authorized to issue up to 100,000
shares of preferred stock. The board has the power to establish the dividend
rates, preferential payments on our liquidation, voting rights, redemption and
conversion terms and privileges for any series of preferred stock.
-11-
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, stockholders may find it more difficult to sell our common stock. This
lack of liquidity also may make it more difficult for us to raise capital in the
future.
Trading of our common stock is now being conducted over-the-counter
through the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock does constitute a penny stock
because our common stock has a market price less than $5.00 per share, our
common stock is no longer quoted on Nasdaq and our net tangible assets do not
exceed $2,000,000. As our common stock falls within the definition of penny
stock, these regulations require the delivery, prior to any transaction
involving our common stock, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Furthermore, the ability of
broker/dealers to sell our common stock and the ability of stockholders to sell
our common stock in the secondary market would be limited. As a result, the
market liquidity for our common stock would be severely and adversely affected.
We can provide no assurance that trading in our common stock will not be subject
to these or other regulations in the future, which would negatively affect the
market for our common stock.
USE OF PROCEEDS
The selling security holders are selling all of the shares covered by
this prospectus for their own account. Accordingly, we will not receive any
proceeds from the resale of the shares. We will bear all expenses relating to
this registration.
SELLING SECURITY HOLDERS
CONVERTIBLE NOTE PURCHASE AGREEMENT DATED DECEMBER 12, 2000
The shares being offered by Amro International, S.A., Balmore Funds,
S.A. and Celeste Trust Reg. consist of shares of common stock upon conversion of
the notes pursuant to the convertible note purchase agreement dated December 12,
2000. The natural persons who exercise sole or shared voting or investment power
over the shares of common stock that Amro International, S.A will sell are H.U.
Bochofen and Michael Klee. Amro International, S.A. is primarily engaged in the
business of investing in public entities. The address of Amro International,
S.A. is c/o Ultra Finance, Grossmuenster Platz, #6, Zurich, Switzerland CN822.
The natural person who exercises sole voting or investment power over
the shares of common stock that Balmore Funds, S.A. will sell is Gisela Kindle,
Director. Balmore Funds, S.A. is primarily engaged in the business of investment
advising. The address of Balmore Funds, S.A. is c/o Trident Chambers, P.O. Box
146, Roadstown Tortola, BVI.
-12-
During the past three years, we have not had any relationship with Amro
International, S.A or Celeste Trust Reg. In January of 1999, we entered into a
securities purchase agreement with Balmore Funds, S.A. whereby Balmore was
issued series D preferred stock which was converted into 3,500,000 shares of our
common stock. Additionally, we issued Balmore a warrant to purchase 1,750,000
shares of our common stock.
Pursuant to the convertible note purchase agreement dated December 12,
2000, Amro International S.A., Balmore Funds, S.A. and Celeste Trust Reg have
registration rights to which this registration statement relates which requires
us to register the shares upon the conversion of the notes, and failure to
register such shares by a specified date results in liquidated damages in favor
of the purchasers. The purchasers also have prepayment rights upon an event of
default, upon a major corporate transaction, or upon certain other triggering
events.
CONVERTIBLE NOTE PURCHASE AGREEMENT DATED JULY 26, 2001
78,740,157 shares being offered by Balmore Funds, S.A. consist of
shares of common stock upon conversion of the note pursuant to the convertible
note purchase agreement dated July 26, 2001. Pursuant to this agreement, Balmore
has registration rights to which this registration statement relates which
requires us to register the shares upon the conversion of the notes, and failure
to register such shares by a specified date results in liquidated damages in
favor of Balmore. Balmore also has prepayment rights upon an event of default,
upon a major corporate transaction, or upon certain other triggering events.
The natural person who exercises sole voting or investment power over
the shares of common stock that Balmore will sell is Gisela Kindle, Director.
Balmore is primarily engaged in the business of investment advising. The address
of Balmore is c/o Trident Chambers, P.O. Box 146, Roadstown Tortola, BVI.
AGREEMENT WITH ARTIFEX SOFTWARE, INC.
The shares being offered by Artifex Software, Inc. consist of shares of
common stock issued pursuant to the second OEM amendment dated October 25, 2001.
The natural person who exercises sole voting or investment power over the shares
of common stock that Artifex Software, Inc. will sell is Miles Jones. Artifex
Software, Inc. is primarily engaged in the business of software development. The
address of Artifex Software, Inc. is 101 Lucas Valley Road, #110, San Rafel, CA
94903.
The registration statement is a part of the prospectus being filed. The
shares offered in this prospectus by Amro International, S.A., Balmore Funds,
S.A. and Celeste Trust Reg. are based on the various rights contained in the
convertible note purchase agreements between the various purchasers and us. The
shares offered in this prospectus by Artifex Software, Inc. are based on the
various rights contained in the second OEM amendment. For additional information
about the convertible note purchase agreements and second OEM amendment, see
"The Offering."
The following table identifies the selling security holders based upon
information provided to us as of April 30, 2002, with respect to the shares
beneficially held by or acquirable by, the selling security holders, and the
shares of common stock beneficially owned by the selling security holders which
are not covered by this prospectus. Neither the selling security holders nor
their respective affiliates have held any position, office, or other material
relationship with us.
-13-
SELLING SECURITY HOLDERS' TABLE
PERCENT OF
COMMON SHARES COMMON SHARES TOTAL NUMBER TOTAL NUMBER OF
OWNED PRIOR OWNED PRIOR OF SHARES TO SHARES OWNED
NAME OF INVESTOR TO OFFERING TO OFFERING BE REGISTERED FOLLOWING OFFERING
---------------------------------------------------------------------------------------------------------------
Amro International, S.A 0 0 14,644,758 0
---------------------------------------------------------------------------------------------------------------
Balmore Funds, S.A 0 0 93,788,058* 0
---------------------------------------------------------------------------------------------------------------
Celeste Trust Reg 0 0 5,367,184 0
---------------------------------------------------------------------------------------------------------------
Artifex Software, Inc. 40,000 .025% 1,200,000 0
---------------------------------------------------------------------------------------------------------------
* 78,740,157 shares are being registered herein pursuant to the
convertible note purchase agreement dated July 26, 2001.
EFFECTS ON MARKET PRICE AND DILUTION TO COMMON STOCKHOLDERS RESULTING FROM
CONVERSION OF THE NOTES
Since the outstanding principal amount of the notes converts at a
floating rate based on a discount to the market price of the common stock, the
lower the stock price when the holder converts, the more shares of common stock
the holder gets. When the selling securityholder converts and then sells the
common stock, the common stock price may decrease due to the additional shares
in the market. This could allow the selling securityholders to convert the notes
into greater amounts of common stock, the sales of which would further depress
the stock price. The significant downward pressure on the price of the common
stock as the selling securityholder converts and sells material amounts of
common stock could encourage short sales by the selling securityholder or
others. This could place further downward pressure on the price of the common
stock. The conversion of the notes may result in substantial dilution to the
interests of other holders of common stock since each holder of the notes may
ultimately convert and sell the full amount issuable on conversion.
DESCRIPTION OF FLOATING CONVERSION FEATURE AND EXAMPLES OF HOW THIS CONVERSION
FEATURE WORKS
Each note pursuant to the convertible note purchase agreements 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 pursuant to the convertible note
purchase agreement dated December 12, 2000 equals the lesser of (x) $.059 and
(y) 70% of the average of the 3 lowest closing bid prices during the 30 trading
days prior to the conversion date. The conversion price pursuant to the
convertible note purchase agreement dated July 26, 2001 equals the lesser of (x)
$.065 and (y) 70% of the average of the 3 lowest closing bid prices during the
30 trading days prior to the conversion date.
For example, if all of the note holders pursuant to the convertible
note purchase agreements convert the full $1,850,000 and the average closing bid
price for the 3 trading days having the lowest closing bid prices during the
30 trading days prior to the conversion date is $.01, the note holders will own
an aggregate of 264,285,714 shares of our common stock (70% of $.01 equals $.007
and 1,850,000 divided by .007 equals 264,285,714).
If all of the note holders pursuant to the convertible note purchase
agreements convert the full $1,850,000 and the average closing bid price for the
3 trading days having the lowest closing bid prices during the 30 trading
-14-
days prior to the conversion date is $.02, the note holders will own an
aggregate of 132,142,857 shares of our common stock (70% of $.02 equals $.014
and 1,850,000 divided by .014 equals 132,142,857).
If all of the note holders pursuant to the convertible note purchase
agreements convert the full $1,850,000 and the average closing bid price for the
3 trading days having the lowest closing bid prices during the 30 trading days
prior to the conversion date is $.05, the note holders will own an aggregate of
52,857,107 shares of our common stock (70% of $.05 equals $.035 and 1,850,000
divided by .035 equals 52,857,107).
If all of the note holders pursuant to the convertible note purchase
agreements convert the full $1,850,000 and the average closing bid price for the
3 trading days having the lowest closing bid prices during the 30 trading days
prior to the conversion date is $.15, the note holders will own an aggregate of
17,619,007 shares of our common stock (70% of $.15 equals $.105 and 1,850,000
divided by .105 equals 17,619,007).
If all of the note holders pursuant to the convertible note purchase
agreements convert the full $1,850,000 and the average closing bid price for the
3 trading days having the lowest closing bid prices during the 30 trading days
prior to the conversion date is $.25, the note holders will own an aggregate of
10,571,407 shares of our common stock (70% of $.25 equals $.175 and 1,850,000
divided by .175 equals 10,571,407).
The following table illustrates the differences in the dilutive effect
on our common stock at various market prices assuming the aggregate amount of
all of the outstanding notes pursuant to the convertible note purchase
agreements were converted simultaneously:
--------------------------------------------------------------------------------
MARKET PRICE
OF SHARES OF NUMBER OF SHARES
COMMON STOCK CONVERTIBLE UPON PERCENTAGE OF
UNDERLYING THE EXERCISE OF TOTAL OUTSTANDING
CONVERTIBLE NOTES CONVERSION PRICE THE NOTES COMMON STOCK
--------------------------------------------------------------------------------
$.01 $.007 264,285,714 75.7%
--------------------------------------------------------------------------------
$.02 $.014 132,142,857 37.9%
--------------------------------------------------------------------------------
$.05 $.035 52,857,107 15.1%
--------------------------------------------------------------------------------
$.10 $.07 26,428,507 7.6%
--------------------------------------------------------------------------------
$.15 $.105 17,619,007 5.0%
--------------------------------------------------------------------------------
$.20 $.14 13,214,207 3.8%
--------------------------------------------------------------------------------
$.25 $.175 10,571,407 3.0%
--------------------------------------------------------------------------------
$.50 $.35 5,285,710 1.5%
--------------------------------------------------------------------------------
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
security holders or by pledgees, donees or transferees of, or successors in
interest to, the selling security holders, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. The
distribution of the shares may be effected in one or more of the following
methods:
o ordinary broker transactions,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts pursuant to this
prospectus,
-15-
o "at the market" to or through market makers or into an existing
market for the common stock,
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling security holders may enter into hedging
transactions with broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling security holders.
The selling security holders may also enter into option or other transactions
with broker-dealers that require the delivery by such broker-dealers of the
shares, which shares may be resold thereafter pursuant to this prospectus.
The selling security holders are "underwriters" within the meaning of
the Securities Act in connection with the sale of the common stock offered
hereby. Broker-dealers who act in connection with the sale of the common stock
may also be deemed to be underwriters. Profits on any resale of the common stock
as a principal by such broker-dealers and any commissions received by such
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act. Any broker-dealer participating in such transactions as
agent may receive commissions from the selling security holders (and, if they
act as agent for the purchaser of our common stock, from such purchaser).
Broker-dealers may agree with the selling security holders to sell a specified
number of shares of our common stock at a stipulated price per share, and, to
the extent such a broker-dealer is unable to do so acting as agent for any of
the selling security holders, to purchase as principal any unsold common stock
at the price required to fulfill the broker-dealer commitment to any of the
selling security holders. Broker-dealers who acquire common stock as principal
may thereafter resell the common stock from time to time in transactions (which
may involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise,
at market prices prevailing at the time of the sale or at negotiated prices, and
in connection with such resales may pay to or receive from the purchasers of
such common stock commissions computed as described above.
We will not receive any proceeds from the sale of the common shares
pursuant to this prospectus. We have agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be $17,816.20.
We have informed the selling security holders that certain
anti-manipulative rules contained in Regulation M under the Securities Exchange
Act of 1934, as amended, may apply to their sales of the common stock. In
addition, we have informed the selling security holders of the need for delivery
of copies of this prospectus.
The selling security holders may also use Rule 144 under the Securities
Act, to sell the shares if they meet the criteria and conform to the
requirements of such rule.
DESCRIPTION OF SECURITIES
COMMON STOCK
Holders of the common stock are entitled to one vote for each share
held in the election of directors and in all other matters to be voted on by
shareholders. Stockholders have cumulative voting rights in the election of
directors. Holders of common stock are entitled to receive dividends as may be
declared from time to time by our board of directors out of funds legally
available. In the event of liquidation, dissolution or winding up, holders of
common stock are to share in all assets remaining after the payment of
liabilities. The holders of common stock have no preemptive or conversion rights
and are not subject to further calls or assessments. There are no redemption or
sinking fund provisions applicable to the common stock. The rights of the
holders of the common stock are
-16-
subject to any rights that may be fixed for holders of preferred stock. All of
the outstanding shares of common stock are fully paid and non-assessable.
INFORMATION WITH RESPECT TO THE REGISTRANT
BUSINESS
We distribute high-quality digital imaging solutions and color
management software products for use in graphics, publishing, digital
photography, and other business and technical markets. In the 1980's, we began
developing core technologies related to the design and functionality of
non-impact printers and multi-function peripheral devices (printer/copier/fax).
Our ColorBlind(R) software provides color management to improve the accuracy of
color reproduction - especially as it relates to matching color between
different devices in a network, such as monitors and printers.
Recently, we discontinued hardware development and manufacturing, in
order to concentrate on our core competencies in software and office products
marketing and support. Additionally, we market products on the Internet through
our dealseekers.com and color.com websites.
We have concentrated on systems solutions, providing hardware and
software products to assist in the creation and management of documents. We
integrate a variety of imaging and document management products for our business
customers.
We have recently embarked on an expansion program to provide more
services to help with tasks that have negatively impacted the business
operations of our exiting and potential customers. To this end, we have begun a
program of strategic acquisitions in personnel and employment practice
management.
We provide comprehensive personnel management services through our
wholly-owned SourceOne and EnStructure subsidiaries. Each of these subsidiaries
is a professional employer organization ("PEO") that provides benefits and
payroll administration, health and workers' compensation insurance programs,
personnel records management and employer liability management.
MARKET OVERVIEW
Our technology markets encompass desktop digital imaging and printing.
Our primary market segment is image management to enhance the function of
printers and/or digital copiers. We provide a variety of technical solutions and
products to meet the changing needs of this market, including printers,
plotters, copiers, and software.
The worldwide document/imaging market is expected to grow to $209
billion by 2003. The global office market is forecast to increase to $43 billion
in 2003. In-house color document production is expected to grow at a compound
annual rate of 40% over the next few years. Various underlying industries may
have a direct impact on our market potential. For example, according to the
Gartner Group, approximately 13 million of the 103 million households in the
United States currently have a digital camera Worldwide digital camera shipments
are forecast to increase dramatically to 41.6 million by 2004, according to
International Data Corp.
Changes in the technology of document creation, management, production,
and transmittal (including the Internet) have been transforming the imaging
market. The greater bandwidth now available to even small desktop computers has
facilitated the movement of color images; this has created an increase in the
demand for cross platform color reproduction.
The growth of networks, the increased availability and dissemination of
documents on the Internet, and the rapid adoption of color at the desktop have
significantly changed printing and document management. In the last few years,
the market has been reshaped from one dominated by dedicated printers and
scanners at the workstation, to an emphasis on document workflow using
network-shared imaging products that enable remote document delivery and
distribution.
-17-
The direct-to-plate and direct-to-print trends in the printing industry
have created more demand for digital color proofing due to the fact that
conventional proofing methods cannot be used in those environments.
The market growth and acceptance of the digital camera and the improved
resolution of these cameras have increased the demand for color management and
accurate color printing.
Accordingly, color integrity is an important underlying requirement in
the imaging process. The widespread use of color applications at the desktop,
demand for higher quality color reproduction, expanded use of the Internet for
document dissemination and e-commerce, growth of office networks, and the
increased acceptance and use of digital photography are some of the factors that
influence our markets.
We are working to deliver solutions that meet current and future
demands of the imaging markets. Our objective is to be a global market leader in
digital imaging by delivering higher-quality, easy-to-use products and
technology. We are focused on continuing to provide advanced integrated digital
imaging solutions.
We have expanded into business services through providing PEO services.
The PEO industry collectively serves approximately 4 million work site
employees in the United States. The target market for the PEO industry is
represented by companies with 100 or fewer employees; a market of approximately
60 million people.
The PEO industry began in 1985 with approximately 14,000 employees
collectively under management. According to the National Association of
Professional Employer Organizations ("NAPEO"), there are approximately 900 PEO
firms operating in the U.S., in nearly every state.
NAPEO reports that current PEO industry revenues are approximately $18
billion. The average annual growth rate of the industry, since 1985, has been
15%.
According to the U.S. Small Business Administration ("SBA"), the U.S.
has over 6 million small businesses, defined as those companies with 100 or
fewer employees, representing over 99% of all businesses. The U.S. Census Bureau
reports that small businesses represent the fastest growing segment of U.S.
employment and commerce, representing an estimated annual payroll of $1.4
trillion.
A typical PEO client company has 12 work site employees and an average
annual pay per work site employee of $22,517.
The PEO industry is growing due to the increased burden associated with
employment practice management and human resources regulation.
Growing pressure from federal agencies such as the Department of Labor,
the Immigration and Naturalization Service, and the Equal Employment Opportunity
Commission, and the burdens of employment-related compliance such as COBRA,
OSHA, workers' compensation, unemployment compensation, wrongful termination,
ADA ("Americans with Disabilities Act"), and FMLA ("Family and Medical Leave
Act") demand increasing levels of resources from small businesses.
BUSINESS STRATEGY
OFFICE PRODUCTS AND SYSTEMS
The office products and systems industry is undergoing a fundamental
transformation characterized by a transition from analog to digital systems,
management of publishing and printing over the Internet, reliance on
outsourcing, and the rapid transition to color output.
Our operations in this area integrate a variety of products, including
printers, plotters, copiers, and software, into a seamless, networked solution
for clients who are generally small to medium sized businesses. Hardware,
software, supplies and service are bundled together as a systems solution.
-18-
Through strategic acquisitions of existing office products resellers,
we have been able to assemble an infrastructure of competent sales and support
personnel. This acquisition strategy leverages our access to capital and
customers throughout the world, with the local expertise of small value-added
resellers who find it difficult to grow their businesses when competing with
larger companies.
PERSONNEL MANAGEMENT SYSTEMS
We expect to leverage our office products and systems expertise with
that of offering PEO services.
The PEO business provides a broad range of services associated with
staff leasing and human resources management. These include benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, employee recruiting and
selection, performance management, and training and development services.
The PEO business is growing rapidly, but profit margins are small.
Consequently, profitability depends on (1) economies of scale leading to greater
operating efficiencies; and (2) value-added services such as training,
education, Internet support, and product sales such as those offered by our
Office Products and Systems group.
The income model for this business generally revolves around fees
charged per employee. While gross profit is low, revenues are generally
substantial. To this end, we have begun a series of acquisitions of small PEO
firms. Each acquisition includes retention of some existing management and staff
in order to assure continuity of operations.
COLOR MANAGEMENT SOFTWARE
Accurate color reproduction is one of the largest single challenges
facing the imaging industry. Customers demand systems that are easy to use,
predictable and consistent. The fundamental challenge is the control of "color
space." Color space for printed materials is different from the color space for
devices such as cameras, scanners and computer monitors. A color management
system is needed so users can convert their files for use with different
devices. The varying characteristics of each device are captured in a device
profile. The International Color Consortium ("ICC") has established a standard
for the format for these profiles.
Our ColorBlind Color management software is a pre-packaged suite of
applications, utilities, and tools that allow users to precisely create ICC
profiles for each device in the color workflow including scanners, monitors,
digital cameras, printers, and other specialized digital color input and output
devices. Once profiled, ColorBlind balances these profiles to produce accurate,
consistent, and reliable color rendering from input to output.
In order to advance "ColorBlind Aware" as an industry standard, we
actively encourage printer, scanner, and monitor manufacturers to integrate
ColorBlind into product designs. ColorBlind software is sold as a stand-alone
application or licensed to OEM's for resale to be bundled with peripheral
devices.
We have launched an Internet site, color.com, as a resource center to
provide information on the highest quality correct color. This site allows
consumers to purchase our products, including ColorBlind software. This website
also serves as a resource center for color imaging, with information including
white papers on color imaging and management, links to color consultants and
experts, and products.
COMPETITION
The markets for our technology products are highly competitive and
rapidly changing. Our ability to compete in our markets depends on a number of
factors, including the success and timing of our product introductions and our
competitors, selling prices, product performance, product distribution,
marketing ability, and customer support. A key element of our strategy is to
provide competitively-priced, quality products.
The PEO business is also highly competitive, with approximately 900
firms operating in the U.S. There are several firms that operate on a nationwide
basis with revenues and resources far greater than ours. Several large PEO
companies are owned by insurance carriers and several are public companies whose
shares trade on Nasdaq, including Administaff, Inc., Team Staff, Inc., Barrett
Business Services, and Staff Leasing, Inc. Also see "Risks and Uncertainties."
-19-
OPERATIONS
Our 21,000 square foot corporate headquarters facility in San Diego,
California houses most of our U.S. operations. A small branch office for sales
of printers, plotters, copiers and accessories is maintained in Los Angeles,
California, and PEO operations are conducted from offices in Richmond, Virginia.
MANUFACTURING, PRODUCTION, AND SOURCES OF SUPPLY
We have traditionally outsourced nearly all of our manufacturing. In
June 2001, we suspended manufacturing of our branded products. We will continue
to manufacture our software products in-house and through selected outside
vendors. Also see "Risks and Uncertainties."
RESEARCH AND DEVELOPMENT
The markets for our products are characterized by rapidly evolving
technology, frequent new product introductions, and significant price
competition. Accordingly, we monitor new technology developments and coordinates
with suppliers, distributors and dealers to enhance existing products and lower
costs. Advances in technology require ongoing investment. Also see "Risks and
Uncertainties."
INTELLECTUAL PROPERTY
Our software products are copyrighted. However, copyright protection
does not prevent other companies from emulating the features and benefits
provided by our software. We also 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. We currently hold no patents. Technology products exist in a
rapidly changing business environment. Consequently, the Company believes the
effectiveness of patents, trade secrets, and copyright protection are less
important in influencing long term success than the experience of our employees
and our contractual relationships.
We have obtained U.S. registration for several of our trade names or
trademarks, including PCPI, NewGen, ColorBlind, LaserImage, ColorImage,
ImageScript, ImageFont, ImagePress, and ImageNet. These trade names are used to
distinguish our products in the marketplace.
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 rely on a
combination of trade secrets, copyright and trademark protection, and
non-disclosure agreements to protect our proprietary rights. Also see "Risks and
Uncertainties."
PERSONNEL
We employed a total of 58 individuals worldwide as of April 10, 2002.
Of this number, 35 were involved in sales, marketing, corporate administration
and finance, and 23 were in engineering, research and development, and technical
support. There is no union representation for any of our employees.
PROPERTY
We own no real property. We lease approximately 21,000 square feet of
space in a facility located at 15175 Innovation Drive, San Diego, California
92128, at a monthly lease rate of approximately $31,000. This facility houses
corporate management, marketing, sales, engineering, and support offices. The
lease expires in October 2003. We have month-to-month leases on our small branch
offices in Los Angeles, California and Richmond, Virginia.
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
-20-
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.
Throughout fiscal 1999, 2000 and 2001, 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, we may be involved in litigation
relating to claims arising out of our operations in the normal course of
business.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market, and quoted
on the NASD Electronic Bulletin Board under the symbol "ITEC."
The following table sets forth the high and low bid quotations of our
common stock for the periods indicated as reported by the over-the-counter
market or the NASD Electronic Bulletin Board. Prices shown in the table
represent inter-dealer quotations, without adjustment for retail markup,
markdown, or commission, and do not necessarily represent actual transactions.
High Low
-------------------------------------------------------
Year ended June 30, 1999
First quarter $ 3.88 $ 1.69
Second quarter 2.06 0.25
Third quarter 5.22 0.28
Fourth quarter 2.28 0.59
Year ended June 30, 2000
First quarter $ 1.63 $ 0.28
Second quarter 2.13 0.09
Third quarter 3.22 0.36
Fourth quarter 0.97 0.19
Year ended June 30, 2001
First quarter $ 0.92 $ 0.05
Second quarter 0.30 0.05
Third quarter 0.38 0.05
Fourth quarter 0.13 0.06
-------------------------------------------------------
The number of holders of record of our common stock, $.005 par value,
was approximately 45,000 at June 30, 2001.
-21-
DIVIDENDS
We have never declared nor paid any cash dividends on our common stock.
We currently intend to retain earnings, if any, after any payment of dividends
on our 5% convertible preferred stock, for use in our business and therefore, do
not anticipate paying any cash dividends on our common stock.
Holders of the 5% convertible preferred stock are entitled to receive,
when and as declared by our Board of Directors, but only out of amounts legally
available for the payment thereof, cumulative cash dividends at the annual rate
of $50.00 per share, payable semi-annually, commencing on October 15, 1986. We
have never declared nor paid any cash dividends on the 5% convertible preferred
stock. Dividends in arrears at June 30, 2001 were $309,000.
We do not anticipate paying dividends on the 5% convertible preferred
stock in the near future. However, the 5% convertible preferred stock is
convertible, at any time, into shares of our common stock, at a price of $17.50
per common share. This conversion price is subject to certain anti-dilution
adjustments, in the event of certain future stock splits or dividends, mergers,
consolidations or other similar events. In addition, we shall reserve, and keep
reserved, out of our authorized but unissued shares of common stock, sufficient
shares to effect the conversion of all shares of the 5% convertible preferred
stock.
-22-
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDING DECEMBER 31, 2001
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31, JUNE 30,
2001 2001
(audited)
Current assets
Cash $ 159 $ 35
Accounts receivable, net:
Billed 954 58
Unbilled 634
-------- --------
1,747 58
Inventories 877 50
Prepaid expenses and other 311 259
-------- --------
Total current assets 2,935 402
Property and equipment, net 206 241
Goodwill, net 1,823 569
Other 197 475
-------- --------
$ 5,161 $ 1,212
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank note payable $ 3,818 $ 4,318
Short-term debt 3,379
6,001
Accounts payable 6,325 6,450
PEO payroll taxes and other payroll deductions 443 --
PEO accrued worksite employee 550 --
Other accrued expenses 5,497 3,175
-------- --------
Total current liabilities 22,634 17,322
Shareholders' net capital deficiency
Series A preferred stock, $1,000 par value, 7,500 shares
Authorized, 420.5 shares issued and outstanding 420 420
Common stock, $0.005 par value, 500,000,000 shares
Authorized, 226,555,800 and 170,901,065 shares issued
and outstanding, respectively 1,133 864
Paid-in capital 71,642 69,472
Shareholder loans (105) (105)
Common stock warrants 541 475-
Accumulated deficit (91,104) (87,236)
-------- --------
Total shareholders' net capital deficiency (17,473) (16,110)
-------- --------
$ 5,161 $ 1,212
======== ========
See Notes to Consolidated Financial Statements.
-23-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2001 2000
Revenues
Sales of products $ 891 $ 556
Software sales, licenses and royalties 145 455
PEO services 7,074 --
--------- ---------
8,110 1,011
Costs and expenses
Cost of products sold 646 481
Cost of software sales, licenses and royalties 24 --
Cost of PEO services 6,795 --
Selling, general, and administrative 2,137 1,721
Research and development 64 217
--------- ---------
9,666 2,419
--------- ---------
Loss from operations (1,556) (1,408)
--------- ---------
Other income (expense):
Interest and financing costs, net (298) (177)
--------- ---------
Other -- --
--------- ---------
(298) (177)
Loss before income taxes (1,854) (1,585)
========= =========
Income tax
Net loss $ (1,854) $ (1,585)
========= =========
Loss per common share
Basic $ (0.01) $ (0.01)
========= =========
Diluted $ (0.01) $ (0.01)
========= =========
Weighted average common shares 199,037 112,709
========= =========
Weighted average common shares - assuming dilution 199,037 112,709
========= =========
See Notes to Consolidated Financial Statements.
-24-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2001 2000
Revenues
Sales of imaging products $ 1,764 $ 1,216
Sales of software, licenses and royalties 350 632
PEO services 7,074 --
--------- ---------
9,188 1,848
Costs and expenses
Cost of products sold 1,214 924
Cost of software, licenses and royalties 54 --
Cost of PEO services 6,795 --
Selling, general, and administrative 3,586 4,072
Research and development 136 456
--------- ---------
11,785 5,452
--------- ---------
Loss from operations (2,597) (3,604)
--------- ---------
Other income (expense):
Interest and financing costs, net (1,018) (358)
--------- ---------
Other -- --
--------- ---------
(1,018) (358)
Loss before income taxes (3,615) (3,962)
--------- ---------
Income tax
Net loss $ (3,615) $ (3,962)
========= =========
Loss per common share
Basic $ (0.02) $ (0.04)
========= =========
Diluted $ (0.02) $ (0.04)
========= =========
Weighted average common shares 185,010 107,997
========= =========
Weighted average common shares - assuming dilution 185,010 107,997
========= =========
See Notes to Consolidated Financial Statements.
-25-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2001 2000
Cash flows from operating activities
Net loss $ (3,615) $ (3,962)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 51 143
Stock issued for services 367 618
Changes in operating assets and liabilities
Accounts receivable (1,418) (355)
Inventories (827) 45
Prepaid expenses and other (44) (37)
Accounts payable and accrued expenses 1,961 767
PEO payroll taxes and other payroll 106 --
deductions
PEO accrued worksite employee expense 318 --
Other assets
2 --
----------- -----------
Net cash from operating activities (3,099) (2,781)
Cash flows from investing activities
Capital expenditures (56) (90)
Cash investment in acquisitions (250) --
Cash acquired in acquisitions 215 --
Other -- 150
----------- -----------
-- --
Net cash from investing activities (91) 60
----------- -----------
Cash flows from financing activities
Net borrowings under bank lines of credit (500) (900)
Issuance of other notes payable 1,922 850
Warrant proceeds 66 -
Net proceeds from issuance of common stock 1,826 2,877
----------- -----------
Net cash from financing activities 3,314 2,827
----------- -----------
Net increase (decrease) in cash 124 106
Cash, beginning of period 35 291
--- ---
Cash, end of period $ 159 $ 397
$0 was paid for interest or income taxes during these periods.
See Notes to Consolidated Financial Statements.
-26-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDING DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Note 1. Basis Of Presentation
The accompanying unaudited consolidated condensed financial statements
of Imaging Technologies Corporation and Subsidiaries (the "Company" or "ITEC")
have been prepared pursuant to the rules of the Securities and Exchange
Commission (the "SEC") for quarterly reports on Form 10-Q and do not include all
of the information and note disclosures required by generally accepted
accounting principles. These financial statements and notes herein are
unaudited, but in the opinion of management, include all the adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position, results of operations, and
cash flows for the periods presented. These financial statements should be read
in conjunction with the Company's audited financial statements and notes thereto
for the years ended June 30, 2001, 2000, and 1999 included in the Company's
annual report on Form 10-K filed with the SEC. Interim operating results are not
necessarily indicative of operating results for any future interim period or for
the full year.
Note 2. Going Concern Considerations
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. At December 31, 2001, and for the
year then ended, the Company has experienced a net loss and has deficiencies in
working capital and net worth that 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, stockholders may find it more difficult to sell common
stock. This lack of liquidity also may make it more difficult to raise capital
in the future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock does constitute a penny stock
because our common stock has a market price less than $5.00 per share, our
common stock is no longer quoted on Nasdaq and our net tangible assets do not
exceed $2,000,000. As our common stock falls within the definition of penny
stock, these regulations require the delivery, prior to any transaction
involving our common stock, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Furthermore, the ability of
broker/dealers to sell our common stock and the ability of shareholders to sell
our common stock in the secondary market would be limited. As a result, the
market liquidity for our common stock would be severely and adversely
-27-
affected. We can provide no assurance that trading in our common stock will not
be subject to these or other regulations in the future, which would negatively
affect the market for our common stock.
The Company must obtain additional funds to provide adequate working
capital and finance operations. 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
stockholders. If adequate funds are not available, the Company may be required
to delay, reduce or eliminate some or all of its planned activities, including
any potential mergers or acquisitions. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company plans to overcome the circumstances that impact its ability
to remain a going concern through a combination of increased revenues and
decreased costs with interim cash flow deficiencies being addressed through
additional equity financing. Since the removal of the operational receiver, the
Company has been able to re-establish relationships with some of its past
customers and distributors and establish relationships with new customers. These
actions have increased revenues as reflected in recent quarterly reports. At the
same time, the Company has been able to reduce costs by reducing the number of
employees and terminating unprofitable operations, such as the design and
fabrication of controller boards as an OEM supplier to other computer printer
manufacturers, which had greatly diminished revenues over the past three years.
The Company commenced a program to reduce its debt, which it will address more
aggressively in the third and fourth quarters of its current fiscal year,
partially through debt-to-equity conversions. Finally, the Company will continue
to pursue the acquisition of business units that will be consistent with these
measures. The Company anticipates that all of these initiatives will be carried
out throughout the fiscal year ending June 30, 2002.
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) (DENOMINATOR) AMOUNT
DECEMBER 31, 2000
Net loss $ (1,585)
Preferred dividends
(6)
Basic and diluted EPS (1,591) 112,709 $ (0.01)
DECEMBER 31, 2001
Net loss $ (1,854)
Preferred dividends
(6)
Basic and diluted EPS (1,860) 199,037 $ (0.01)
-28-
Note 4. Inventories
DEC. 31, 2001 SEPT. 30, 2001
Inventories
Materials and suppliers $ 25 $ 10
Finished goods 852 130
------------- ---------------
$ 877 $ 140
Note 5. Convertible Notes Payable
In December 2000, the Company entered into a Convertible Note Purchase
Agreement for $850,000, bearing an annual interest rate of 8%, due December
2003. The Note is convertible into the Company's common stock at a price equal
to the lesser of $0.08 per share or 70% of the average market price as defined
in the agreement. The Company has recognized interest expense of $364,000
relating to the beneficial conversion feature of the above note.
In July 2001, the Company entered into a Convertible Note Purchase
Agreement for $1,000,000, bearing an annual interest rate of 8%, due July 2004.
The Note is convertible into the Company's common stock at a price equal to the
lesser of $0.06 per share or 70% of the average market price as defined in the
agreement. The Company has recognized interest expense of approximately $429,000
relating to the beneficial conversion feature of the above note.
In September 2001, the Company entered into a Convertible Promissory
Note for $300,000, bearing an interest rate of 8%, due September 2004. The Note
is convertible into the Company's common stock at a price equal to the lesser of
$0.0266 per share or 70% of the average market price as defined in the
agreement. The Company has recognized interest expense of approximately $150,000
relating to the beneficial conversion feature of the above note.
In November 2001, the Company entered into a Convertible Promissory
Note for $200,000, bearing an interest rate of 8%, due November 2004. The Note
is convertible into the Company's common stock at a price equal to the lesser of
$0.0266 per share or 70% of the average market price as defined in the
agreement. The Company has recognized interest expense of approximately $86,000
relating to the beneficial conversion feature of the above note.
In January 2002, the Company entered into a Secured Convertible
Debenture for $500,000, bearing an interest rate of 8%. The Debenture is
convertible into the Company's common stock at a price equal to the lesser of
$0.0166 per share or 70% of the average market price as defined in the
agreement. The Company shall recognize interest expense of approximately
$214,000 relating to the beneficial conversion feature of the above note.
Note 6. Stock Issuances
During the quarter, ITEC issued 27,236,338 common shares to holders of
convertible notes payable at an average conversion price of $0.018 per share.
ITEC issued during the quarter 9,898,666 registered common shares for
legal and consulting at a warrant conversion average price of $0.03 per share
pursuant to previously registrations under Form S-8. The Company recognized
$294,491 in expenses as a result of the conversions.
Registered warrants, exercised during the quarter at an average price
of $0.023 per share, amounted to 5,667,277 common shares. The Company received
$131,575 in cash.
-29-
Note 7. Business Acquisitions
On October 25, 2001, the Company acquired certain assets. These assets,
related to the Company's office products and services business activities,
represent an aggregate of $260,000 and include inventories, fixed assets, and
accounts receivable. The purchase price of the assets was 7,500,000 shares of
ITEC common stock, determined by the market price of ITEC common stock at the
date of acquisition. The Company has agreed to register these shares.
On November 12, 2001, the Company acquired all of the outstanding
shares of SourceOne, Inc. ("SourceOne") from Neotactix, Inc. for $750,000. ITEC
paid $250,000 in cash at Closing. $200,000 of these funds were provided by
outside investors in the form of a promissory note convertible into shares of
ITEC common stock, the number of which will be determined by a formula applied
to the market price of the shares at the time that the promissory note is
converted. The balance is payable in cash or stock on a quarterly payment
schedule beginning in April 2002.
The purchase price was determined through analysis of SourceOne's
recent, unaudited financial performance. SourceOne, through September 30, 2001,
had losses of approximately $220 thousand on 6-month revenues of approximately
$25 million. The total purchase price was arrived at through negotiations. The
assets of SourceOne consist of cash, accounts receivable, and pre-paid insurance
premiums.
SourceOne is a professional employer organization ("PEO") that provides
comprehensive personnel management services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, and employer liability management.
The Company disclosed the details of the SourceOne transaction on Form
8-K, dated January 25, 2002.
SourceOne Group, Inc. is operated by ITEC as a wholly-owned subsidiary.
The consolidated financial statements of ITEC include the financial condition of
SourceOne Group as of December 31, 2001 and the Statement of Operations since
November 12, 2001. The pro forma presentation below displays pro forma condensed
statement of operations as if SourceOne Group had been part of the Company since
July 1, 2001- the beginning of the fiscal year. A comparison to the same period
last year is not presented as SourceOne Group began operations in April 2001.
(in thousands) AS OF DECEMBER 31, 2001
3-MONTHS 6 MONTHS
-------- --------
Revenues:
Sales of imaging products 891 1,764
Software sales, royalties & licenses 145 350
PEO services 12,032 25,485
------- -------
13,068 27,599
Costs and expenses:
Cost of imaging products sold 646 1,214
Cost of software sales, royalties & licenses 24 54
Cost of PEO services 11,744 24,900
Selling, general and administrative 2,285 4,142
Research and development 64 136
------- -------
14,763 30,446
Loss from operations (1,695) (2,847)
Other income (expense):
Interest and finance costs, net (298) (1,018)
------- -------
Loss before income taxes (1,993) (3,865)
======= =======
Income tax benefit (expense) - -
------- -------
Net loss (1,993) (3,865)
======= =======
-30-
Note 8. Segment Information
During the three-month and six-month period ended December 31, 2001,
the Company managed and internally reported the Company's business as three
reportable segments, principally, (1) imaging products and accessories, (2)
imaging software, and (3) PEO services.
Segment information for the period ended December 31, 2001 is as
follows:
(in thousands)
IMAGING IMAGING PEO
PRODUCTS SOFTWARE SERVICES
3-months
Revenues $ 891 $ 145 $ 7,074
Operating income (loss) (1,816) 97 163
6-months
Revenues $ 1,764 $ 350 $ 7,074
Operating income (loss) (2,996) 236 163
Additional information regarding revenue by products and service groups
is not presented because it is currently impracticable to do so due to various
reorganizations of the Company's accounting systems. A comprehensive accounting
system is being implemented that should enable the Company to report such
information in the future.
During the period ended December 31, 2001, no customer accounted for
more than 10% of consolidated accounts receivable or total consolidated
revenues.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDING DECEMBER 31, 2001
--------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this report.
RESULTS OF OPERATIONS NET REVENUES
Revenues were $8.1 million and $1 million for the three-month period
ended December 31, 2001 and 2000, respectively, an increase of $7.1 million or
703%. Revenues were $9.2 million and $1.8 million for the six-month period ended
December 31, 2001 and 2000, respectively, an increase of $7.3 million or 398%.
The increase in revenues was due primarily to the PEO revenues associated with
the acquisition of SourceOne Group.
Sales of imaging products were $891 thousand and $556 thousand for the
three-month period ended December 31, 2001 and 2000, respectively, an increase
of $335 thousand or 61%. Sales of imaging products were $1.8 million and $1.2
million for the six-month period ended December 31, 2001 and 2000, respectively,
an increase of $548 thousand or 45%. The increase in product sales from the
reported periods of 2001 to 2000 was due to an overall increase in the sales
activities of the Company. The Company has devoted itself primarily to the
resale of office products, including copiers, printers, and network solutions.
However, the Company's lack of sufficient working capital has had, and may
continue to have, a negative adverse effect on product sales.
The Company had sales software sales, licensing fees, and royalties for
the three-month period ended December 31, 2001 and 2000 of $145 thousand and
$455 thousand, respectively. Software revenues fell by $310 thousand (69%). For
the six-month period ended December 31, 2001 and 2000, software sales, licensing
fees, and royalties were $350 thousand and $632 thousand, respectively, a
reduction of $282 thousand (45%). The reduction in software revenues was due
primarily to the absence of licensing and royalty income.
Royalties and licensing fees vary from quarter to quarter and are
dependent on the sales of the Company's products made by customers using
ColorBlind software source code. However, ColorBlind software is sold by ITEC
primarily as a packaged application, whether as a stand-alone application or to
be bundled by our customers with
-31-
hardware imaging products such as printers and copiers. At present, and in the
future, royalties from the licensing of ColorBlind source code are not expected
to be significant and will be reported as part of software sales.
COST OF PRODUCTS SOLD
Cost of products sold were $646 thousand (73% of product sales) and
$481 thousand (87% of product sales) for the period ended December 31, 2001 and
2000, respectively. For the six-month period ended December 31, 2001 and 2000,
cost of products sold were $1.2 million (69% of product sales) and $924 thousand
(76% of product sales), respectively.
The increase in margins is primarily due to changes in the
Company's sales and distribution strategies. The Company has concentrated on
sales of office products and software rather than its prior strategy of selling
its own branded products, which, due to a variety of competitive factors,
resulted in heavier discounting and lower margins. Management hopes to increase
margins through adding more value to products it sells with software
enhancements and offering training to its customers.
Cost of software, licenses and royalties were $24 thousand (17%) for
the three-month period ended December 31, 2001 and $54 thousand (16%) for the
six-month period. Comparative results for the year-earlier period is not
presented because it is currently impracticable to do so due to various
reorganizations of the Company's accounting systems. A comprehensive accounting
system is being implemented that should enable the Company to report such
information in the future.
Cost of PEO services were $6.8 million (96%) for the period ended
December 31, 2001. The Company began providing these services pursuant to the
acquisition of SourceOne Group on November 12, 2001. Accordingly, results are
presented as of the date of acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three-month period
ended December 31, 2001 and 2000, respectively, were $2.1 million and $1.7
million. Selling, general and administrative expenses for the six-month period
ended December 31, 2001 and 2000, respectively, were $3.6 million and $4
million.
Selling, general and administrative expenses have consisted primarily
of salaries and commissions of sales and marketing personnel, salaries and
related costs for general corporate functions, including finance, accounting,
facilities and legal, advertising and other marketing related expenses, and fees
for professional services. For the three-month period ended December 31, the
selling, general, and administrative expenses increased $416 thousand (25%) due
primarily to additional costs associated with acquisitions, including its PEO
subsidiary, SourceOne Group. However, for the six-month period ended December
31, 2001 and 2000, the Company reduced selling, general, and administrative
expenses $486 thousand (12%) due primarily to reductions in engineering
personnel, which were assigned to the support of certain ITEC-branded printer
products, which have been suspended.
RESEARCH AND DEVELOPMENT
Research and development costs were $64 thousand and $217 thousand for
the three-month period ended December 31, 2001 and 2000, respectively; a
decrease of $153 thousand (71%). For the six-month period ended December 31,
2001 and 2000, respectively, research and development costs were $136 thousand
and $456 thousand; a decrease of $320 thousand (71%).
The Company had been reducing its research and development costs during
the past several quarters. It has suspended most of its engineering and
licensing activities associated with OEM printer products and has re-directed
its research and development costs toward the support of its ColorBlind software
products.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
cash generated from operations, debt financing, and from the sale of equity
securities. Additionally, in order to facilitate its growth and future
liquidity, the Company has made some strategic acquisitions.
-32-
As a result of some of the Company's financing activities, there has
been a significant increase in the number of issued and outstanding shares.
During the three-months period ended December 31 2001, the Company issued an
additional 55.6 million shares. During the six-month period ended December 31,
2001, the Company issued an additional 55.7 million shares. These shares of
common stock were issued primarily for raising capital due for corporate
expenses in lieu of cash, and for acquisitions.
During the quarter, ITEC issued 27,236,338 common shares to holders of
convertible notes payable at an average conversion price of $0.018 per share.
ITEC issued during the quarter 9,898,666 registered common shares for
legal and consulting at a warrant conversion average price of $0.03 per share
pursuant to previously registrations under Form S-8. The Company recognized
$294,491 in expenses as a result of the conversions.
Registered warrants, exercised during the quarter at an average price
of $0.023 per share, amounted to 5,667,277 common shares. The Company received
$131,575 in cash.
As the result of beneficial conversions of convertible notes payable to
common stock, during the quarters ended December 31 and September 30, 2001,
$85,719 and $579,699 was charged to interest expense respectively.
As of December 31, 2001, the Company had negative working capital of
$19.7 million, an increase of approximately $2.8 million (17%) in working
capital as compared to June 30, 2001. This increase was due primarily to
increases in short-term debt.
Net cash used in operating activities increased $318 thousand (12%) to
$3.1 million during the six-month period ended December 31, 2001, from $2.8
million during the year-earlier period, due primarily to costs associated with
the Company's acquisition of SourceOne Group during the period.
Net cash used in investing activities was $306 thousand during the
six-month period ended December 31, 2001 as compared to net cash from investing
activities of $171 thousand at June 30, 2001. The change was due primarily with
the Company's cash investment for the SourceOne Group acquisition.
Net cash from financing activities was $3.3 million for the six-month
period ended December 31, 2001, an increase of $487 thousand or 18%. The
increase is due primarily to the issuance of notes payable, which were used to
finance continuing operations.
The Company has no material commitments for capital expenditures. The
Company's 5% convertible preferred stock (which ranks prior to the Company's
common stock), carries cumulative dividends, when and as declared, at an annual
rate of $50.00 per share. The aggregate amount of such dividends in arrears at
December 31, 2001, was approximately $309 thousand.
The Company's capital requirements depend on numerous factors,
including market acceptance of the Company's products and services, the
resources the Company devotes to marketing and selling its products and
services, and other factors. The report of the Company's independent auditors
accompanying the Company's June 30, 2001 financial statements includes an
explanatory paragraph indicating there is a substantial doubt about the
Company's ability to continue as a going concern, due primarily to the decreases
in the Company's working capital and net worth. (Also see Note 2 to the
Consolidate Financial Statements.)
-33-
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR PERIOD ENDING JUNE 30, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
===========================================================================
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IMAGING TECHNOLOGIES CORPORATION
We have audited the consolidated balance sheets of Imaging Technologies
Corporation and its subsidiaries as of June 30, 2001, and 2000 and the related
consolidated statements of operations, shareholders' net capital deficiency, and
cash flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Imaging Technologies Corporation and its subsidiaries as of June 30, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. Note 1 to the financial statements
describes various factors that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, the Company changed
its method of accounting for the beneficial conversion feature relating to
certain preferred stock issued in the year ended June 30, 1999.
BOROS & FARRINGTON APC
San Diego, California
October 10, 2001
-34-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
(in thousands, except per share data)
ASSETS
2001 2000
Current assets
Cash $ 35 $ 291
Accounts receivable, net 58 175
Inventories 50 203
Prepaid expenses and other 259 333
--------- ---------
Total current assets 402 1,002
Goodwill, net 569 -
Property and equipment, net 241 531
Other - 150
--------- ---------
$ 1,212 $ 1,683
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Borrowings under bank notes payable $ 4,318 $ 5,765
Short-term debt 3,379 2,563
Accounts payable 6,450 5,378
Accrued expenses 3,175 1,828
--------- ---------
Total current liabilities 17,322 15,534
--------- ---------
Commitments and contingencies (Note 9)
Shareholders' net capital deficiency
Series A convertible preferred stock, $1,000 par value,
7,500 shares 420 420
authorized, 420.5 shares issued and outstanding
Common stock, $0.005 par value, 200,000,000 shares
Authorized; 170,901,065 and 101,481,876 shares issued 864 507
and outstanding for years ending June 30, 2001 and 2000,
respectively
Common stock warrants 475 -
Paid-in capital 69,472 62,675
Shareholder loans (105) (105)
Accumulated deficit (87,236) (77,348)
--------- ---------
Total shareholders' deficiency (16,110) (13,851)
--------- ---------
$ 1,212 $ 1,683
========= =========
See Notes to Consolidated Financial Statements.
-35-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(in thousands, except per share data)
2001 2000 1999
Revenues
Sales of products $ 2,897 $ 1,634 $ 16,417
Licenses and royalties 555 788 730
--------- --------- ---------
3,452 2,422 17,147
--------- --------- ---------
Costs and expenses
Cost of products sold 2,742 5,197 18,015
Selling, general, and administrative 8,720 7,780 13,707
Research and development 250 1,929 2,033
Special charges
Charge for uncollectible receivables - - 2,233
Restructuring costs - - 2,948
--------- --------- ---------
11,712 14,906 38,936
--------- --------- ---------
Loss from operations (8,260) (12,484) (21,789)
--------- --------- ---------
Other income (expense):
Interest and finance costs, net (1,628) (1,853) (1,989)
Other 139 -
--------- --------- ---------
(1,628) (1,714) (1,989)
--------- --------- ---------
Loss before income taxes (9,888) (14,198) (23,778)
Provision for income tax - - (264)
--------- --------- ---------
Loss before discontinued operations, net of tax effect (9,888) (14,198) (24,042)
Loss from discontinued operations - - (1,087)
--------- --------- ---------
Net loss before preferred stock dividend (9,888) (14,198) (25,129)
--------- --------- ---------
Preferred stock dividends (21) (21) (4,055)
--------- --------- ---------
Net loss attributed to common shares $ (9,909) $(14,219) $(29,184)
========= ========= =========
Net Loss
Loss per common share
Continuing operations - basic and diluted $ (0.08) $ (0.20) $ (1.81)
Discontinued operations - basic and diluted - - (0.07)
--------- --------- ---------
Total $ (0.08) $ (0.20) $
========= ========= =========
(1.88)
Weighted average common shares 131,488 70,269 15,498
========= ========= =========
Weighted average common shares - assuming dilution 131,488 70,269 15,498
========= ========= =========
See Notes to Consolidated Financial Statements.
-36-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' NET CAPITAL DEFICIENCY
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(in thousands, except per share data)
SERIES A SERIES C SERIES COMMON
PREFERRED PREFERRED D&E STOCK COMMON PAID-IN
STOCK STOCK PREFERRED WARRANTS STOCK CAPITAL LOANS ACCUM.
STOCK DEFICIT TOTAL
--------- --------- --------- -------- -------- ------- -------- --------- ---------
BALANCE, JUNE 30, 1998 $420 $2,360 $ - $ - $62 $35,859 $(110) $(33,987) $4,604
Redemption of preferred stock - (2,360) - - - (870) - (3,230)
Issuance of preferred stock
(900 shares) - - 1,800 - - - - - 1,800
Issuance of preferred stock
(931 shares) - - 4,655 - - - - 4,655
Issuance of common stock
Cash (4,105,800 shares) - - - - 21 1,922 - - 1,943
Services (3,167,500 shares) - - - - 16 1,854 - - 1,870
Conversion of note payable
(2,000,000 shares) - - - - 10 940 - - 950
Exercise of options and warrants
(270,660 shares) - - - - 1 269 - - 270
Stock issuance costs - - - - - (170) - - (170)
Preferred stock dividend - - - - - 4,034 - (4,034) -
Collection of shareholder loans - - - - - - 5 - 5
Net loss - - - - - - - (25,129) (25,129)
--------- --------- ------- -------- -------- ------- -------- --------- --------
BALANCE, JUNE 30, 1999 420 - 6,455 - 110 43,838 (105) (63,150) (12,432)
Conversion of Series D and E
preferred stock - - (6,455) - 296 6,159 - - -
(1200 and 1,161 shares)
Issuance of common stock
Cash (15,686,366 shares) - - - - 78 7,898 - - 7,976
Services (2,445,221 shares) - - - - 12 2,040 - - 2,052
Conversion of liabilities
(2,259,836 shares) - - - - 11 2,740 - - 2,751
Net loss (14,198) (14,198)
--------- --------- ------- -------- -------- ------- -------- -------- --------
BALANCE, JUNE 30, 2000 420 - - - 507 62,675 (105) (77,348) (13,851)
Issuance of common stock
Cash (43,718,203 shares) - - - - 219 4,992 - - 5,211
Business acquisition
(3,750,000 shares) - - - - 19 254 - - 273
Software purchase
(1,200,000 shares) - - - - 6 219 - - 225
Services (4,386,666 shares) - - - - 22 351 - - 373
Conversion of liabilities
(18,275,149 shares) - - - - 91 584 - - 675
Issuance of warrants - - - 508 - - - - 508
Exercise of warrants - - - (33) - 33 - - -
Beneficial conversion on notes - - - - - 364 - - 364
Net loss - - - - - - - (9,888) (9,888)
--------- --------- ------- -------- -------- ------- -------- --------- ---------
BALANCE, JUNE 30, 2001 $ 420 $ - $ - 475 $ 864 $69,472 $ (105) $(87,236) $(16,110)
========= ========= ======= ======== ======== ======= ======== ========= =========
See Notes to Consolidated Financial Statements.
-37-
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
(in thousands, except per share data)
2001 2000 1999
---------- ---------- ----------
Cash flows from operating activities
Net loss $ (9,888) $ (14,198) $ (25,129)
Adjustments to reconcile net loss to net
cash from operating activities
Non-cash special charges - - 3,440
Depreciation and amortization 806 478 761
Amortization of capitalized software - 2,851 3,951
Stock issued for services 373 2,052 1,870
Cost attributed to warrants 508 - -
Interest from beneficial conversion feature 364 - -
Provision for income taxes - - 250
Changes in operating assets and liabilities
Accounts receivable 117 1,784 (59)
Inventories 153 349 5,197
Prepaid expenses and other 303 344 626
Accounts payable and accrued expenses 1,924 (347) 2,043
---------- ---------- ----------
Net cash from operating activities (5,340) (6,687) (7,050)
---------- ---------- ----------
Cash flows from investing activities
Prepaid licenses - - (34)
Capitalized software - - (3,147)
Capital expenditures (171) (23) (222)
---------- ---------- ----------
Net cash from investing activities (171) (23) (3,403)
---------- ---------- ----------
Cash flows from financing activities
Net borrowings under bank notes payable (1,447) (704) (1,234)
Issuance of other notes payable 1,491 - 5,860
Net proceeds from issuance of common stock 5,211 7,976 2,213
Net proceeds from issuance of preferred stock - - 5,190
Stock issuance costs - - (170)
Redemption of preferred stock - - (3,230)
Collection of shareholder loans - - 5
Repayment of notes payable - (346) (1,129)
---------- ---------- ----------
Net cash from financing activities 5,255 6,926 7,505
---------- ---------- ----------
Net increase (decrease) in cash (256) 216 (2,948)
Cash, beginning of year 291 75 3,023
---------- ---------- ----------
Cash, end of year $ 35 $ 291 $ 75
========== ========== ==========
See Notes to Consolidated Financial Statements.
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IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDING JUNE 30, 2001
(Dollar amounts expressed in thousands, except per share data)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Imaging Technologies Corporation, formerly Personal Computer Products,
Inc., a Delaware corporation, and its subsidiaries ("ITEC" or the "Company")
design, develop, and sell high-quality digital imaging solutions and color
management software products for use in graphics, publishing, digital
photography, and other business and technical markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ITEC and
its active subsidiaries, Eduadvantage.com, Inc., NewGen Imaging Systems, Inc.
("NewGen"), and Color Solutions, Inc. ("CSI"). All significant inter-company
accounts and transactions have been eliminated.
CHANGE IN ACCOUNTING PRINCIPLE
The accompanying financial statements have been adjusted to record the
beneficial conversion feature of certain preferred stock issued in fiscal 1999.
The effect of the adjustment as of June 30, 1999 and for the year then ended is
that additional paid-in capital and accumulated deficit each increased by
$4,034,000 and loss per share available to common shareholders increased from
$1.62 to $1.88 per share due to recognition of the preferred stock dividend
relating to the beneficial conversion feature.
GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. At June 30, 2001, and for the year
then ended, the Company has experienced a net loss and has deficiencies in
working capital and net worth that 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, stockholders may find it more difficult to sell common
stock. This lack of liquidity also may make it more difficult to raise capital
in the future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock does constitute a penny stock
because our common stock has a market price less than $5.00 per share, our
common stock is no longer quoted
-39-
on Nasdaq and our net tangible assets do not exceed $2,000,000. As our common
stock falls within the definition of penny stock, these regulations require the
delivery, prior to any transaction involving our common stock, of a disclosure
schedule explaining the penny stock market and the risks associated with it.
Furthermore, the ability of broker/dealers to sell our common stock and the
ability of shareholders to sell our common stock in the secondary market would
be limited. As a result, the market liquidity for our common stock would be
severely and adversely affected. We can provide no assurance that trading in our
common stock will not be subject to these or other regulations in the future,
which would negatively affect the market for our common stock.
The Company must obtain additional funds to provide adequate working
capital and finance operations. 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
stockholders. If adequate funds are not available, the Company may be required
to delay, reduce or eliminate some or all of its planned activities, including
any potential mergers or acquisitions. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company plans to overcome the circumstances that impact its ability
to remain a going concern through a combination of increased revenues and
decreased costs with interim cash flow deficiencies being addressed through
additional equity financing. Since the removal of the operational receiver, the
Company has been able to re-establish relationships with some of its past
customers and distributors and establish relationships with new customers. These
actions have increased revenues as reflected in recent quarterly reports. At the
same time, the Company has been able to reduce costs by reducing the number of
employees and terminating unprofitable operations, such as the design and
fabrication of controller boards as an OEM supplier to other computer printer
manufacturers, which had greatly diminished revenues over the past three years.
The Company commenced a program to reduce its debt, which it will address more
aggressively in the third and fourth quarters of its current fiscal year,
partially through debt-to-equity conversions. Finally, the Company will continue
to pursue the acquisition of business units that will be consistent with these
measures. The Company anticipates that all of these initiatives will be carried
out throughout the fiscal year ending June 30, 2002.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market; cost being
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally computed
on a straight-line basis over the estimated useful lives of assets ranging from
three to seven years. Amortization of leasehold improvements is provided over
the initial term of the lease, on a straight-line basis. Maintenance, repairs,
and minor renewals and betterments are charged to expense. Depreciation and
amortization expense for property and equipment was $689,000, $478,000 and
$761,000 for the years ending June 30, 2001, 2000 and 1999, respectively.
LONG-LIVED ASSETS
SFAS No. 121, "Accounting for the Impairment of long-lived Assets and
for long-lived Assets to be disposed of" requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company has
adopted this
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statement and has determined that recognition of an impairment loss for
applicable assets of continuing operations is not necessary.
GOODWILL
Goodwill represents the cost in excess of the fair market value of the
assets acquired from one unrelated company. Goodwill is being amortized on the
straight-line basis over 3 years. Should events or circumstances occur
subsequent to the acquisition of a business which bring into question the
realizable value or impairment of the related goodwill, the Company will
evaluate the remaining useful life and balance of goodwill and make adjustments,
if required. The Company's principal consideration in determining impairment
includes the strategic benefit to the Company of the particular assets as
measured by undiscounted current and expected future operating income of that
specified group of assets and expected undiscounted future cash flows. Should an
impairment be identified, a loss would be reported to the extent that the
carrying value of the related goodwill exceeds the fair value of that goodwill
as determined by valuation techniques available in the circumstances.
Amortization of goodwill was $117,000 for year ending June 30, 2001 and $0 for
years ending June 30, 2000 and 1999.
REVENUE RECOGNITION
The company recognizes revenue when it is realized or realizable and
earned. The company considers revenue realized or realizable and earned when it
has persuasive evidence of an arrangement, the product has been shipped or the
services have been provided to the customer, the sales price is fixed or
determinable and collectibility is reasonably assured. Maintenance and
subscription revenue is recognized ratably over the contract period. When the
revenue recognition criteria required for distributor and reseller arrangements
are not met, revenue is recognized as payments are received. Provisions are
recorded for bad debts. No accrual has been made for sales returns because
management believes that such amounts are immaterial. The Company's software
arrangements do not contain multiple elements, and the Company does not offer
post contract support.
WARRANTY COSTS
Estimated costs related to product warranty are accrued at the time of
sale and are included in cost of sales.
ADVERTISING COSTS
The Company expenses advertising and promotion costs as incurred.
During fiscal 2001, 2000, and 1999, the Company incurred advertising and
promotion costs of approximately $224, $243, and $660 thousand, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
CAPITALIZED SOFTWARE AND DEVELOPMENT COSTS
During fiscal 1999 the Company developed software technology and
capitalized certain qualifying costs pursuant to the provisions of Statement of
Financial Accounting Standards No. 86 "Accounting for Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed". The capitalized software development
costs were related to software contained in laser printer controllers. Costs
incurred prior to the establishment of technological feasibility, or subsequent
to the release to customers, were expensed as incurred. Capitalized software
costs were amortized on a product-by-product basis. The annual amortization was
the greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product, or (b) the straight-line method over the estimated
economic life of the product, generally three years. Amortization began when the
product was available for general release to customers. Due to the financial
difficulties discussed above, the Company has been unable to meet its sales
goals regarding these products and management cannot provide any assurance that
the Company can obtain the resources necessary to achieve future sales goals.
Accordingly, the unamortized balance of capitalized software costs was charged
to expense in fiscal 2000.
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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.
STOCK ISSUANCE COSTS
Stock issuance costs including distribution fees, due diligence fees,
wholesaling costs, legal and accounting fees, and printing are capitalized
before the sale of the related stock and then charged against gross proceeds
when the stock is sold.
DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortization is provided over
the life of the related debt using the straight-line method.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation ("FAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock option plans. Under APB 25,
if the exercise price of the Company's employee stock options equals or exceeds
the fair value of the underlying stock on the date of grant, no compensation is
recognized. Information regarding the Company's pro forma disclosure of
stock-based compensation pursuant to FAS 123 may be found in Note 9.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are reviewed for recoverability and valuation
allowances are provided, as necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" requires the disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The carrying
value of the financial instruments on the consolidated balance sheets are
considered reasonable estimates of the fair value.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may have exceeded FDIC insured
levels at various times during the year. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash.
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COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. As of June 30, 2001, 2000 and 1999, the Company had no
items that represent comprehensive income and, therefore, has not included a
schedule of comprehensive income in the financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2000, the Company adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"),
which summarizes the SEC's interpretation of applying generally accepted
accounting principles to revenue recognition in the financial statements. The
adoption of SAB No. 101 did not have a material impact on the Company's
consolidated financial position or the results of operations.
On June 29, 2001, Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations", was approved by the Financial Accounting
Standards board ("FASB"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Goodwill and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. The Company is required to
implement SFAS No. 141 on July 1, 2001 and it has not determined the impact, if
any, that this statement will have on its consolidated financial position or
results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets",
was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined that impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
RECLASSIFICATIONS
Certain prior year financial statement classifications have been
reclassified to conform with the current year's presentation.
NOTE 2. SPECIAL CHARGES
CHARGE FOR UNCOLLECTIBLE RECEIVABLES
In fiscal 1999, the Company took a charge for uncollectible receivables
of $2,233 thousand. The charge resulted primarily because, in management's
opinion, certain distributors and other customers took advantage of the
Company's poor financial condition and the presence of the operational receiver
to refuse payment on various grounds including charge backs and product
performance.
RESTRUCTURING OF OPERATIONS
In fiscal 1999, the Company incurred additional charges relating to its
restructuring plan including $1,367 thousand relating to personnel reduction
costs, $1,207 thousand relating to the write-down of inventory, licenses, and
other assets that are not central to the Company's core business; and $374
thousand relating to the consolidation of facilities.
All of the above restructuring charges were paid in the period in which
the charges were recorded. Management expects that the restructuring and
consolidation of operations would result in personnel savings of approximately
$1.1 million and facility savings of approximately $300 thousand.
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NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following summarizes certain financial statement captions at June
30:
2001 2000
Accounts receivable
Trade $375 $334
Less allowance for doubtful accounts (317) (159)
------- --------
$58 $175
======= ========
Change in allowance for doubtful accounts
Balance, beginning of year $159 $2,252
Provision for bad debts 266 404
Write-off of bad debts (108) (2,497)
------- --------
Balance, end of year $317 $159
======= ========
Inventories
Materials and supplies $10 $87
Finished goods 40 116
------- --------
$50 $203
======= ========
Property and equipment
Computers and other equipment $915 $2,366
Office furniture and fixtures 57 510
- 141
------- --------
972 3,017
Less accumulated depreciation and amortization (731) (2,486)
------- --------
$241 $531
======= ========
Accrued liabilities
Compensation and employee benefits $977 $631
Interest 1,998 1,016
Other 200 181
------- --------
$3,175 $1,828
======= ========
Depreciation and amortization expense for property and equipment was $689,000
and $478,000 for the years ending June 30, 2001 and 2000, respectively.
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NOTE 4. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
2001 2000 1999
Non-cash financing activities
Conversion of preferred stock into common stock $ - $ 6,455 $ -
Conversion of notes payable into preferred stock - - 1,000
Conversion of notes payable into common stock 675 2,101 950
Conversion of accounts payable and accrued
liabilities into preferred stock - 650 265
Stock issued for purchase of software 225 - -
Net assets acquired in business combinations
Prepaid and other 79 - -
Property and equipment 3 - -
Goodwill 686 - -
Accounts payable and accrued liabilities (495) - -
Supplemental disclosure of cash flow information
Cash paid during the year for interest 283 1,455 1,371
Cash paid during the year for income taxes - 5 23
NOTE 5. SHORT-TERM DEBT
PAYABLE TO BANKS
On June 6, 2000, the Company entered into a settlement agreement with
Imperial Bank ("Imperial"). Under this agreement, the Company shall pay $150,000
per month until the balance is paid in full. Payments have been reduced to
$100,000 per month through January 2002. Due to the uncertainty regarding the
Company's ability to meet its obligations under this agreement as discussed
above under going concern considerations, the debt has been classified as
current. The debt shall not bear interest as long as the Company is making
timely payments. The debt is collateralized by substantially all assets of the
Company.
The Company owes Export-Import Bank ("Ex-Im") $1,680,000 plus interest
under a Working Capital Guarantee Facility whereby Imperial made a demand upon
Ex-Im who responded by making a claim payment to Imperial. Ex-Im has made a
demand for immediate payment.
The weighted average interest rate on short-term borrowings outstanding
at June 30, 2001 and 2000 was 11.1% and 12.3%, respectively.
NOTES PAYABLE
The following summarizes short-term notes payable at June 30:
2001 2000
Payable to suppliers, 10% $ 41 $ -
Advances from stockholders, non interest bearing 750 150
Legal settlement, 10% 913 913
Payable to stockholders, 8%, convertible into common stock at an price
Average price of 70% of fair market value 175 -
Payable to a former director, 16% 1,500 1,500
------- -------
$ 3,379 $ 2,563
======= =======
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The note payable of $913,000 represents the balance owing on a $1.3
million legal settlement relating to certain advances from stockholders. The
Company has an agreement to repay the note through the issuance of common stock
at the then current fair value.
8% 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 10,040,160 shares of the
Company's common stock at an exercise price equal to $.075 per share. The
purchasers may exercise the warrants through December 12, 2005. During fiscal
2001, notes payable of $675,000 were converted into the Company's common stock.
NOTE 6. SHAREHOLDERS' EQUITY
5% SERIES A CONVERTIBLE PREFERRED STOCK
Holders of the 5% convertible preferred stock ("Series A") are entitled
to receive, when and as declared by the Board of Directors, but only out of
amounts legally available for the payment thereof, cumulative cash dividends at
the annual rate of $50.00 per share, payable semi-annually.
The 5% convertible preferred stock is convertible, at any time, into
shares of the Company's common stock, at a price of $17.50 per common share.
This conversion price is subject to certain anti-dilution adjustments, in the
event of certain future stock splits or dividends, mergers, consolidations or
other similar events. In addition, the Company shall reserve, and keep reserved,
out of its authorized but unissued shares of common stock, sufficient shares to
effect the conversion of all shares of the 5% convertible preferred stock.
In the event of any involuntary or voluntary liquidation, dissolution,
or winding up of the affairs of the Company, the 5% convertible preferred
stockholders shall be entitled to receive $1,000 per share, together with
accrued dividends, to the date of distribution or payment, whether or not earned
or declared.
The 5% convertible preferred stock is callable, at the Company's
option, at call prices ranging from $1,050 to $1,100 per share. No call on the
5% convertible preferred stock was made during fiscal 2001, 2000, or 1999. As of
June 30, 2001, the accumulated dividend in arrears was approximately $309,000
thousand on the Series A.
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK
On August 21, 1997, the Company closed a private placement of its newly
designated Series C Redeemable Convertible Preferred Stock ("Series C Shares")
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act"). In the initial closing of $5 million, ITEC issued 500 Series C
Shares and warrants to purchase up to 200,000 shares of the Company's common
stock. After satisfying certain holding periods, each of the newly issued Series
C Shares is convertible, at the option
-46-
of its holder, into shares of Common Stock of the Company based upon a
conversion price equal to $9.00 or if lower, the lowest closing market price of
the Company's Common Stock during the 7 trading days prior to the conversion
date. The warrants have an exercise price of $7.50 per share. Subject to certain
additional conditions, the Company had the right to call for a second round of
financing up to an aggregate amount of $5 million, beginning on and including
January 1, 1998 and ending June 30, 1998. This additional round of financing
would have involved the issuance of up to an additional 500 Series C Shares and
warrants for the purchase of up to 200,000 shares of Common Stock. Additionally,
purchasers of the Series C Shares were entitled to purchase additional Series C
Shares up to 40% of the number of Series C Shares held by each investor on
December 31, 1997.
During fiscal 1998, 264 shares of Series C Shares were converted into
958,598 shares of common stock. On September 25, 1998, the Company redeemed all
outstanding shares of the Series C Convertible Preferred Stock.
SERIES D CONVERTIBLE PREFERRED STOCK
On January 13, 1999, the Company entered into a Securities Purchase
Agreement (the "Series D Agreement") with certain investors contemplating a
potential funding of up to $2.4 million (the "Series D Funding"). The Series D
Funding provides for the private placement by the Company of up to 1,200 units
(the "Units"), each Unit consisting of (i) one share of Series D Convertible
Preferred Stock (the "Series D Stock") and (ii) 2,000 warrants (the "Series D
Warrants" and, collectively, with the Series D Stock, the "Series D Securities")
exercisable for shares of Common Stock. Pursuant to the Series D Agreement, the
Company issued 900 units during fiscal 1999 for consideration totaling
$1,800,000. The Series D Stock is convertible into shares of the Company's
Common Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of
the closing bid price per share of Common Stock on the Nasdaq SmallCap Market
(the "Series D Closing Price") for the three trading days having the lowest
closing price during the 30 trading days prior to the date on which the investor
gives to the Company a notice of conversion of Series D Stock; except that all
Series D Stock converted prior to February 26, 1999 would be converted at $.50.
However, each of the investors has agreed that in no event shall it be permitted
to convert any shares of Series D Stock in excess of the number of such shares
upon the conversion of which, the sum of (i) the number of shares of Common
Stock owned by such investor (other than shares of Common Stock issuable upon
conversion of Series D Stock or upon exercise of Series D Warrants) plus (ii)
the number of shares of Common Stock issuable upon conversion of such shares of
Series D Preferred Stock or exercise of Series D Warrants, would be equal to or
exceed 9.999 percent of the number of shares of Common Stock then issued and
outstanding, including the shares that would be issuable upon conversion of the
Series D Stock or exercise of Series D Warrants held by such investor. Each
investor in Series D Stock shall have the right to vote, except as otherwise
required by Delaware law, on all matters on which holders of Common Stock have
the right to vote on with each such investor having the right to cast one vote
for each whole share of Common Stock into which each share of the Series D
Preferred Stock held by such investor is convertible immediately prior to the
record date for the determination of stockholders entitled to vote; provided,
however, that in no event shall a holder be entitled to vote more than 9.999
percent of the number of shares entitled to be voted on any matter. Series D
Warrants are immediately exercisable upon issuance at an exercise price of $.875
per share and expire five years after the date of their issuance. In fiscal
2000, the issued and outstanding shares of Series D Stock was converted into
19,812,410 shares of common stock.
SERIES E CONVERTIBLE PREFERRED STOCK
In fiscal 1999, the Company entered into a Securities Purchase
Agreement (the "Series E Agreement") and an Exchange Agreement (the "Exchange
Agreement") (together the "Series E Funding") with certain investors (including
one of whom is a director of the Company) that provided funding and exchange of
indebtedness of $4,655,000. The Series E Funding provided for the private
placement by the Company of up to 1,250 units (the "Units"), each Unit
consisting of (i) one share of Series E Convertible Preferred Stock (the "Series
E Stock") and (ii) 5,000 warrants (the "Series E Warrants" and, collectively,
with the Series E Stock, the "Series E Securities") exercisable for shares of
Common Stock. The Series E Stock is convertible into shares of the Company's
Common Stock at the lesser of (A) $.50 and (B) an amount equal to 70 percent of
the closing bid price per share of Common Stock on the Nasdaq SmallCap Market
(the "Series E Closing Price") for the three trading days having the lowest
closing price during the 30 trading days prior to the date on which the
applicable investor gives to the Company notice of conversion of Series E Stock;
except that all Series E Stock converted prior to February 26, 1999 would be
converted at $.50. Each investor in Series E Stock shall have the right to vote,
except as otherwise required by Delaware law, on all matters on which holders of
Common Stock have the right to vote on with each such investor
-47-
having the right to cast one vote for each whole share of Common Stock into
which each share of the Series E Preferred Stock held by such investor is
convertible immediately prior to the record date for the determination of
stockholders entitled to vote. The Series E Warrants are immediately exercisable
upon issuance at an exercise price of $.875 per share and expire five years
after their date of issuance. In fiscal 2000, the issued and outstanding shares
of Series E Stock was converted into 33,841,035 shares of common stock.
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
On July 5, 2000, the Company entered into a Private Equity Line of
Credit Agreement with Impany Investment Limited ("Impany"). Pursuant to this
agreement, the Company has the right, subject to certain conditions, to sell up
to $36,000,000 of common stock over the next two years to Impany, which Impany
may resell to the public under a registration statement filed with the SEC in
September 2000. Beginning on the date the registration statement is declared
effective by the SEC, and continuing for two years thereafter, the Company may
in its sole discretion sell, or put, shares of our common stock to Impany. From
time to time during the two-year term, the Company may make 18 monthly draw
downs, by giving notice and requiring Impany to purchase shares of our common
stock, for the draw down amount. Impany's purchase price will be based upon the
average of the three lowest closing bid prices of the common stock over the
period of five (5) trading days during which the purchase price of the common
stock is determined with respect to the put date, which period shall begin two
(2) trading days prior to the put date and end two (2) trading days following
the put date. During fiscal 2001, the Company sold $750,000 of common stock
under this agreement. Funding under this agreement is not currently available to
the Company.
COMMON STOCK WARRANTS
The Company, from time-to-time, grants warrants to employees,
directors, outside consultants and other key persons, to purchase shares of the
Company's common stock, at an exercise price equal to no less than the fair
market value of such stock on the date of grant. The terms and vesting of these
warrants are determined by the Board of Directors on a case-by-case basis. The
vesting period is generally 48 months. However, during fiscal 2000 the Board has
accelerated vesting in order to induce the exercise of warrants and thereby
raise needed capital. Accordingly, all outstanding warrants have been treated as
exercisable at June 30, 2001.
In August 2000, the Company issued "retention" warrants to employees
that allow the purchase of up to 3,321,000 shares of common stock at a purchase
price of $.01 per share. These warrants become exercisable in January 2001 for
those employees who have remained employed by the Company through that period.
The value of these warrants was estimated at $175,000 using the Black-Scholes
option pricing model.
In August 2000, the Company issued warrants to officers and key
employees that allow the purchase of 2,136,000 shares of common stock at a
purchase price of $0.30 per share. These warrants are exercisable immediately.
The value of these warrants was estimated at $65,000 using the Black-Scholes
option pricing model.
In December 2000 in connection with the issuance of a convertible note
payable, the Company issued warrants to purchase 10,040,000 shares of the
Company's common stock at an exercise price equal to $.075 per share. The
purchasers may exercise the warrants through December 12, 2005. The value of
these warrants was estimated at $123,000 using the Black-Scholes option pricing
model.
In connection with the Private Equity Line of Credit Agreement, the
Company issued a warrant on July 5, 2000 to Impany to purchase up to 2,000,000
shares of its common stock at an exercise price equal to $.57 per share. Impany
may exercise the warrant through January 5, 2003. The value of these warrants
was estimated at $145,000 using the Black-Scholes option pricing model.
-48-
The following is a summary of the warrant activity:
PRICE PER UNDERLYING COMMON
SHARE SHARES
June 30, 1998 $1.00 - $7.50 4,484
Granted $1.13 - $4.00 2,185
Exercised $1.00 - $1.00 (271)
Canceled $1.90 - $7.50 (658)
--------
June 30, 1999 $1.00 - $7.50 5,740
Granted $0.40 - $0.91 8,773
Exercised $0.87 - $2.03 (3,570)
Canceled $1.00 - $6.25 (585)
--------
June 30, 2000 $0.41 - $7.50 10,358
Granted $0.01 - $0.59 17,497
Exercised $0.01 - $0.40 (6,359)
Canceled $1.00 - $7.50 (677)
-------
June 30, 2001 $0.01 - $6.25 20,819
========
Exercisable at June 30, 2001 $0.01 - $6.25 20,819
========
COMMON STOCK OPTION PLANS
In July 1984 ("1984 Plan"), November 1987 ("1988 Plan") and September,
1996 ("1997 Plan"), the Company adopted stock option plans, under which
incentive stock options and non-qualified stock options may be granted to
employees, directors, and other key persons, to purchase shares of the Company's
common stock, at an exercise price equal to no less than the fair market value
of such stock on the date of grant, with such options exercisable in
installments at dates typically ranging from one to not more than ten years
after the date of grant.
Under the terms of the 1988 and 1997 Plans, loans may be made to option
holders which permit the option holders to pay the option price, upon exercise,
in installments. A total of 212,000 and 1,000,000 shares of common stock are
authorized for issuance under the 1988 and 1997 Plans, respectively.
No shares are available for future issuance under the 1984 Plan due to
the expiration of the plan during 1994. As of June 30, 1999, options to acquire
2,000 shares were outstanding under the 1984 Plan and options to acquire 670,000
shares remained available for grant under the 1988 and 1997 Plans.
In addition, the Board of Directors, outside the 1984, 1988 and 1997
Plans ("Outside Plan"), granted to employees, directors and other key persons of
ITEC or its subsidiaries options to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of such
stock on the date of grant. Options are exercisable in installments at dates
typically ranging from one to not more than ten years after the date of grant.
In October 1995, the Board of Directors authorized the exercise price
for employee options and warrants to be reduced to the current market value.
Accordingly, the exercise price on an aggregate of 18,220 and 275,000 options
under the 1988 and Outside Plans, respectively, were canceled and reissued at an
exercise price of $1.00 per share.
-49-
COMMON STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan ("Purchase Plan") was approved by
the Company's shareholders in September 1996. The Purchase Plan permits
employees to purchase the Company's common stock at a 15% discounted price. The
Purchase Plan is designed to encourage and assist a broad spectrum of employees
of the Company to acquire an equity interest in the Company through the purchase
of its common stock. It is also intended to provide participating employees the
tax benefits under Section 421 of the Code. The Purchase Plan covers an
aggregate of 500,000 shares of the Company's common stock.
All employees, including executive officers and directors who are
employees, customarily employed more than 20 hours per week and more than five
months per year by the Company are eligible to participate in the Purchase Plan
on the first enrollment date following employment. However, employees who hold,
directly or through options, five percent or more of the stock of the Company
are not eligible to participate.
Participants may elect to participate in the Purchase Plan by
contributing up to a maximum of 15 percent of their compensation, or such lesser
percentage as the Board may establish from time to time. Enrollment dates are
the first trading day of January, April, July and October or such other dates as
may be established by the Board from time to time. On the last trading day of
each December, March, June and September, or such other dates as may be
established by the Board from time to time, the Company will apply the funds
then in each participant's account to the purchase of shares. The cost of each
share purchased is 85 percent of the lower of the fair market value of common
stock on (i) the enrollment date or (ii) the purchase date. The length of the
enrollment period may not exceed a maximum of 24 months. No participant's right
to acquire shares may accrue at a rate exceeding $25,000 of fair market value of
common stock (determined as of the first trading day in an enrollment period) in
any calendar year. No shares have been issued under the Purchase Plan.
-50-
STOCK OPTION ACTIVITY
The following is a summary of the stock option activity:
1994, 1988 AND 1997 PLANS OTHER OPTION
PRICE PER UNDERLYING COMMON PRICE PER UNDERLYING COMMON
SHARE SHARES SHARE SHARES
JUNE 30, 1998 $1.00 - $8.45 396 $1.00 195
Granted $0.91 - $1.90 619
Exercised -
Canceled $1.06 - $6.90 (195) $1.00 (2)
------- ------
JUNE 30, 1999 $0.91 - $8.45 820 $1.00 193
Granted $0.14 - $0.34 1,340
Exercised $0.14 - $1.19 (1,265) $1.00 (138)
Canceled $0.91 - $8.45 (660) $1.00 (55)
------- ------
JUNE 30, 2000 $0.91 - $8.45 235 -
Granted $0.14 - $0.34 - -
Exercised $0.14 - $1.19 - -
Canceled $0.91 - $8.45 (73) -
------- ------
JUNE 30, 2001 $0.34 - $7.50 162 -
------- ------
EXERCISABLE AT JUNE 30, 2001 $0.34 - $7.50 147 -
======= ======
At June 30, 2001, the weighted average price per share of outstanding
options was $1.41 and the weighted average price per share of exercisable
options was $1.27.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. The Company
has opted under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") to disclose its stock-based
compensation with no financial effect. The pro forma effects of applying SFAS
123 in this initial phase-in period are not necessarily representative of the
effects on reported net income or loss for future years. Had compensation
expense for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under SFAS 123, the Company's pro forma net income (loss)
and net income (loss) per share would have been as follows for the years ended
June 30:
2001 2000 1999
Net income (loss)
As reported $ (9,909) $ (14,219) $ (29,184)
Pro forma (9,909) (16,000) (30,500)
Basic earnings (loss) per share
As reported $ (0.08) $ (0.20) $ (1.88)
Pro forma (0.08) (0.23) (1.96)
The weighted average fair value of the options granted during fiscal
years 2000 and 1999 is estimated on the date of grant using the Black-Scholes
option pricing model. No options were granted in fiscal 2001. The weighted
average fair values and weighted average assumptions used in calculating the
fair values were as follows for the years ended June 30:
2001 2000 1999
Fair Value of options granted N/a $ 2.50 $ 2.50
Risk free interest rate N/a 6% 6%
Expected life (years) N/a 3 3
-51-
Expected volatility N/a 95% 95%
Expected dividends N/a - -
STOCK ISSUED FOR SERVICES
During the years ended June 30, 2001, 2000, and 1999, due to cash flow
problems as discussed in Note 1 "Going Concern Considerations," the Company
issued common stock to pay for legal and consulting services rendered in the
normal course of business. There were no vesting requirements associated with
these stock issuances. In accordance with EITF 96-18, the fair value of equity
instruments in all nonemployee awards is measured based on the Company's stock
price and the measurement date is the earlier of the date on which the issuer
and the counterparty reach a commitment for the counterparty's performance to
earn the equity instruments and the counterparty's performance is considered
probable or the date on which the counterparty's performance is concluded. The
related assets or expenses are recognized in the same period and in the same
manner as if the issuer had paid for the goods or services in cash. For the
years ending June 30, 2001, 2000 and 1999, respectively, 4,386,666, 1,445,221
and 3,167,500 shares of the Company's common stock were issued for services
totaling approximately $373,000, $2,052,000 and $1,870,000, respectively.
NOTE 7. SEGMENT AND GEOGRAPHIC INFORMATION (IN THOUSANDS)
During fiscal 2001, the Company managed and internally reported the
Company's business as three reportable segments, principally, (1) imaging
products and accessories, (2) imaging software, and (3) e-commerce. During
fiscal 2000 and 1999, it is not practicable to discern revenues and operating
results by segment due to the prior organizational structure and accounting
systems.
Segment information for the year ended June 30, 2001 is as follows:
IMAGING
PRODUCTS & IMAGING E-COMMERCE
ACCESSORIES SOFTWARE
2001
Revenues $1,973 $559 $920
Operating income (loss) (8,341) 387 (306)
Additional information regarding revenue by products and service groups
is not presented because it is currently impracticable to do so due to various
reorganizations of the Company's accounting systems. A comprehensive accounting
system is being implemented that should enable the Company to report such
information in the future.
As of and during the years ended June 30, 2001, 2000, and 1999 no
customer accounted for more than 10% of consolidated accounts receivable or
total consolidated revenues.
Net sales from principal geographic areas were as follows:
2001 2000 1999
---- ---- ----
Europe $ 82 $ 28 $ 981
Asia 633 23 1,530
Others 34 41 326
-------- -------- --------
Total export sales 749 92 2,837
Domestic sales 2,703 2,330 14,310
-------- -------- --------
Total sales $ 3,452 $ 2,422 $ 17,147
======== ======== ========
Receivables from export sales at December 31, 2001 and 2000 were
approximately $10 and $12 thousand, respectively.
-52-
NOTE 8. INCOME TAXES
The Company's provision for income taxes is accounted for in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under the SFAS 109 asset
and liability method, deferred tax assets and liabilities are determined based
upon the difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is then provided for
deferred tax assets which are more likely than not to not be realized.
The benefit (provision) for income taxes is as follows for the years
ended June 30:
2001 2000 1999
Current - State $ - $ - $ -
Deferred benefit - - (241)
------- ------- -------
$ - $ - $ (264)
======= ======= =======
The components of deferred income taxes are as follows at June 30:
2001 2000 1999
Deferred tax assets
Net operating loss carryforwards $ 30,000 $ 25,000 $ 20,000
Other 500 850 1,369
------- ------- -------
30,500 25,850 21,369
Valuation allowance (30,500) (25,850) (21,369)
------- ------- -------
$ - $ - $ -
======= ======= =======
The Company's federal and state net operating loss carryforwards expire
in various years through 2016. The Company has made numerous equity issuances
that could result in limitations on the annual utilization of the Company's net
operating loss carryforwards. The Company has not performed an analysis to
determine the effect of such changes.
The provision for income taxes results in an effective rate which
differs from the federal statutory rate. A reconciliation between the actual tax
provision and taxes computed at the statutory rate is as follows for the years
ended June 30:
2001 2000 1999
Benefit (provision) at federal
statutory income tax rate $ 2,808 $ 4,827 $ 8,544
Losses for which no current
benefit is available (2,808) (4,827) (8,544)
State income taxes - - (23)
------- ------- -------
$ - $ - $ 23
======= ======= =======
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company leases its operating facilities under a lease agreement
that expires in October 2003. In addition, the Company leases other facilities
and equipment under short-term leases. Total rental expense was approximately
$457 thousand in fiscal 2001, $606 thousand in fiscal 2000, and $579 thousand in
fiscal 1999.
Future minimum lease payments under this long-term non-cancelable
operating lease was as follows:
YEAR ENDING JUNE 30,
2002 $ 327
2003 340
2004 115
---
$ 782
=====
-53-
LEGAL MATTERS
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.
Throughout fiscal 1999, 2000 and 2001, 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. The
accompanying financial statements include an accrual of approximately $1,050,000
for judgments, costs, and fees.
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. Although it is not possible to determine the final outcome of these
matters, the resulting liability, if any, could have a material adverse effect
on the Company's operations or financial position.
NOTE 10. RELATED PARTY TRANSACTIONS
A former director receives compensation as a consultant to the Company
on corporate matters and investment banking issues under an agreement expiring
in June 2002. These consulting fees amounted to $56 thousand in fiscal 2000 and
1999 and $120 thousand in fiscal 1998. Effective July 1, 1998, the annual
consulting fee under the agreement has been reduced to $56 thousand. During
fiscal 1998, as consideration for services provided relating to the private
placement of the Series C Preferred Stock, this former director received
commissions and expense reimbursement totaling $200 thousand of which $100
thousand was paid in cash and $100 thousand was used to exercise warrants for
100,000 shares at a price of $1.00 per share.
In June 1998, a director of the Company loaned $1 million to the
Company under a 10% note payable due on or after December 31, 1998 and
convertible into the Company's common stock at the lesser of $2.36 per share or
85% of the volume weighted trade price on the date of conversion. In fiscal
1999, this loan plus accrued interest and directors fees totaling $265 thousand
were converted into 253 shares of Series E Preferred Stock.
NOTE 11. BUSINESS ACQUISITIONS
Effective December 1, 2000, the Company acquired all of the outstanding
shares of Eduadvantage.com in exchange for 3,500,000 of the Company's common
stock valued at approximately $273,000. Eduadvantage.com is a California
corporation that is primarily engaged in a web-based business. The acquisition
has been accounted for as a purchase transaction. The following summarized the
net assets acquired:
-54-
Assets
Receivables $ 79
Equipment 3
Goodwill 686
-----
768
Less assumption of liabilities (495)
-----
Net assets acquired $273
====
The goodwill associated with the above acquisition is being amortized
over a period of three years.
In December 2000, the Company entered into an agreement to acquire a
majority interest in Quality Photographic Imaging, Inc. (OTCBB-QPIX) ("QPI").
The management of QPI has announced its intention to withdraw its recommendation
to its shareholders that they approve the transaction. As of the date of this
report, the acquisition agreement has not been approved by QPI shareholders.
NOTE 12. DISCONTINUED OPERATIONS
In fiscal 1999, the Company disposed of its wholly owned subsidiaries
Prima, Inc. and McMican Corporation resulting in a loss of $1,087,000. These
subsidiaries had no significant operating results in fiscal 1999.
NOTE 13. SUBSEQUENT EVENTS
AUTHORIZED SHARES OF COMMON STOCK.
On September 28, 2001, the Company's shareholders approved a Board
proposal to amend the Certificate of Incorporation to increase the number of
shares of common stock that the Company is authorized to issue from 200,000,000
to 500,000,000 shares.
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 stockholder 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.
2001 STOCK OPTION AND STOCK PURCHASE PLANS.
On September 28, 2001, the Company's shareholders approved the 2001
Stock Option Plan, pursuant to which 5,000,000 shares of common stock (subject
to adjustment for the effect of the reverse stock split) will be reserved for
issuance to eligible employees and directors of, and consultants to, the Company
or any of its subsidiaries. Upon expiration, cancellation or termination of
unexercised options, the shares of the Company's Common Stock subject to such
options will again be available for the grant of options under the 2001 Stock
Option Plan. Options granted under the 2001 Stock Option Plan may either be
incentive or nonqualified stock options. On September 28, 2001, the Company's
shareholders approved the 2001 Stock Purchase Plan, which enables eligible
employees to purchase in the aggregate up to 2,500,000 shares of common stock
(subject to adjustment for the effect of the reverse stock split) at not less
than 85% of the fair market value on the date of purchase.
-55-
SELECTED FINANCIAL DATA
The consolidated statement of operations data with respect to the five
years ended June 30, 2001, and the consolidated balance sheet data for those
five years at June 30, set forth below are derived from the consolidated
financial statements of the Company included in Item 8 below, which have been
audited by Boros & Farrington APC, independent accountants. The selected
consolidated financial data set forth (in thousands, except per share data)
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 7 below, and
the Company's consolidated financial statements and the notes thereto contained
in Item 8 below. Historical results are not necessarily indicative of future
results of operations.
STATEMENT OF OPERATIONS DATA:
In thousands (except per share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
NET REVENUES
Sales of products $2,897 $1,634 $16,417 $30,740 $26,081
Engineering Fees - - - 2,327 5,860
License fees and royalties 555 788 730 1,350 296
------ ------- ------- ------ ------
Net total revenues 3,452 2,422 17,147 34,417 32,237
------ ------- ------- ------ ------
COSTS AND EXPENSES
Cost of products sold 2,742 5,197 18,015 22,536 17,022
Selling, general, and
administrative 8,720 7,780 13,707 10,269 10,460
Research and development 250 1,929 2,033 2,475 4,243
Special charges - - 5,181 8,941 -
------ ------- ------- ------ ------
TOTAL COSTS AND
EXPENSES 11,712 14,906 38,936 44,221 31,725
INCOME (LOSS) FROM
OPERATIONS (8,260) (12,484) (21,789) (9,804) 512
------ ------- ------- ------ ------
NET LOSS (9,888) (14,198) (29,184) (10,163) 723
====== ======= ======= ======= ======
LOSS PER COMMON SHARE
Basic $(0.08) $(0.20) $(1.88) $(0.90) $0.07
Diluted $(0.08) $(0.20) $(1.88) $(0.90) $0.06
-56-
BALANCE SHEET DATA:
-------------------
In thousands
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Cash $35 $291 $75 $3,023 $255
Working Capital (16,920) (13,851) (16,519) 315 4,818
Total assets 1,212 1,683 7,250 20,961 14,075
Long-term obligations - - - 1,828 228
Preferred stock 420 420 6,875 420 420
Total shareholders' deficit (16,110) (13,851) (12,432) 4,604 7,877
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDING JUNE 30, 2001
RESTRUCTURING AND NEW BUSINESS UNITS
During fiscal 1999, we 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, we had been under the control of
an operational receiver appointed by the Court pursuant to litigation between us
and Imperial Bank. The litigation has been settled, and we have reassumed
control. Accordingly, we did not have operational control for nearly all of
fiscal 2000.
ACQUISITION AND SALE OF BUSINESS UNITS
In December 2000, we acquired all of the shares of EduAdvantage.com, Inc.,
an internet sales organization that sells computer hardware and software
products to educational institutions and other customers via its websites:
www.eduadvantage.com and www.soft4u.com. During fiscal 2001, we began
integrating EduAdvantage operations. However, these operations have not been
profitable and management is evaluating the future of this business unit.
SPECIAL CHARGES
In fiscal 1999, we took a charge for uncollectible receivables of $2,233
thousand. The charge resulted primarily because, in management's opinion,
certain distributors and other customers took advantage of our poor financial
condition and the presence of the operational receiver to refuse payment on
various grounds including charge backs and product performance.
In fiscal 1999, we incurred additional charges relating to its
restructuring plan including $1,367 thousand relating to personnel reduction
costs, $1,207 thousand relating to the write-down of inventory, licenses, and
other assets that are not central to our core business; and $374 thousand
relating to the consolidation of facilities.
All of the above restructuring charges were paid in the period in which the
charges were recorded. Management expects that the restructuring and
consolidation of operations would result in personnel savings of approximately
$1.1 million and facility savings of approximately $300 thousand.
-57-
RESULTS OF OPERATIONS
NET REVENUES
Revenues were $3.5 million, $2.4 million, and $17.1 million for the fiscal
years ended June 30, 2001, 2000, and 1999, respectively. Sales of product were
$2.9 million, $1.6 million, and $16.4 million for the fiscal years ended June
30, 2001, 2000, and 1999, respectively. The increase in product sales in fiscal
2001 from the previous year was due to renewed management control of its sales
operations. The decrease in product sales in fiscal 2000 from 1999 was due
primarily to a lack of working capital to fund inventory and sales and marketing
operations.
License fees and royalties were $555,000, $788,000, and $730,000 for the
fiscal years ended June 30, 2001, 2000, and 1999, respectively. Variances from
year-to-year are due primarily to changes in shipments by OEM customers'
products based on our technology. Since we have elected to suspend our
controller technology development efforts, future license fees and royalties are
expected to be associated with our ColorBlind software technology.
COST OF PRODUCTS SOLD
Cost of products sold were $2.7 million or 95% of product sales, $5.2
million or 318% of product sales, and $18 million or 110% of product sales, for
the fiscal years ended June 30, 2001, 2000, and 1999, respectively. The increase
in profitability in fiscal 2001 compared to fiscal 2000 was due primarily to
changes in the mix of products sold, which had the effect of increasing overall
profit margins. However, competitive market conditions continue to require deep
discounting of sales prices to customers. The decrease in profitability in
fiscal 2000 compared to fiscal 1999 was due primarily to sales policies during
fiscal 2000 mandated by the operational receiver, which resulted in sales made
at liquidation prices. We have been able to maintain reasonable profit margins
on sales of products. However, software products provide significantly higher
profit margins than hardware products such as printers, plotters, and copiers.
In the years ended June 30, 2000 and 1999, we amortized $2.9 million and
$4.0 million, respectively of amortized software. There was no such amortization
in the year ended June 30, 2001.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $8.7 million or 253% of
total revenues, $7.8 million or 21% of total revenues, and $13.7 million or 80%
of total revenues for the fiscal years ended June 30, 2001, 2000, and 1999,
respectively. Selling, general and administrative expenses consisted primarily
of salaries and commissions of sales and marketing personnel, salaries and
related costs for general corporate functions, including finance, accounting,
facilities, advertising, and other marketing related expenses. The increase in
selling, general and administrative expenses in the year ended June 30, 2001
compared to the year-earlier period was due primarily to increased costs
associated with financing our operations, larger write-offs for bad debt, and
penalties associated with servicing our debt. Expenses as a percentage of total
revenues decreased due primarily to increased sales. The decrease to total
expenses and increase in percentage of total revenues in fiscal 2000 compared
for fiscal 1999 was due primarily to the management of the court-appointed
operational receiver who controlled our operations for nearly all of fiscal
2000. During this period, we vastly cut our overall activities, including
manufacturing, engineering, and sales and marketing.
RESEARCH AND DEVELOPMENT
Research and development was $250 thousand for the year ended June 30, 2001
compared to costs of $1.9 million in the year-earlier period. Research and
development was $2.0 million in fiscal 1999. There were no engineering fees for
the year ended June 30, 2001; and such fees for the two prior fiscal years were
minimal due to a change in corporate strategy from a focus on engineering fees
and royalties to that of product sales. In fiscal 2001 we substantially reduced
our research and development activities and, in July 2001, suspended our printer
controller development and manufacturing operations.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations primarily through cash
generated from operations, debt financing, and from the sale of equity
securities; but over the past three years we have relied upon debt financing and
the sale of equity securities.
In January 1999, we completed a private placement of 1,200 units, each unit
consisting of one share of series D convertible preferred stock and 2,000
warrants exercisable into shares of our common stock. We raised $1.8 million,
less fees and expenses incurred in connection with the private placement.
In February 1999, we completed a private placement of 1,161 units, each
unit consisting of one share of series E preferred stock and 5,000 warrants into
shares of common stock. The terms of the series E preferred stock were identical
to the terms of the series D preferred stock. In connection with this private
placement, we raised $3.7 million in cash and retired $1 million of debt, which
was exchanged, for series E preferred stock.
On August 20, 1999, at the request of imperial bank (now Comerica Bank),
our primary lender, the court appointed an operational receiver. On August 23,
1999, the operational receiver took control of our day-to-day operations. On
June 21, 2000, the court entered an order as a part of a settlement of the
litigation between the company and imperial bank that relieved the operational
receiver of his responsibilities, thereby returning control of the company to
its management.
On July 5, 2000, we signed an agreement for a financing facility providing
commitments to purchase up to $36 million of our common shares over the next two
years after the effective date of the registration statement, September 25,
2000. To date, we have received $750,000 in funding pursuant to the agreement.
In December 2000, we entered into a Convertible Note Purchase Agreement for
$850,000, bearing an annual interest rate of 8%, due December 2003. The Note is
convertible into our common stock. To date, $675,000 has been converted into
common stock.
We continue to pursue additional financings to fund its operations and
growth. There can be no assurance, however, that we will be able to complete any
additional debt or equity financings on favorable terms or at all, or that any
such financings, if completed, will be adequate to meet our capital
requirements. Any additional equity or convertible debt financings could result
in substantial dilution to our stockholders. If adequate funds are not
available, we may be required to delay, reduce or eliminate some or all of our
planned activities. Our inability to fund our capital requirements would have a
material adverse effect on our operations. Also see risks and uncertainties.
As of June 30, 2001, we had negative working capital of approximately $16.9
million, an increase of $2.4 million from June 30, 2000. The decrease is
primarily due to the effect of operating losses and the difficulty in obtaining
sufficient long-term debt and equity financing.
Net cash used in operating activities was $5.3 million in fiscal 2001
compared to $6.7 million during fiscal 2000. In fiscal 1999, we used $7.5
million in operating cash.
Net cash used in investing activities was $171 thousand in fiscal 2001
compared to $23 thousand in fiscal 2000, an increase of $148 thousand. The
increase is due to capital expenditures. Net cash from investing activities
decreased $3.4 million in fiscal 2000 compared to fiscal 1999 due primarily to
the absence of capitalized software.
We have no material commitments for capital expenditures. Our 5%
convertible preferred stock (which ranks prior to our common stock), carries
cumulative dividends, when and as declared, at an annual rate of $50.00 per
share. The aggregate amount of such dividends in arrears at June 30, 2001, was
approximately $309,000.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to marketing and selling our
products, and other factors. We anticipate that our capital requirements will
increase in future periods as we reduce our debt and increase our sales and
marketing efforts. The
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report of our independent auditors accompanying our June 30, 2001 financial
statements includes an explanatory paragraph indicating there is a substantial
doubt about our ability to continue as a going concern, due primarily to the
decreases in our working capital and net worth.
We plan to overcome the circumstances that impact its ability to remain a
going concern through a combination of increased revenues and decreased costs,
with interim cash flow deficiencies being addressed through additional equity
financing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages and
positions with the Company as of October 26, 2001 are as follows:
Name Age Position
---- --- --------
Brian Bonar 54 Chairman of the Board of Directors,
President and Chief Executive Officer
Robert A. Dietrich 56 Director
Stephen J. Fryer 63 Director
Eric W. Gaer 53 Director
Richard H. Green 65 Director
Philip J. Englund 57 Senior Vice President, General Counsel
and Secretary
INFORMATION ABOUT DIRECTORS
BRIAN BONAR has served as Chairman of the Board of Directors since December
1999 and as a director of the Company since August 1995. From August 1992
through April 1994, Mr. Bonar served as the Company's Director of Technology
Sales and from April 1994 through September 1994, as the Company's Vice
President, Sales and Marketing. In September 1994, Mr. Bonar became the
Company's Executive Vice President, Sales, Marketing and, Engineering and in
July 1997, Mr. Bonar was appointed as the Company's President and Chief
Operating Officer. In April 1998, he was appointed as the Company's Chief
Executive Officer. From 1991 to 1992, Mr. Bonar was Vice President of Worldwide
Sales and Marketing for Bezier Systems, Inc., a San Jose, California-based
manufacturer and marketer of laser printers. From 1990 to 1991, he was Worldwide
Sales Manager for Adaptec, Inc., a San Jose-based laser printer controller
developer. From 1988 to 1990, Mr. Bonar was Vice President of Sales and
Marketing for Rastek Corporation, a laser printer controller developer located
in Huntsville, Alabama. From 1984 to 1988, Mr. Bonar was employed as Executive
Director of Engineering at QMS, Inc., an Alabama-based developer and
manufacturer of high-performance color and monochrome printing solutions. Prior
to these positions, Mr. Bonar was employed by IBM, U.K. Ltd. for approximately
17 years. Mr. Bonar serves as a member of the Board of Directors of Pen
Interconnect, Inc.
ROBERT A DIETRICH has served as director of the Company since January 2000
and at the beginning of October 2001 began serving as the Company's Finance
Director. Mr. Dietrich currently serves on the board of directors of CyberAir
Communications, Inc., a privately held telecommunications company and Knowledge
Foundations, Inc. (KNFD:OB), a knowledge management software company. He has
served in executive capacities for these companies during the past five years.
Since 1994 Mr. Dietrich has performed consulting and investment banking services
for clients, primarily early stage technology companies. From 1990 to 1994 Mr.
Dietrich was
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Managing Director and CFO for Ventana International, Inc. a venture capital and
private investment banking firm. He is an accounting graduate from the
University of Notre Dame and holds an MBA from the University of Detroit.
STEPHEN J. FRYER has served as a director of the Company since March 2000.
He is currently Chairman of the Board and CEO of Pen Interconnect, Inc. ("Pen"),
a high technology company in Irvine, California. He began his employment service
at Pen in 1997 as Senior Vice President of Sales ad Marketing. At Pen, he became
a director in 1995 and was appointed President and CEO in 1998. From 1989 to
1996, Mr. Fryer was a principal in Ventana International, Ltd., a venture
capital and private investment banking firm in Irvine, California. He has over
28 years experience in the computer industry in the United States, Asia and
Europe. Mr. Fryer graduated from the University of California in 1960 with a
bachelor's degree in mechanical engineering.
ERIC W. GAER has served as a director since March 2000. Since 1998, Mr.
Gaer has been the President and CEO of Arroyo Development Corporation, a
privately-held, San Diego-based management consulting company. From 1996 to
1998, he was Chairman, President and CEO of Greenland Corporation, a
publicly-held high technology company in San Diego, California. In 1995, he was
CEO of Ariel Systems, Inc., a privately-held engineering development company in
Vista, California. Over the past 25 years, Mr. Gaer has served in executive
management positions at a variety of high-technology companies, including ITEC,
Daybreak Technologies, Inc., Venture Software, Inc., and Merisel, Inc. In 1970,
he received a Bachelor of Arts degree in mass communications from California
State University, Northridge.
RICHARD H. GREEN has served as a director since September 2000. He is
currently the President of International Power & Environmental Company (IPEC), a
consulting company located in San Diego, California. From 1993 through 1995, he
served as Deputy Secretary of the State of California Environmental Protection
Agency (Cal/EPA). From 1988 through 1993 Dr. Green served as Manager of Program
Engineering and Review Office in the Office of Technology and Applications at
the Jet Propulsion Laboratory (JPL) in Pasadena, California, where he had held
various management positions since 1967. From 1965 through 1967, Dr. Green
served as Senior Engineer for The Boeing Company, Space Division. From 1983
through 1985, Dr. Green held the Corwin D. Denny Chair as Professor of Energy
and Director of the Energy Institute at the University of LaVerne, and from 1961
through 1964 served as Assistant Professor of Civil Engineering (Environmental
Sciences) at Washington State University. Dr. Green currently is a member of the
Governing Board of Pasadena City College. Dr. Green completed his bachelor's
degree at Whitman College in 1958, his Master of Science at Washington State
University in 1961, and his Ph.D. at Washington State University, under a United
States Public Health Services Career Development Award, in 1965.
INFORMATION ABOUT NON-DIRECTOR EXECUTIVE OFFICER
PHILIP J. ENGLUND has served as Senior Vice President, General Counsel and
Secretary of the Company since February 1999. Prior to joining the Company, Mr.
Englund served as general counsel to a number of companies on a contract basis
from October 1997 through February 1999, as he had done from April 1995 through
November 1996. He served as Senior Vice President, General Counsel and Secretary
to the Titan Corporation from November 1996 through October 1997; and as Vice
President and General Counsel to Optical Radiation Corporation from November
1986 through April 1995.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
cash compensation and certain other compensation paid, awarded, or accrued, by
the Company to the Company's Chief Executive Officer and the two most highly
compensated executive officers who were serving at the end of Fiscal Year 2001,
each of whose salary and bonus exceeded $100,000 for the Fiscal Year 2001 for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1999, 2000 and 2001. The listed individuals shall be
hereinafter referred to as the "Named Officers."
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SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
----------------------- -------------- ---------------------------
Fiscal Other Annual Options/ Other
Name and Principal Position Year Salary Bonus Compensation SARS (#) Compensation
----------- ---------- ------------ -------------- ------------ ------------
Brian Bonar 2001 $243,333 $ -- $ -- 625,000 $ --
Chairman, Board of Directors, 2000 178,333 -- -- 0 --
President and C.E.O. 1999 250,570 -- -- 850,000 --
Christopher W. McKee (1) 2001 175,000 -- -- 415,000 --
Senior Vice President of 2000 104,125 -- -- 76,000 --
Operations Worldwide 1999 127,044 -- -- 100,000 --
Philip J. Englund 2001 165,000 -- -- 360,000 --
Senior Vice President, General 2000 102,500 20,250 -- 96,000 --
Counsel and Secretary 1999 55,741 -- -- 80,000 --
(1) Mr. McKee resigned effective August 3, 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on Options/SARs granted in the
2001 Fiscal Year to the Named Officers.
----------------------
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise or for Option Term (2)
Options/SARs Employees in Base Price Expiration ----------------------
Name Granted (#) (1) Fiscal Year ($/share) Date 5% ($) 10% ($)
-------------------------- --------------- ------------ ----------- ---------- --------- --------
Brian Bonar 5,000 22 $0.01 1/1/03 $12,500.00 $14,375.00
Christopher W. McKee 415,000 15 0.01 1/1/03 8,300.00 9,545.00
Philip J. Englund 165,000 13 0.01 1/1/03 7,200.00 8,280.00
(1) Warrants/options become exercisable monthly over a 3 year period from date
of grant.
(2) Calculated based on the closing price of the Company's common stock on
October 26, 2001, which was $0.028.
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AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table provides information on option exercises in the 2001
Fiscal Year by the Named Officers and the value of such Named Officers'
unexercised options at June 30, 2001. Warrants to purchase Common Stock are
included as options. No stock appreciation rights were exercised by the Named
Officers during the 2001 Fiscal Year, and no stock appreciation rights were held
by them at the end of the 2001 Fiscal Year.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-money Options/SARs
Shares Options/SARs at FY-end (#) At Fiscal Year End ($) (1)
Acquired on Value ---------------------------- ----------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------- ------------- ------------- ------------ ------------- ------------ -------------
Brian Bonar 2,500,000 $115,750.59 625,000 0 36,250.00 0
Christopher W. McKee 476,000 31,089.08 415,000 0 24,070.00 0
Philip J. Englund 476,000 32,496.19 360,000 0 20,880.00 0
(1) At the 2001 Fiscal Year end, the closing price of the Common Stock on that
date as quoted by the NASD Electronic Bulletin Board was $0.068.
COMPENSATION OF DIRECTORS
Each member of the Board of Directors of the Company, who is not an
employee of the Company, receives a monthly fee of $2,500 from the Company.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Dietrich and
Fryer. Neither of these individuals was an officer or employee of the Company at
any time during the 2001 Fiscal Year.
Brian Bonar serves on the Board of Directors of Pen Interconnect, Inc.,
whose President is Mr. Stephen J. Fryer, a member of the Compensation Committee
of the Board of Directors of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the best of the
Company's knowledge with respect to the beneficial ownership of Common Stock as
of October 26, 2001, by (i) all persons who are beneficial owners of five
percent (5 percent) or more of the Common Stock, (ii) each director, and (iii)
all current directors and executive officers individually and as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws, where applicable.
Shares of
Beneficial Ownership of Common Stock Common Percentage (1)
------------------------------------ --------- --------------
Brian Bonar (2).....................................26,625,000 15.1
Robert A. Dietrich (3) 6,000,000 3.4
Stephen J. Fryer (3) 6,000,000 3.4
Eric W. Gaer (3) 6,000,000 3.4
Richard Green (3) 6,000,000 3.4
Philip Englund (4)...................................7,848,000 4.4
All current directors and executive officers
(group of 6) (5) 58,473,000 33.1
(1) Percentage of ownership is based on 176,812,265 shares of Common Stock
outstanding on October 26, 2001. Shares of Common Stock subject to stock
options, warrants and convertible securities which are currently exercisable or
convertible or will become exercisable or convertible within 60 days after
October 26, 2001 are deemed outstanding for computing the percentage of the
person or group holding such options, warrants or convertible securities but are
not deemed outstanding for computing the percentage of any other person or
group.
(2) Includes 26,625,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after October
26, 2001.
(3) Includes 6,000,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after October
26, 2001.
(4) Includes 7,836,000 shares issuable upon exercise of options and warrants
that are currently exercisable or will become exercisable within 60 days after
October 26, 2001.
(5) Includes 58,461,000 shares issuable upon exercise of options and warrants
that are currently exercisable or will become exercisable within 60 days after
October 26, 2001.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company pays Arroyo Development Corporation, owned by Mr. Eric Gaer, a
member of the Board of Directors, monthly consulting fees in the amount of five
thousand dollars ($5,000).
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the materials we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the SEC's regional offices at 7 World Trade Center, 13th Floor,
New York, New York 10048; and at Citicorp Center, 500 West Madison Street, Room
1400, Chicago, Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the Public Reference Rooms. Our filings
are also available to the public from the SEC's World Wide Web site on the
Internet at http://www.sec.gov. This site contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors of the Registrant under certain conditions and subject
to certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.
Article X of the Bylaws of the Registrant provides that the Registrant
shall indemnify its officers, directors and employees. The rights to indemnity
thereunder continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors, and
administrators of the person. In addition, expenses incurred by a director or
officer in defending any action, suit or proceeding by reason of the fact that
he or she is or was a director or officer of the Registrant shall be paid by the
Registrant unless such officer, director or employee is adjudged liable for
negligence or misconduct in the performance of his or her duties.
Article Seventh of the Registrant's Certificate of Incorporation provides
that the Registrant shall indemnify all persons whom it may indemnify pursuant
to Section 145 of the Delaware General Corporation Law to the full extent
permitted by such Section 145.
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933 MAY BE
PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING US ACCORDING TO THE
PROVISIONS IN OUR ARTICLES OF INCORPORATION, WE HAVE BEEN INFORMED THAT IN
THE OPINION OF THE SEC, THIS INDEMNIFICATION IS AGAINST PUBLIC POLICY AS
EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE
EXPERTS
The financial statements contained herein for the year ended June 30, 2001
have been prepared by Boros & Farrington APC, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
LEGAL OPINIONS
For the purpose of this offering, Jenkens & Gilchrist Parker Chapin LLP is
our counsel in regard to this registration statement.
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THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT
WE FILED WITH THE SEC. YOU SHOULD RELY ON THE
INFORMATION OR REPRESENTATIONS PROVIDED IN THIS
PROSPECTUS. WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU 115,000,000 SHARES
WITH DIFFERENT INFORMATION. THE SELLING SECURITY
HOLDERS DESCRIBED IN THIS PROSPECTUS ARE NOT MAKING IMAGING TECHNOLOGIES
AN OFFER IN ANY JURISDICTION WHERE THE OFFER IS NOT CORPORATION
PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE OF THIS PROSPECTUS. COMMON STOCK
-----------------
TABLE OF CONTENTS
-----------------
Page
----------------
Forward-Looking Statements............................................ 1 PROSPECTUS
Prospectus Summary.................................................... 1 ----------------
The Offering.......................................................... 3
Risk Factors.......................................................... 4
Use of Proceeds...................................................... 12
Selling Security Holders............................................. 12
Plan of Distribution................................................. 15
Description of Securities............................................ 17
Information With Respect to the Registrant........................... 17
Description of Business.............................................. 17
Description of Property.............................................. 20
Legal Proceedings.................................................... 21
Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 21
Financial Statements for the Period Ending
December 31, 2001................................................. 23 IMAGING TECHNOLOGIES CORPORATION
Notes to Financial Statements for the Period Ending 15175 INNOVATION DRIVE
December 31, 2001................................................. 30 SAN DIEGO, CALIFORNIA 92128
Management's Discussion & Analysis of Financial (858) 613-1300
Condition and Results of Operations for the Period
Ending December 31, 2001....................................... 34
Financial Statements for the Period Ending
June 30, 2001..................................................... 37
Notes to Financial Statements for the Period Ending
June 30, 2001..................................................... 42
Selected Financial Data for the Period Ending
June 30, 2001..................................................... 59
Management's Discussion & Analysis of Financial MAY __, 2002
Condition and Results of Operations for the Period
Ending June 30, 2001............................................ 60
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.............................. 63
Quantitative and Qualitative Disclosures about Market Risk.......... 63
Directors and Executive Officers..................................... 63
Executive Compensation............................................... 64
Security Ownership of Certain Beneficial Owners
and Management.................................................... 66
Certain Relationships and Related Transactions....................... 67
Where You Can Find More Information.................................. 67
Disclosure of Commission Position on
Indemnification for Securities and Liabilities.................... 67
Experts ............................................................ 67
Legal Opinions....................................................... 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the estimated expenses in connection with the
issuance and distribution of the common stock being registered:
SEC registration fees ...................................$1,013.70
Legal fees and expenses.................................$25,000.00
Accounting fees and expenses.............................$2,000.00
Miscellaneous................................................$0.00
-----
TOTAL $28,013.70
===== ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors of the Registrant under certain conditions and subject
to certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.
Article X of the Bylaws of the Registrant provides that the Registrant
shall indemnify its officers, directors and employees. The rights to indemnity
thereunder continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors, and
administrators of the person. In addition, expenses incurred by a director or
officer in defending any action, suit or proceeding by reason of the fact that
he or she is or was a director or officer of the Registrant shall be paid by the
Registrant unless such officer, director or employee is adjudged liable for
negligence or misconduct in the performance of his or her duties.
Article Seventh of the Registrant's Certificate of Incorporation provides
that the Registrant shall indemnify all persons whom it may indemnify pursuant
to Section 145 of the Delaware General Corporation Law to the full extent
permitted by such Section 145.
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933 MAY BE
PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING US ACCORDING TO THE
PROVISIONS IN OUR ARTICLES OF INCORPORATION, WE HAVE BEEN INFORMED THAT IN THE
OPINION OF THE SEC, THIS INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED
IN THE ACT AND IS THEREFORE UNENFORCEABLE
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 22, 2002, the Company entered into a securities purchase
agreement with an investor. Pursuant to this agreement, the Company sold to the
investor a secured convertible debenture in the principal amount of $500,000
bearing interest at the rate of eight percent (8%) per annum, due January 22,
2003. At any time after the issuance of the debenture, the debenture is
convertible into such number of shares of the Company's common stock as is
determined by dividing (a) that portion of the outstanding principal balance of
the debenture as of the date of conversion by (b) the lesser of (x) $.0166 and
(y) an amount equal to seventy percent of the average of the lowest three
trading prices of the Company's common stock for the thirty trading days prior
to the conversion date. In connection with this private placement, the Company
issued to the investor a warrant to purchase 60,240,964 shares of its common
stock at a per share exercise price equal to the lesser of $.0166 and seventy
percent of the average of the lowest three trading prices of the registrant's
common stock for the thirty trading days prior to the exercise date. The
investor may exercise the warrant through January 22, 2009. The net proceeds of
the sale were used for working capital of the Company. The private placement was
exempt from registration pursuant to Regulation S and Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT DESCRIPTION
3(a) Certificate of Incorporation of the Company, as amended, and *
currently in effect. See also below (Incorporated by
reference to Exhibit 3(a) to 1988 Form 10-K)
3(b) Certificate of Amendment of Certificate of Incorporation of *
the Company, filed February 8, 1995, as amended, and
currently in effect (Incorporated by reference to Exhibit
3(b) to 1995 Form 10-K)
3(c) Certificate of Amendment of Certificate of Incorporation of *
the Company, filed May 23, 1997, as amended, and currently in
effect (Incorporated by reference to 1997 Form 10-K)
3(d) Certificate of Amendment of Certificate of Incorporation, *
filed January 12, 1999, as amended and currently in effect
(Incorporated by reference to Form 10-Q for the period ended
December 31, 1998)
3(e) Certificate Eliminating Reference to Certain Series of *
Shares of Stock from the Certificate of Incorporation, filed
January 12, 1999, as amended and currently in effect
(Incorporated by reference to Form 10-Q for the period ended
December 31, 1998)
3(f) By-Laws of the Company, as amended, and currently in effect *
(Incorporated by reference to Exhibit 3(b) to 1987 Form
10-K)
4(a) Amended Certificate of Designation of Imaging Technologies *
Corporation with respect to the 5% Convertible Preferred
Stock (Incorporated by reference to Exhibit 4(d) to 1987 Form
10-K)
4(b) Amended Certificate of Designation of Imaging Technologies *
Corporation with respect to the 5% Series B Convertible
Preferred Stock (Incorporated by reference to Exhibit 4(b) to
1988 Form 10-K)
4(c) Certificate of Designations, Preferences and Rights of Series *
C Convertible Preferred Stock of Imaging Technologies
Corporation (Incorporated by reference to Exhibit 4(c) to
1998 Form 10-K)
4(d) Certificate of Designation, Powers, Preferences and Rights of *
the Series of Preferred Stock to be Designated Series D
Convertible Preferred Stock, filed January 13, 1999
(Incorporated by reference to Form 10-Q for the period ended
December 31, 1998)
4(e) Certificate of Designation, Powers, Preferences and Rights of *
the Series of Preferred Stock to be Designated Series E
Convertible Preferred Stock, filed January 28, 1999
(Incorporated by reference to Form 10-Q for the period ended
December 31, 1998)
5 Legal Opinion of Jenkens & Gilchrist Parker Chapin LLP **
10(a.1) 1988 Stock Option Plan for the Company (Incorporated by *
reference to Exhibit 10(g) to 1989 Form 10-K)
10(a.2) Amendment and Restatement of 1988 Stock Option Plan *
(Incorporated by reference to Exhibit 10(d) to 1991 Form
10-K)
10(a.3) Forms of Standard Non-Qualified and Incentive Stock Option *
Agreement for 1988 Stock Option Plan (Incorporated by
reference to Exhibit 10(e) to 1991 Form 10-K)
10(b) Reference is made to the various stock options and warrants *
granted in 1996 to directors and executive officers of the
Company as described in Notes 6 and 7 to the 1996 Financial
Statements (Incorporated by reference to Forms S-8 dated
February 12, 1996, File Nos. 333-00871, 333-00873 and
333-00879)
10(c.1) Consulting Agreement, dated April 1, 1994, between the *
Company and Irwin Roth (Incorporated by reference to Exhibit
10(az) to 1994 Form 10-KSB)
10(c.2) Amendment to Consulting Agreement dated June 12, 1998 between *
the Company and Irwin Roth (Incorporated by reference to
Exhibit 10(g.3) to 1998 Form 10-K)
10(d.1) Warrant Purchase Agreement, dated September 17. 1993, between *
the Company and Robinson International, Ltd. (Incorporated by
reference to Exhibit 10(ar) to 1994 Form 10-KSB)
10(d.2) Warrant Certificate for 250,000 Warrants to Purchase Shares *
of Common Stock of the Company at $1.50 per share dated
September 17, 1993, between the Company and Robinson
International, Ltd. (Incorporated by reference to Exhibit
10(as) to 1994 Form 10-KSB)
10(d.3) Warrant Certificate for 250,000 Warrants to Purchase Shares *
of Common Stock of the Company at $1.00 per share dated
September 17, 1993, between the Company and Robinson
International, Ltd. (Incorporated by reference to Exhibit
10(at) to 1994 Form 10KSB)
10(e) ITEC/MEl License Agreement dated September 30, 1994 between *
the Company and Matsushita Electric Industrial Co., Ltd.
(Incorporated by reference to Exhibit 10(aac) to 1994 Form
10-KSB)
10(f) Form of Standard Warrant Agreement dated January 3, 1996 *
issued to Harry J. Saal as described in Note 6 to the 1996
Financial Statements (Incorporated by reference to Exhibit
10(o) to 1996 Form 10-KSB)
10(g) Form of Standard Warrant and Consulting Agreement issued to *
consultants as described in Note 6 to the 1996 Financial
Statements (Incorporated by reference to Form S-8 dated May
9, 1996, File Number 333-03375)
10(h) Warrant to Purchase Stock between Imperial Bank and the *
Company dated June 23, 1998 (Incorporated by reference to
Exhibit 10(w) to 1998 Form 10-K)
10(i) Form of Warrant to Purchase Common Stock between buyers and *
the Company dated August 21, 1997 (Incorporated by reference
to Exhibit 10(z) to 1998 Form 10-K)
10(j) Securities Purchase Agreement dated as of January 13, 1999, *
by and among the Company and the applicable parties named
therein (Incorporated by reference to Exhibit 10.3 to Form
10-Q for the period ended December 31, 1998)
10(k) Registration Rights Agreement dated as of January 13, 1999, *
by and among the Company and the applicable parties named
therein (Incorporated by reference to Exhibit 10.4 to Form
10-Q for the period ended December 31, 1998)
10(l) Form of Warrant to Purchase Shares of Common Stock of the *
Company at $.875 per share dated January 13, 1999, between
the Company and each of the applicable parties named in
Exhibit 10(j) hereto (Incorporated by reference to Exhibit
10.5 to Form 10-Q for the period ended December 31, 1998)
10(m) Securities Purchase Agreement dated as of February 2, 1999, *
by and among the Company and the applicable parties named
therein (Incorporated by reference to Exhibit 10.6 to Form
10-Q for the period ended December 31, 1998)
10(n) Registration Rights Agreement dated as of February 2, 1999, *
by and among the Company and the applicable parties named
therein (Incorporated by reference to Exhibit 10.7 to Form
10-Q for the period ended December 31, 1998)
10(o) Form of Warrant to Purchase Shares of Common Stock of the *
Company at $.875 per share dated February 2, 1999, between
the Company and each of the applicable parties named in
Exhibit 10(n) hereto (Incorporated by reference to Exhibit
10.8 to Form 10-Q for the period ended December 31, 1998)
10(p) Exchange Agreement dated as of February 19, 1999, by and *
among the Company and the applicable parties named therein
(Incorporated by reference to Exhibit 10.9 to Form 10-Q for
the period ended December 31, 1998)
10(q) Form of Warrant to Purchase 50,000 shares of Common Stock of *
ITEC at $1.50 per share, dated March 5, 1999, between ITEC
and Carmel Mountain Environmental L.L.C. (Incorporated by
reference to Exhibit 4.9 to Amendment No. 2 to Form S-3 filed
July 16, 1999, File No. 333-77629)
10(r) Form of Warrant to Purchase 50,000 Shares of Common Stock of *
ITEC at $1.50 per share dated March 5, 1999, between ITEC and
Carmel Mountain #8 Associates, L.P. (Incorporated by
reference to Exhibit 4.10 to Amendment No. 2 to Form S-3
filed July 16, 1999, File No. 333-77629)
10(s) Form of Warrant to Purchase 5,000 Shares of Common Stock of *
ITEC at $1.50 per share, dated March 5, 1999 between ITEC and
John P. Mulder (Incorporated by reference to Exhibit 4.12 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629)
10(t) Form of Warrant to Purchase 5,000 Shares of Common Stock of *
ITEC at $1.50 per share, dated March 5, 1999 between ITEC and
Steve Tiritilli (Incorporated by reference to Exhibit 4.13 to
Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629)
10(u) Common Stock Purchase Agreement (Incorporated by reference to *
Exhibit 10.1 to the Company's Report on Form 10-Q for the
period ended September 30, 1998)
10(v) Form of Subordinated Note Purchase Agreement (Incorporated by *
reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the period ended September 30, 1998)
10(w) Registration Rights Agreement (Incorporated by reference to *
Exhibit 10.6 to the Company's Report on Form 10-Q for the
period ended September 30, 1998)
10(x) Form of Convertible Subordinated Promissory Note *
(Incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q for the period ended September 30, 1998)
10(y) Form of Common Stock Purchase Warrant (Incorporated by *
reference to Exhibit 10.12 to the Company's Report on Form
10-Q for the period ended September 30, 1998)
10(z) Form of Common Stock Purchase Warrant (Incorporated by *
reference to Exhibit 10.9 to the Company's Report on Form
10-Q for the period ended September 30, 1998)
10(aa) Form of Common Stock Purchase Warrant (Incorporated by *
reference to Exhibit 10.5 to the Company's Report on Form
10-Q for the period ended September 30, 1998)
10(ab) Form of Warrant to Purchase 60,000 Shares of Common Stock of *
ITEC at $2.50 per share, dated June 23, 1998, between ITEC
and Imperial Ban. (Incorporated by reference to Exhibit 4.40
to Amendment No. 2 to Form S-3 filed July 16, 1999, File No.
333-77629)
10(ac) Standard Industries/Commercial Single-Tenant Lease-Net, dated *
February 22, 1999 and addendum thereto, dated March 5, 1999,
by and between Carmel Mountain #8 Associates, L.P. and ITEC
(Incorporated by reference to Exhibit 10.10 to Form 10-Q for
the period ended March 31, 1999)
10(ad) 1999 Special Compensation Plan for certain directors, *
officers and employees of the Company (Incorporated by
reference to Form S-8, filed June 18, 1999)
10(ae) Form of Restated and Amended Common Stock Purchase Warrants *
relating to Exhibit 10(bt) above (Incorporated by reference
to Form S-8, filed June 18, 1999)
10(af) Form of Compensation Agreement relating to Exhibit 10(ad) *
above (Incorporated by reference to Form S-8, filed June 18,
1999)
10(ag) Consulting Agreement dated July 1, 1999 between Howard *
Schraub and the Company (Incorporated by reference to Form
S-8, filed August 4, 1999)
10(ah) Consulting Agreement dated July 1, 1999 between George Furla *
and the Company (Incorporated by reference to Form S-8, filed
August 4, 1999)
10(ai) Consulting Agreement dated July 1, 1999 between Franz Herbert *
and the Company. (Incorporated by reference to Form S-8,
filed August 4, 1999)
10(aj) Consulting Agreement dated July 1, 1999 between Peter Benz *
and the Company (Incorporated by reference to Form S-8, filed
September 22, 1999)
10(ak) Consulting Agreement dated July 1, 1999 between Richard *
Kaplan and the Company (Incorporated by reference to Form
S-8, filed September 22, 1999)
10(al) Convertible Note Purchase Agreement dated December 12, 2000 *
by and among certain Purchasers and the Company (Incorporated
by reference to Form 8-K, filed January 19, 2001)
10(am) Settlement Agreement dated June 20, 2000 between Imperial **
Bank and the Company
10(an) Agreement and Release dated March 1, 2001 among American **
Industries, Inc., Ellison Carl Morgan, the Ellison Carl
Morgan Revocable Trust, the 2030 Investors 401K and the 2030
Investors LLC, and Imaging Technologies, Inc. and Brian Bonar
10(ao) OEM Agreement dated July 1, 1999 by and between Artifex **
Software Inc. and the Company
10(ap) First OEM Amendment dated September 7, 1999 by and between **
Artifex Software Inc. and the Company
10(aq) Second OEM Amendment dated October 25, 2000 by and between **
Artifex Software Inc. and the Company
10(ar) Share Purchase Agreement dated December 1, 2000 by and **
between ELB Group.com, LLC, Robert Marks, BET Trust, Carl
Perkins, Eduadvantage.com, Inc., Brent H. Coeur-Barron, as
escrow agent, and the Company
10(as) Convertible Note Purchase Agreement dated July 26, 2001 by *
and between a certain Purchaser and the Company (Incorporated
by reference to Form 8-K, filed August 2, 2001)
10(at) Convertible Note Purchase Agreement dated September 21, 2001 **
by and between Stonestreet Limited Partnership and the
Company
10(au) Convertible Promissory Note dated September 21, 2001 issued **
by the Company to Stonestreet Limited Partnership
10(av) Registration Rights Agreement dated September 21, 2001 by and **
between Stonestreet Limited Partnership and the Company
10(aw) Stock Purchase Warrant dated September 21, 2001 issued by the **
Company to Stonestreet Limited Partnership
10(ax) Convertible Note Purchase Agreement dated November 7, 2001 by *
and between Stonestreet Limited Partnership and the Company
(Incorporated by reference to Form 10-Q for the quarter ended
December 31, 2001)
10(ay) Convertible Promissory Note dated November 7, 2001 issued by *
the Company to Stonestreet Limited Partnership (Incorporated
by reference to Form 10-Q for the quarter ended December 31,
2001)
10(az) Registration Rights Agreement dated November 7, 2001 by and *
between Stonestreet Limited Partnership and the Company
(Incorporated by reference to Form 10-Q for the quarter ended
December 31, 2001)
10(ba) Stock Purchase Warrant dated November 7, 2001 issued by the *
Company to Stonestreet Limited Partnership (Incorporated by
reference to Form 10-Q for the quarter ended December 31,
2001)
10(bb) Securities Purchase Agreement dated January 22, 2002 between *
by and between Bristol Investment Fund, Ltd. and the Company
(Incorporated by reference to Form 10-Q for the quarter ended
December 31, 2001)
10(bc) Secured Convertible Debenture dated January 22, 2002 issued *
by the Company to Bristol Investment Fund, Ltd. (Incorporated
by reference to Form 10-Q for the quarter ended December 31,
2001)
10(bd) Registration Rights Agreement dated January 22, 2002 by and *
between Bristol Investment Fund, Ltd. and the Company
(Incorporated by reference to Form 10-Q for the quarter ended
December 31, 2001)
10(be) Stock Purchase Warrant dated January 22, 2002 issued by the *
Company to Bristol Investment Fund, Ltd. (Incorporated by
reference to Form 10-Q for the quarter ended December 31,
2001)
10(bf) Security Agreement dated January 22, 2002 by and between *
Bristol Investment Fund, Ltd. and the Company (Incorporated
by reference to Form 10-Q for the quarter ended December 31,
2001)
21 List of Subsidiaries of the Company (Incorporated by *
reference to Form 10-K for the year ended June 30, 2001)
23 Consent of Independent Accountants **
* Exhibit is incorporated by reference only and a copy is not included
in this Form S-1 filing.
** Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or not required or the information required to be set forth therein
is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed in
this Registration Statement or any material change to such information in this
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the Prospectus, to deliver, or
cause to be delivered to each person to
whom the Prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the Prospectus to provide such interim
financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, Delaware General Corporation
Law or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefor, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 3 to Form S-2 on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, State of California, on the 2nd day of May 2002.
IMAGING TECHNOLOGIES CORPORATION
By: /s/ Brian Bonar
-------------------------
Brian Bonar
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 to Form S-2 on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.
By: /s/ Brian Bonar
-------------------------
Name: Brian Bonar
Title: Acting Chief Financial Officer
Date: May 2, 2002
By: /s/ Brian Bonar
-------------------------
Name: Brian Bonar
Title: Acting Principal Accounting Officer
Date: May 2, 2002
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Brian
Bonar and Philip J. Englund, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution and resubstitution, for
him or her in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title
* Chief Executive Officer May 2, 2002
------------------- and Director
Brian Bonar (Principal Executive Officer)
*
------------------- Director May 2, 2002
Robert A. Dietrich
*
------------------- Director May 2, 2002
Eric W. Gaer
*
------------------- Director May 2, 2002
Richard H. Green
*
------------------- Director May 2, 2002
Stephen J. Fryer
*By: Brian Bonar
Attorney-in-fact