SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[GRAPHIC OMITED]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0021693
(State or other jurisdiction of incorporation or organization) (IRS Employer
ID No.)
15175 INNOVATION DRIVE
SAN DIEGO, CALIFORNIA 92128
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (858) 613-1300
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No
The number of shares outstanding of the registrant's common stock as of February
12, 2002 was 262,546,959.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 2001 (unaudited) and June 30, 2001 (audited) .. 3
Consolidated Statements of Operations - 3 months ended December 31, 2001 and 2000 (unaudited). 4
Consolidated Statements of Operations - 6 months ended December 31, 2001 and 2000 (unaudited). 5
Consolidated Statements of Cash Flows - 6 months ended December 31, 2001 and 2000 (unaudited) . 6
Notes to Consolidated Financial Statements .. . . . . . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . 20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 2. Changes in Securities and Use of Proceeds .. . . . . . . . . . . . . . . . . 21
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 21
ITEM 4. Submission of Matters to a Vote of Security Holders .. . . . . . . . . . . . . . . 21
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, JUNE 30,
2001 2001
(audited)
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 159 $ 35
Accounts receivable:
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 -
-------------- -------------
$ 5,161 $ 1,212
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank note payable. . . . . . . . . . . . $ 3,818 $ 4,318
Short-term debt . . . . . . . . . . . . . . . . . . . . . 6,001 3,379
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
Stockholders' 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.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT 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
-------------- -------------
Income (loss) from operations. . . . . . . . . . . . (1,556) (1,408)
-------------- -------------
Other income (expense):
Interest and financing costs, net . . . . . . . (298) (177)
Other . . . . . . . . . . . . . . . . . . . . . - -
-------------- -------------
(298) (177)
-------------- -------------
Income (loss) before income taxes. . . . . . . . . . (1,854) (1,585)
Income tax expense
Net income (loss). . . . . . . . . . . . . . . . . . $ (1,854) $ (1,585)
============== =============
Earnings (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.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT 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
------------- -------------
Income (loss) from operations . . . . . . . . . . . (2,597) (3,604)
------------- -------------
Other income (expense):
Interest and financing costs, net . . . . . . (1,018) (358)
Other. . . . . . . . . . . . . . . . . . . . . - -
------------- -------------
(1,018) (358)
------------- -------------
Income (loss) before income taxes . . . . . . . . . (3,615) (3,962)
Income tax expense
Net income (loss) . . . . . . . . . . . . . . . . . $ (3,615) $ (3,962)
============= =============
Earnings (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.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2001 2000
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . $ (3,615) $ (3,962)
Adjustments to reconcile net income (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 deductions. 106 -
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) -
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
================== ==================
See Notes to Consolidated Financial Statements.
MAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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.
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 . . . . . . . . $ ( 1,697)
Preferred dividends (6)
----------------
Basic and diluted EPS. . (1,703) 199,037 $ (0.01)
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 a of 8%, due December 2003.
The Note is convertible into the Company's common stock.
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.
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.
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.
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.
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.
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)
======================== =======
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
PRODUCTS IMAGING SOFTWARE PEO 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Quarterly Report on Form 10-Q. The discussion of the Company's business
contained in this Quarterly Report on Form 10-Q may contain certain projections,
estimates and other forward-looking statements that involve a number of risks
and uncertainties, including those discussed below at "Risks and Uncertainties."
While this outlook represents management's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested below. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
OVERVIEW
Imaging Technologies Corporation develops and distributes imaging software
and distributes high-quality digital imaging products. The Company sells a range
of printer and imaging products for use in graphics and publishing, digital
photography, and other niche business and technical markets. The Company's core
technologies are related the design and development of software products that
improve the accuracy of color reproduction. ITEC's ColorBlind software provides
color management to improve the accuracy of color reproduction - especially as
it relates to matching color between different devices in a network, such as
monitors and printers.
In order to capitalize on its existing systems integration expertise, the
Company has 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, ITEC has 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.
The Company provides comprehensive personnel management services through
its wholly-owned SourceOne subsidiary. SourceOne 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.
The Company's business continues to experience operational and liquidity
challenges. Accordingly, year-to-year financial comparisons may be of limited
usefulness now and for the next several quarters due to anticipated changes in
the Company's business as these changes relate to acquisitions of new
businesses, changes in product lines, and the potential for discontinuing
certain components of the business.
The Company's current strategy is: (1) to commercialize its own technology,
which is embodies in its ColorBlind Color Management software, (2) to market
imaging products, including printers, copiers, and consumables (toner, ink,
etc.) from other manufacturers to its customers, and (3) to expand its PEO
related business activities.
To successfully execute its current strategy, the Company will need to
improve its working capital position. The Company plans to overcome the
circumstances that impact our ability to remain a going concern through a
combination of achieving profitability, raising additional debt and equity
financing, and renegotiating existing obligations.
There can be no assurance, however, that the Company will be able to
complete any additional debt or equity financings on favorable terms or at all,
or that any such financings, if completed, will be adequate to meet the
Company's capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to the Company's stockholders.
If adequate funds are not available, the Company may be required to delay,
reduce or eliminate some or all of its planned activities, including any
potential mergers or acquisitions. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company. Also see
"Liquidity and Capital Resources." and "Item 1. Business - Risks and
Uncertainties - Future Capital Needs."
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.
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.
ITEC's office products and systems group integrates 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 and supplies are bundled together as a systems solution.
ITEC's e-commerce initiatives, dealseekers.com and color.com, provide for
sales and support of software products and consumables such as inks, toner, and
paper.
Personnel Management Systems - SourceOne
As ITEC changes its focus from development and manufacturing to providing
business services, management identified the opportunity to expand into
personnel and human resources management. ITEC hopes to leverage its office
products and systems expertise with that of offering professional employer
organization (PEO) services.
The Company's SourceOne 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 low.
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 office products sales.
ACQUISITION AND SALE OF BUSINESS UNITS
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 from Neotactix, Inc. for 10,000,000 shares of ITEC common stock. The
acquisition price also included the assumption of $750,000 in payments due
SourceOne from Neotactix. ITEC paid $250,000 in cash at Closing. These funds
were provided by outside investors in exchange for 13,888,890 shares of ITEC
common stock. 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 of $750 thousand in cash plus the payment of
10,000,000 shares of ITEC common stock, was arrived at through negotiations. The
assets of SourceOne consist of cash, accounts receivable, and pre-paid insurance
premiums.
The Company reported this transaction, including audited financial
statements of SourceOne, on Form 8-K dated January 25, 2002.
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 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.
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, a decrease of approximately $2.8 million (17%) in working capital as
compared to June 30, 2000. 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 $91 thousand during the six-month
period ended December 31, 2001 as compared to net cash from investing activities
of $60 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.)
RISKS AND UNCERTAINTIES
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE
OUR OPERATIONS. Our business has not been profitable in the past and it may not
be profitable in the future. We may incur losses on a quarterly or annual basis
for a number of reasons, some within and others outside our control. See
"Potential Fluctuation in Our Quarterly Performance." The growth of our business
will require the commitment of substantial capital resources. If funds are not
available from operations, we will need additional funds. We may seek such
additional funding through public and private financing, including debt or
equity financing. Adequate funds for these purposes, whether through financial
markets or from other sources, may not be available when we need them. Even if
funds are available, the terms under which the funds are available to us may not
be acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
the Company's June 30, 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 our working
capital and net worth. The Company plans to overcome the circumstances that
impact our ability to remain a going concern through a combination of increased
revenues and decreased costs, with interim cash flow deficiencies being
addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS. Our quarterly operating results can fluctuate
significantly depending on a number of factors, any one of which could have a
negative impact on our results of operations. The factors include: the timing of
product announcements and subsequent introductions of new or enhanced products
by us and by our competitors, the availability and cost of products and/or
components, the timing and mix of shipments of our products, the market
acceptance of our new products, the availability of leasing or other purchase
financing for our customers, seasonality, currency fluctuations, changes in our
prices and in our competitors' prices, price protection offered to distributors
and OEMs for product price reductions, the timing of expenditures for staffing
and related support costs, the extent and success of advertising, research and
development expenditures, and changes in general economic conditions.
We may experience significant quarterly fluctuations in revenues and
operating expenses as we introduce new products. In addition, our component
purchases, production 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.
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS FLUCTUATED
SIGNIFICANTLY. Our stock price could fluctuate significantly in the future based
upon any number of factors such as: general stock market trends, announcements
of developments related to our business, fluctuations in our operating results,
a shortfall in our revenues or earnings compared to the estimates of securities
analysts, announcements of technological innovations, new products or
enhancements by us or our competitors, general conditions in the markets we
serve, general conditions in the worldwide economy, developments in patents or
other intellectual property rights, and developments in our relationships with
our customers and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of technology and other stocks have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
SINCE OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN
WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES. The markets
for our products 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: the frequency and success of product
introductions by us and by our competitors, the selling prices of our products
and of our competitors' products, the performance of our products and of our
competitors' products, product distribution by us and by our competitors, our
marketing ability and the marketing ability of our competitors, and the quality
of customer support offered by us and by our competitors.
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.
The PEO industry in which we operate our SourceOne subsidiary is highly
fragmented. While many of our competitors have limited operations, there are
several PEO companies equal or substantially greater in size than ours. We also
encounter competition from "fee-for-service" companies such as payroll
processing firms, insurance companies, and human resources consultants. The
large PEO companies have substantially more resources than us and provide a
broader range of resources than we do.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR
OVERALL FINANCIAL PERFORMANCE. In order to grow our business, we may acquire
businesses that we believe are complementary. To successfully implement this
strategy, we must identify suitable acquisition candidates, acquire these
candidates on acceptable terms, integrate their operations and technology
successfully with ours, retain existing customers and maintain the goodwill of
the acquired business. We may fail in our efforts to implement one or more of
these tasks. Moreover, in pursuing acquisition opportunities, we may compete for
acquisition targets with other companies with similar growth strategies. Some of
these competitors may be larger and have greater financial and other resources
than we do. Competition for these acquisition targets likely could also result
in increased prices of acquisition targets and a diminished pool of companies
available for acquisition. Our overall financial performance will be materially
and adversely affected if we are unable to manage internal or acquisition-based
growth effectively. Acquisitions involve a number of risks, including:
integrating acquired products and technologies in a timely manner, integrating
businesses and employees with our business, managing geographically-dispersed
operations, reductions in our reported operating results from
acquisition-related charges and amortization of goodwill, potential increases in
stock compensation expense and increased compensation expense resulting from
newly-hired employees, the diversion of management attention, the assumption of
unknown liabilities, potential disputes with the sellers of one or more acquired
entities, our inability to maintain customers or goodwill of an acquired
business, the need to divest unwanted assets or products, and the possible
failure to retain key acquired personnel.
Client satisfaction or performance problems with an acquired business could
also have a material adverse effect on our reputation, and any acquired business
could significantly under perform relative to our expectations. We cannot be
certain that we will be able to integrate acquired businesses, products or
technologies successfully or in a timely manner in accordance with our strategic
objectives, which could have a material adverse effect on our overall financial
performance.
In addition, if we issue equity securities as consideration for any future
acquisitions, existing stockholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY MANNER,
WE MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY HURT
OUR ABILITY TO CONTINUE OPERATIONS. The markets for our products are
characterized by rapidly evolving technology, frequent new product introductions
and significant price competition. Consequently, short product life cycles and
reductions in product selling prices due to competitive pressures over the life
of a product are common. Our future success will depend on our ability to
continue to develop new versions of our ColorBlind software, and to acquire
competitive products from other manufacturers. We monitor new technology
developments and coordinate with suppliers, distributors and dealers to enhance
our products and to lower costs. If we are unable to develop and acquire new,
competitive products in a timely manner, our financial condition and results of
operations will be adversely affected.
IF THE MARKET'S ACCEPTANCE OF OUR PRODUCTS 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 color printers, color management software and supplies. 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. If our products are not accepted by the
market, we will not generate sufficient revenues to continue our operations.
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, hardware
designs, and circuit layouts are copyrighted. However, copyright protection does
not prevent other companies from emulating the features and benefits provided by
our software, hardware designs or the integration of the two. 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 INTERNATIONAL FINANCIAL CONDITIONS DETERIORATE, OUR CONTINUED OPERATIONS
AND OVERALL FINANCIAL PERFORMANCE WILL BE NEGATIVELY IMPACTED. We conduct
business globally. Accordingly, our future results could be adversely affected
by a variety of uncontrollable and changing factors including: foreign currency
exchange fluctuations, regulatory, political or economic conditions in a
specific country or region, the imposition of governmental controls, export
license requirements, restrictions on the export of critical technology, trade
restrictions, changes in tariffs, government spending patterns, natural
disasters, difficulties in staffing and managing international operations; and
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 72%, 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 OUR WORLDWIDE DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS,
OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED. Our products are marketed
and sold through a distribution channel of value added resellers, manufacturers'
representatives, retail vendors, and systems integrators. We have a network of
dealers and distributors in the United States and Canada, in the European
Community and on the European Continent, as well as a growing number of
resellers in Africa, Asia, the Middle East, Latin America, and Australia. We
support our worldwide distribution network and end-user customers through
operations headquartered in San Diego. As of November 8, 2001, we directly
employed 18 individuals involved in marketing and sales activities.
A portion of our sales are made through distributors, which may carry
competing product lines. These distributors could reduce or discontinue sales
of our products, which could adversely affect us. These independent distributors
may not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are dependent upon the continued
viability and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique factors
affecting our markets.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES, AND WORKERS'
COMPENSATION RATES WILL HAVE A SIGNIFICANT EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE. Health insurance premiums, state unemployment taxes, and workers'
compensation rates are, in part, determined by our SourceOne subsidiary's claims
experience, and comprise a significant portion of SourceOne's direct costs. We
employ risk management procedures in an attempt to control claims incidence and
structure our benefits contracts to provide as much cost stability as possible.
However, should we experience a large increase in claims activity, the
unemployment taxes, health insurance premiums, or workers' compensation
insurance rates we pay could increase. Our ability to incorporate such increases
into service fees to clients is generally constrained by contractual agreements
with our clients. Consequently, we could experience a delay before such
increases could be reflected in the service fees we charge. As a result, such
increases could have a material adverse effect on our financial condition or
results of operations.
WE CARRY SUBSTANTIAL LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS.
Under our client service agreements, we become a co-employer of worksite
employees and we assume the obligations to pay the salaries, wages, and related
benefits costs and payroll taxes of such worksite employees. We assume such
obligations as a principal, not merely as an agent of the client company. Our
obligations include responsibility for (a) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to SourceOne of the associated service fee; and (2)
providing benefits to worksite employees even if the costs incurred by the
SourceOne to provide such benefits exceed the fees paid by the client company.
If a client company does not pay us, or if the costs of benefits provided to
worksite employees exceed the fees paid by a client company, our ultimate
liability for worksite employee payroll and benefits costs could have a material
adverse effect on the Company's financial condition or results of operations.
AS A MAJOR EMPLOYER, OUR OPERATIONS ARE AFFECTED BY NUMEROUS FEDERAL, STATE, AND
LOCAL LAWS RELATED TO LABOR, TAX, AND EMPLOYMENT MATTERS. By entering into a
co-employer relationship with employees assigned to work at client company
locations, we assume certain obligations and responsibilities or an employer
under these laws. However, many of these laws (such as the Employee Retirement
Income Security Act ("ERISA") and federal and state employment tax laws) do not
specifically address the obligations and responsibilities of non-traditional
employers such as PEOs; and the definition of "employer" under these laws is not
uniform. Additionally, some of the states in which we operate have not addressed
the PEO relationship for purposes of compliance with applicable state laws
governing the employer/employee relationship. If these other federal or state
laws are ultimately applied to our PEO relationship with our worksite employees
in a manner adverse to the Company, such an application could have a material
adverse effect on the Company's financial condition or results of operations.
While many states do not explicitly regulate PEOs, 21 states have passed laws
that have licensing or registration requirements for PEOs, and several other
states are considering such regulation. Such laws vary from state to state, but
generally provide for monitoring the fiscal responsibility of PEOs and, in some
cases, codify and clarify the co-employment relationship for unemployment,
workers' compensation, and other purposes under state law. There can be no
assurance that we will be able to satisfy licensing requirements of other
applicable relations for all states. Additionally, there can be no assurance
that we will be able to renew our licenses in all states.
THE MAINTENANCE OF HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT COVER
WORKSITE EMPLOYEES IS A SIGNIFICANT PART OF OUR BUSINESS. The current health and
workers' compensation contracts are provided by vendors with whom we have an
established relationship, and on terms that we believe to be favorable. While we
believe that replacement contracts could be secured on competitive terms without
causing significant disruption to our business, there can be no assurance in
this regards.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT. Accordingly, the short-term
nature of 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.
A NUMBER OF LEGAL ISSUES REMAIN UNRESOLVED WITH RESPECT TO THE CO-EMPLOYMENT
AGREEMENT BETWEEN A PEO AND ITS WORKSITE EMPLOYEES, INCLUDING QUESTIONS
CONCERNING THE ULTIMATE LIABILITY FOR VIOLATIONS OF EMPLOYMENT AND
DISCRIMINATION LAWS. Our client service agreement establishes a contractual
division of responsibilities between the Company 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 the Company 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 agents of the Company, subjecting us to liability for the actions of such
worksite employees.
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 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. Should we be
required to pay the full amount demanded in each of these claims and lawsuits,
we may have to cease our operations. However, to date, the superior security
interest held by Imperial Bank has prevented nearly all of these trade creditors
from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING
CAPITAL AND A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING,
WE MAY BE FORCED TO DISCONTINUE OPERATIONS. For several recent periods, up
through the present, we had a net loss, 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
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 suspended 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 AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE MAY
NOT BE ABLE TO CARRY OUT OUR BUSINESS PLAN. On August 20, 1999, at the request
of Imperial Bank, our primary lender, the Superior Court, San Diego appointed an
operational receiver to us. On August 23, 1999, the operational 65receiver took
control of our day-to-day operations. On June 21, 2000, the Superior Court, San
Diego issued an order dismissing the operational receiver as a part of a
settlement of litigation with Imperial Bank pursuant to the Settlement Agreement
effective as of June 20, 2000. The Settlement Agreement requires that we make
monthly payments of $150,000 to Imperial Bank until the indebtedness is paid in
full. 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. We are currently meeting
the monthly amount of $150,000 as stipulated by the Settlement Agreement with
Imperial Bank. However, the monthly payments have been reduced to $100,000
through January of 2002.
THE DELISTING OF OUR COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET HAS MADE
IT MORE DIFFICULT TO RAISE FINANCING, AND THERE IS LESS LIQUIDITY FOR OUR COMMON
STOCK AS A RESULT. The Nasdaq SmallCap Market and Nasdaq Marketplace Rules
require an issuer to evidence a minimum of $2,000,000 in net tangible assets, a
$35,000,000 market capitalization or $500,000 in net income in the latest fiscal
year or in two of the last three fiscal years, and a $1.00 per share bid price,
respectively. On October 21, 1999, Nasdaq notified us that we no longer complied
with the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The Nasdaq SmallCap Market. At a hearing
on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public
interest concerns relating to our financial viability. While the Panel
acknowledged that we were in technical compliance with the bid price and market
capitalization requirements, the Panel was of the opinion that the continued
listing of our common stock on The Nasdaq Stock Market was no longer
appropriate. This conclusion was based on the Panel's concerns regarding our
future viability. Our common stock was delisted from The Nasdaq Stock Market
effective with the close of business on March 1, 2000. As a result of being
delisted from The Nasdaq SmallCap Market, stockholders may find it more
difficult to sell our common stock. This lack of liquidity also may make it more
difficult for us to raise capital in the future.
Trading of our common stock is now being conducted over-the-counter through
the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that generally
define a "penny stock" as any equity security that has a market price of less
than $5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of stockholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about October 7, 1999, the law firms of Weiss & Yourman and Stull,
Stull & Brody made a public announcement that they had filed a lawsuit against
us and certain current and past officers and/or directors, alleging violation of
federal securities laws during the period of April 21, 1998 through October 9,
1998. On or about November 17, 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. A motion to dismiss the lawsuit was granted on
February 16, 2001 on our behalf and those individual defendants that have been
served. However, on or about March 19, 2001, an amended complaint was filed by
Nahid Nazarian Behfarin, Peter Cook, Stephen Domagala and Michael S. Taylor, on
behalf of themselves and others similarly situated. On or about March 20, 2001,
we once again filed a motion to dismiss the case along with certain other
individual defendants. The motion was denied and an answer to the complaint has
been filed on behalf of the company and certain individual defendants. We
believe these claims are without merit and we intend to vigorously defend
against them on our behalf as well as on behalf of the other defendants. The
defense of this action has been tendered to our insurance carriers.
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, the Company may be involved in litigation
relating to claims arising out of its operations in the normal course of
business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
In the first quarter ended September 30, 2001, the Company issued warrants
to directors and certain officers to purchase up to 55,000,000 shares of its
common stock at an exercise price equal to $0.02 per share. The value of these
warrants for non-officer directors is estimated at $66,000.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10(a) Secured Convertible Debenture issued by the Company to
Bristol Investment Fund, Ltd., dated January 22, 2002.
10(b) Securities Purchase Agreement between the Company and
Bristol Investment Fund, Ltd., dated January 22, 2002.
10(c) Registration Rights Agreement between the Company and
Bristol Investment Fund, Ltd., dated January 22, 2002.
10(d) Transaction Fee Agreement between the Company and Alexander
Dunham Securities, Inc., dated January 22, 2002.
10(e) Stock Purchase Warrant issued to Alexander Dunham
Securities, Inc., dated January 22, 2002.
10(f) Stock Purchase Warrant issued to Bristol Investment Fund,
Ltd., dated January 22, 2002.
10(g) Security Agreement between the Company and Bristol
Investment Fund, Ltd., dated January 22, 2002.
10(h) Convertible Promissory Note between the Company and
Stonestreet Limited Partnership, dated November 7, 2001.
10(i) Convertible Note Purchase agreement between the Company and
Stonestreet Limited Partnership, dated November 7, 2001.
10(j) Registration Rights Agreement between the Company and
Stonestreet Limited Partnership, dated November 7, 2001.
10(k) Stock Purchase Warrant issued to Stonestreet Limited
Partnership, dated November 7, 2001.
27 Financial Data Schedule
Reports on Form 8-K:
The Company filed a report on Form 8-K dated January 25, 2001, related to
the acquisition of SourceOne Group, Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 13, 2001
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /S/
_____________________________________
Brian Bonar
Chairman, Chief Executive Officer, and Chief Accounting Officer