SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-12641
[GRAPHIC OMITED]
IMAGING TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-0021693
(State or other jurisdiction of incorporation or organization) (IRS Employer ID No.)
17075 VIA DEL CAMPO
SAN DIEGO, CA 92127
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (858) 451-6120
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
The number of shares outstanding of the registrant's common stock as of August
14, 2003 was 243,759,272
This amendment to the Registrant's Form 10-Q includes adjustments related to
revenue recognition for its professional employer organization (PEO) business
segment; and review by independent accountants. Accordingly, the document
includes changes on its consolidated statements of operations, the applicable
notes to the financial statements, and management's discussion and analysis of
operations. Additional changes relate to the treatment of its recent
acquisitions on the Registrant's consolidated balance sheets.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2003 (unaudited) and June 30, 2002 (audited). . . . 3
Consolidated Statements of Operations - 3 months ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Operations - 9 months ended March 31, 2003 and 2002 (unaudited) 5
Consolidated Statements of Cash Flows - 9 months ended March 31, 2003 and 2002 (unaudited). 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . 27
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 2. Changes In Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 4. Submission of Matters To A Vote of Security Holders . . . . . . . . . . . . . . . . . . 30
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MAR. 31, 2003 JUN 30, 2002
(unaudited) (audited)
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131 $ 43
Accounts receivable:
Billed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 629
Unbilled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 -
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 151
Due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . 28 33
---------------- ---------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 794 856
Property and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 212
Patent, net of accumulated amortization of $30 thousand . . . . . . . . . . . . . . . . 1,588 -
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,118 -
Workers' compensation deposit and other assets. . . . . . . . . . . . . . . . . . . . . 512 112
---------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,193 $ 1,180
================ ===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Borrowings under bank notes payable. . . . . . . . . . . . . . . . . . . . . . . . $ 3,170 $ 3,295
Short-term notes payable, including amounts due to
related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,114 2,796
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,426 803
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,957 7,343
PEO payroll taxes and other payroll deductions . . . . . . . . . . . . . . . . . . 2,917 690
PEO accrued worksite employee. . . . . . . . . . . . . . . . . . . . . . . . . . . 197 644
Note payable, acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 -
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,997 6,036
---------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 26,810 21,607
---------------- ---------------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702 -
---------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,512 21,607
---------------- ---------------
Shareholders' deficiency
Series A convertible, redeemable preferred stock,
$1,000 par value, 7,500 shares authorized,
420.5 shares issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . 420 420
Common stock, $0.005 par value, 500,000,000 shares
authorized; 147,750,839 shares issued and outstanding
at March 31, 2003; 21,929,365 at June 30, 2002. . . . . . . . . . . . . . . . . 739 110
Common stock warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 475
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,619 79,492
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (103,586) (100,924)
---------------- ---------------
Total shareholders' deficiency. . . . . . . . . . . . . . . . . . . . . . . . (21,319) (20,427)
---------------- ---------------
Total liabilities and shareholders' deficiency . . . . . . . . . . . . . . . . . . . . $ 6,193 $ 1,180
================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(in thousands, except share data)
(unaudited)
2003 2002
Revenues
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162 $ 814
Software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . . . . . 62 470
PEO services (gross billings of $4,096 and $8,098,
respectively; less worksite employee payroll costs of
$3,744 and $6,855, respectively) . . . . . . . . . . . . . . . . . . . . . . . . 352 1,243
--------------- -------------
576 2,527
--------------- -------------
Costs and expenses
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 614
Cost of software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . 9 277
Cost of PEO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 880
Selling, general, and administrative. . . . . . . . . . . . . . . . . . . . . . . . 1,216 1,863
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 68
--------------- -------------
1,405 3,702
--------------- -------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (829) (1,175)
--------------- -------------
Other income (expense):
Interest and financing costs, net . . . . . . . . . . . . . . . . . . . . . . . . . (390) (364)
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261 411
--------------- -------------
871 47
--------------- -------------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (1,128)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- -------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ (1,128)
=============== =============
Earnings (loss) per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.09)
=============== =============
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.09)
=============== =============
Weighted average common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,754 13,166
=============== =============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31,
(in thousands, except share data)
(unaudited)
2003 2002
Revenues
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 742 $ 2,578
Sales of software, licenses and royalties . . . . . . . . . . . . . . . . . . . . . 241 820
PEO services (gross billings of $9,057 and $15,172,
respectively; less worksite employee payroll costs of
$8,051 and $12,843, respectively). . . . . . . . . . . . . . . . . . . . . . . . 1,006 2,329
------------- -------------
1,989 5,727
------------- -------------
Costs and expenses
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 1,828
Cost of software, licenses and royalties. . . . . . . . . . . . . . . . . . . . . . 71 331
Cost of PEO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 1,687
Selling, general, and administrative. . . . . . . . . . . . . . . . . . . . . . . . 4,382 5,449
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 140
------------- -------------
5,093 9,435
------------- -------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,104) (3,708)
------------- -------------
Other income (expense):
Interest and financing costs, net . . . . . . . . . . . . . . . . . . . . . . . . . (1,501) (1,382)
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,918 411
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 -
------------- -------------
442 (971)
------------- -------------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,662) (4,679)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,662) $ (4,679)
============= =============
Earnings (loss) per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.03) $ (0.44)
============= =============
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.03) $ (0.44)
============= =============
Weighted average common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,000 10,557
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
(in thousands, except share data)
(unaudited)
2003 2002
--------------- --------------
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,662) $ (4,679)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 107 81
Write-down of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 -
Stock issued for services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 735 495
Amortization of debt discount. . . . . . . . . . . . . . . . . . . . . . . . . . 606 -
Interest related to conversion of debt . . . . . . . . . . . . . . . . . . . . . - 831
Value of service for exercise of warrants. . . . . . . . . . . . . . . . . . . . 166 -
Warrant discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 109
Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . (1,918) (411)
Decrease (increase) in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . 452 (1,406)
Decrease (increase) in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 117 (994)
Decrease (increase) in prepaid expenses and other . . . . . . . . . . . . . . . . . . . (88) (91)
(Decrease) increase in accounts payable and accrued expenses. . . . . . . . . . . . . . 295 2,428
(Decrease) increase in PEO liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 1,780 933
(Decrease) increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (382) (16)
--------------- --------------
Net cash used in operating activities. . . . . . . . . . . . . . . . . . (667) (2,720)
Cash flows from investing activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (101) (56)
Cash investment in acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . - (250)
Cash acquired in acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 215
--------------- --------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (101) (91)
Cash flows from financing activities
Net borrowings under bank lines of credit. . . . . . . . . . . . . . . . . . . . . . (125) (600)
Issuance (repayments) of notes payable . . . . . . . . . . . . . . . . . . . . . . . 435 1,183
Warrant proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 66
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . 546 2,214
--------------- --------------
Net cash provided by financing activities. . . . . . . . . . . . . . . . 856 2,863
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 88 52
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . 43 35
--------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . $ 131 $ 87
=============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINTUED)
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands, except share data)
(unaudited)
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 2003, the Company issued 12,500,000
shares of its common stock for the acquisition of shares of common stock of
Quick Pix, Inc. at a value of $150,000; and 12,190,013 shares of common stock
for the conversion of $88,129 of debt; and another 420,334 shares for $2,781 of
interest payable.
During the three months ended March 31, 2003, the Company issued 4,020,000
shares of its common stock for $56,300 of services; and 500,000 shares of its
common stock to two former employees for service with a total value of $7,500.
During the three months ended September 30, 2002, the Company rescinded the
$70,000 conversion of convertible notes payable into common stock (See note 7.)
During the three months ended December 31, 2002, the Company converted $80,000
of debt into 8,000,000 shares of common stock.
During the three months ended December 31, 2002, the Company issued 100,000
shares of common stock in connection with its acquisition of Dream Canvas
Technology, Inc.
During the three months ended March 31, 2003, the Company acquired two
subsidiaries. See note 9.
IMAGING 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 accounting principles generally
accepted in the United States of America. 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, 2002, 2001, and 2000 included in the
Company's annual report on Form 10-K filed with the SEC. Interim operating
results are not necessarily indicative of operating results for any future
interim period or for the full year.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the three months ended
March 31, 2003, the Company had net income of $42 thousand; but experienced a
net loss of $2.7 million for the nine-month period. As of March 31, 2003, the
Company had a negative working capital deficiency of $26.0 million and had a
shareholders' deficiency of $21.3 million. In addition, the Company is in
default on certain note payable obligations and is being sued by numerous trade
creditors for nonpayment of amounts due. The Company is also deficient in its
payments relating to payroll tax liabilities. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
On August 20, 1999, at the request of Imperial Bank, the Company's primary
lender, the Superior Court of San Diego appointed an operational receiver who
took control of the Company's day-to-day operations on August 23, 1999. On June
21, 2000, in connection with a settlement agreement reached with Imperial Bank,
the Superior Court of San Diego issued an order dismissing the operational
receiver.
On October 21, 1999, Nasdaq notified the Company that it no longer complied with
the bid price and net tangible assets/market capitalization/net income
requirements for continued listing on The Nasdaq SmallCap Market. At a hearing
on December 2, 1999, a Nasdaq Listing Qualifications Panel also raised public
interest concerns relating to the Company's financial viability. The Company's
common stock was delisted from The Nasdaq Stock Market effective with the close
of business on March 1, 2000. As a result of being delisted from The Nasdaq
SmallCap Market, shareholders may find it more difficult to sell common stock.
This lack of liquidity also may make it more difficult to raise capital in the
future. Trading of the Company's common stock is now being conducted
over-the-counter through the NASD Electronic Bulletin Board and covered by Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend these securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Securities and Exchange Commission adopted regulations that generally define
a "penny stock" as any equity security that has a market price of less than
$5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or the Nasdaq and the issuer has
net tangible assets under $2,000,000, the equity security also would constitute
a "penny stock." Our common stock does constitute a penny stock because our
common stock has a market price less than $5.00 per share, our common stock is
no longer quoted on Nasdaq and our net tangible assets do not exceed $2,000,000.
As our common stock falls within the definition of penny stock, these
regulations require the delivery, prior to any transaction involving our common
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with it. Furthermore, the ability of broker/dealers to sell our
common stock and the ability of shareholders to sell our common stock in the
secondary market would be limited. As a result, the market liquidity for our
common stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to these or other
regulations in the future, which would negatively affect the market for our
common stock.
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 shareholders. If adequate funds
are not available, the Company may be required to delay, reduce or eliminate
some or all of its planned activities, including any potential mergers or
acquisitions. The Company's inability to fund its capital requirements would
have a material adverse effect on the Company. The 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 for the nine months ended March 31,
2003 and 2002:
EARNINGS (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
MARCH 31, 2002
Net loss . . . . . . . . $ (4,679)
Preferred dividends (18)
----------------
Basic and diluted EPS. . (4,697) 10,557 $ (0.44)
MARCH 31, 2003
Net loss . . . . . . . . $ (2,662)
Preferred dividends (18)
----------------
Basic and diluted EPS. . (2,680) 77,000 $ (0.03)
NOTE 4. INVENTORIES
MAR. 31, 2003 JUNE 30, 2002
Inventories
Materials and supplies $ 34 $ 93
Finished goods . . . . - 58
------------------ --------------
$ 34 $ 151
================== ==============
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 149
In April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not participate in such transactions,
however, is evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time.
SFAS 150
In May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The Company is evaluating the effect of this new
pronouncement and will adopt FASB 150 within the prescribed time.
NOTE 6. REVENUE RECOGNITION RELATED TO PEO SEGMENT
The Company recognizes its revenues associated with its PEO business pursuant to
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent."
Previously, the Company reported its worksite employees as a component of direct
costs, The Company's revenues are now reported net of worksite employee payroll
cost (net method). To conform to the net method, the Company reclassified
worksite employee payroll costs of $3.7 million and $6.9 million for the
three-month period ended March 31, 2003 and 2002, respectively, from direct
costs to revenues; and $8.0 million and $12.8 million for the nine-month period
ended March 31, 2003 and 2002, respectively. This reclassification had no effect
on gross profit, operating loss, or net loss.
NOTE 7. CONVERTIBLE NOTES PAYABLE
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the Company sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850,000
bearing interest at the rate of eight percent (8%) per annum, due December 12,
2003, each convertible into shares of the Company's common stock. Interest shall
be payable, at the option of the purchasers, in cash or shares of common stock.
At any time after the issuance of the notes, each note is convertible into such
number of shares of common stock as is determined by dividing (a) that portion
of the outstanding principal balance of the note as of the date of conversion by
(b) the lesser of (x) an amount equal to seventy percent (70%) of the average
closing bid prices for the three (3) trading days prior to December 12, 2000 and
(y) an amount equal to seventy percent (70%) of the average closing bid prices
for the three (3) trading days having the lowest closing bid prices during the
thirty (30) trading days prior to the conversion date. The Company has
recognized interest expense of $364,000 relating to the beneficial conversion
feature of the above notes. Additionally, the Company issued a warrant to each
of the purchasers to purchase 502,008 shares of the Company's common stock at an
exercise price equal to $1.50 per share. The purchasers may exercise the
warrants through December 12, 2005. During fiscal year 2001, notes payable of
$675,000 were converted into the Company's common stock.
On July 26, 2001, the Company entered into a convertible note purchase agreement
with certain investors whereby the Company sold to the investors a convertible
debenture in the aggregate principal amount of $1,000,000 bearing interest at
the rate of eight percent (8%) per annum, due July 26, 2004, convertible into
shares of our common stock. Interest is payable, at the option of the investor,
in cash or shares of our common stock. The note is convertible into such number
of shares of our common stock as is determined by dividing (a) that portion of
the outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $1.30 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. Additionally, we issued a warrant to the investor to purchase
769,231 shares of our common stock at an exercise price equal to $1.30 per
share. The investor may exercise the warrant through July 26, 2006. In
accordance with EITF 00-27, the Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
convertible debenture. The proportionate value of the note and the warrants is
$492,000 and $508,000, respectively. The value of the note was then allocated
between the note and the preferential conversion feature, which amounted to $0
and $492,000, respectively. During the quarter ended March 31, 2003, the Company
converted $30,000 into common stock.
On September 21, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby we sold to the investor a convertible
promissory note in the aggregate principal amount of $300,000 bearing interest
at the rate of eight percent (8%) per annum, due September 21, 2004, convertible
into shares of our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note by (b) the conversion
price. The conversion price equals the lesser of (x) $0.532 and (y) 70% of the
average of the 3 lowest closing bid prices during the 30 trading days prior to
the conversion date. Additionally, we issued a warrant to the investor to
purchase 565,410 shares of our common stock at an exercise price equal to $0.76
per share. The investor may exercise the warrant through September 21, 2006. In
December 2001, $70,000 of this note was converted into 209,039 shares of common
stock and in the first quarter of fiscal 2003, the debenture holder requested
that the conversion be rescinded. The Company honored the request and shares
have been returned and the outstanding principal balance due under the note has
been increased to $300,000. In accordance with EITF 00-27, the Company first
determined the value of the note and the fair value of the detachable warrants
issued in connection with this convertible debenture. The proportionate value
of the note and the warrants is $106,000 and $194,000, respectively. The value
of the note was then allocated between the note and the preferential conversion
feature which amounted to $0 and $194,000, respectively.
On November 7, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby we sold to the investor a convertible
promissory note in the aggregate principal amount of $200,000 bearing interest
at the rate of eight percent (8%) per annum, due November 7, 2004, convertible
into shares of our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note by (b) the conversion
price. The conversion price equals the lesser of (x) $0.532 and (y) 70% of the
average of the 3 lowest closing bid prices during the 30 trading days prior to
the conversion date. Additionally, we issued a warrant to the investor to
purchase 413,534 shares of our common stock at an exercise price equal to $0.76
per share. The investor may exercise the warrant through November 7, 2006. In
accordance with EITF 00-27, the Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
convertible debenture. The proportionate value of the note and the warrants is
$92,000 and $108,000, respectively. The value of the note was then allocated
between the note and the preferential conversion feature, which amounted to $0
and $92,000, respectively.
On January 22, 2002, the Company entered into a convertible note purchase
agreement with an investor whereby we sold to the investor a convertible
promissory note in the aggregate principal amount of $500,000 bearing interest
at the rate of eight percent (8%) per annum, due January 22, 2003, convertible
into shares of our common stock. Interest is payable, at the option of the
investor, in cash or shares of our common stock. The note is convertible into
such number of shares of our common stock as is determined by dividing (a) that
portion of the outstanding principal balance of the note by (b) the conversion
price. The conversion price equals the lesser of (x) $0.332 and (y) 70% of the
average of the 3 lowest closing bid prices during the 30 trading days prior to
the conversion date. Additionally, we issued a warrant to the investor to
purchase 3,313,253 shares of our common stock at an exercise price equal to
$0.332 per share. The investor may exercise the warrant through January 22,
2009. In accordance with EITF 00-27, the Company first determined the value of
the note and the fair value of the detachable warrants issued in connection with
this convertible debenture. The proportionate value of the note and the
warrants is $101,000 and $399,000, respectively. The value of the note was then
allocated between the note and the preferential conversion feature, which
amounted to $0 and $101,000, respectively. During the quarter ended March 31,
2003, the Company converted $22,129 into common stock.
All the convertible debentures are shown as a current liability in the
accompanying consolidated balance sheets since each debenture is convertible
into common stock at any time.
NOTE 8. STOCK ISSUANCES
Amendment To The Certificate Of Incorporation.
---------------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any shareholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
On August 9, 2002, the Company's board of directors approved and effected a 1
for 20 reverse stock split. All share and per share data have been
retroactively restated to reflect this stock split.
During the quarter, ITEC issued 12,190,013 common shares to holders of $88,129
of convertible notes payable at an average conversion price of $0.007 per
share. 420,334 common shares were issued pursuant to these notes payable for
$2,781 of interest.
Stock Issuances
----------------
During the quarter ended March 31, 2003, ITEC issued 4,020,000 common shares for
legal and consulting services at an average market price of $0.01 per share.
The Company recognized $56,300 in expenses.
During the quarter ended March 31, 2003, the Company issued 12,500,000 common
shares for the acquisition of approximately 85% of the outstanding shares of
Quik Pix, Inc with a total value of $150,000.
During the quarter ended March 31, 2003, the Company issued 500,000 shares to
two former employees for service with a total value of $7,500.
During the quarter ended March 31, 2003, the Company issued 12,407,156 shares of
common stock to convert $88,129 outstanding convertible note balance and $2,781
of accrued interest.
During the nine months ended March 31, 2003, the Company issued 2,830,000
warrants to outside consultants. The Company has recognized an expense of
$70,198 for the fair value of the warrants. The Company used the Black-Scholes
option pricing model to value the warrants, with the following assumptions: (i)
no expected dividends; (ii) a risk-free rate of 3.5%; (iii) expected volatility
of 179% and (iv) an expected life of .25 years.
NOTE 9. BUSINESS ACQUISITIONS
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40,000 with the issuance of 100,000 shares of
its common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75,000 in cash. The Company reported this transaction on Form 8-K,
filed on December 19, 2002, which is incorporated by reference.
On January 14, 2003, the Company completed the acquisition of shares,
representing controlling interest, of Greenland Corporation (Greenland) and Quik
Pix, Inc. (QPI). The terms of the acquisitions were disclosed on Form 8-K filed
January 21, 2003, and incorporated by reference.
Under the terms of the Greenland acquisition, ITEC acquired all of the
19,183,390 shares of common stock of Greenland; and paid for the exercise of
warrants to purchase 95,319,510 shares of Greenland common stock. The purchase
price was $2,250,000 in the form of a promissory note payable to Greenland and
is convertible into shares of ITEC common stock, the number of which will be
determined by a formula applied to the market price of the shares at the time
that the promissory note is converted. The promissory note of $2,250,000 is
payable to Greenland Corporation and is eliminated during the consolidation.
The warrants have been exercised. 115.1 million Greenland common shares were
issued to ITEC and delivered pursuant to the terms of the Closing Agreement. The
conditions of the exercise of warrants pursuant to the Closing Agreement have
been met. Accordingly, ITEC holds voting rights to 115.1 million shares of
Greenland common stock, representing 84% of the total outstanding Greenland
common shares at May 16, 2003.
On January 14, 2003, four new directors were elected to serve on Greenland's
Board of Directors as nominees of ITEC. As of the date of this report, ITEC
holds four seats of seven. Greenland's Chief Executive Officer, Thomas Beener,
remains in his position. Brian Bonar, ITEC's CEO serves as Chairman of
Greenland's Board of Directors.
The purchase price was determined through analysis of Greenland's financial
reports as filed with the Securities and Exchange Commission and the potential
future performance of Greenland's ExpertHR subsidiary. The total purchase price
was arrived at through negotiations.
Greenland's ExpertHR subsidiary provides professional employer services (PEO) to
niche markets. Greenland's Check Central subsidiary is an information technology
company that has developed the Check Central Solutions' transaction processing
system software and related MAXcash Automated Banking Machine (ABM kiosk
designed to provide self-service check cashing and ATM-banking functionality.
Greenland's common stock trades on the OTC Bulletin Board under the symbol
GREENLAND.
Pursuant to the terms of the Agreement, the actual purchase price was $0 based
on the stated purchase price of $2,250,000 per the agreement less promissory
note payable to $2,250,000 to Greenland, which was eliminated in the
consolidation.
The operating results of Greenland beginning January 14, 2003 are included in
the accompanying consolidated statements of operations
The total purchase price was valued at approximately $0 and is summarized and
allocated as follows:
Other current assets. . . . . . . . . . . . $ 4,000
Property and equipment. . . . . . . . . . . 90,000
Other non-current assets. . . . . . . . . . 18,000
Accounts payable and accrued
expenses, and other current liabilities (3,202,000)
Other long-term liabilities . . . . . . . . (28,000)
Goodwill. . . . . . . . . . . . . . . . . . 3,118,000
-------------------
Purchase price. . . . . . . . . . . . . . . $ -
===================
The allocation of the purchase price is preliminary and is subject to revision,
which is not expected to be material, based on the final valuation of the net
assets acquired. Acquisition related costs were expensed as incurred.
On January 14, 2003, ITEC completed its acquisition of 110,000,000 shares of
common stock of QPI. The purchase price was 12,500,000 shares of ITEC restricted
common stock valued at $150,000. In addition, ITEC agreed to pay $45,000 to a
shareholder of QPI.
The purchase price was determined through analysis of QPI's financial condition
and the potential future performance of its business operations. The total
purchase price was arrived at through negotiations.
Established in 1982, QPI is a visual marketing support firm. Its principal
product, Photomotion, is patented. PhotoMotion is a unique color medium that
uses existing originals to create the illusion of movement and allows for three
to five distinct images to be displayed with an existing light box. QPI visual
marketing products are sold to a range of clientele including advertisers and
their agencies.
Pursuant to the terms of the Agreement, the actual purchase price was $195,000
based on the fair value of the common stock issued of $150,000 and the payable
of $45,000 to a shareholder of QPI.
The operating results of QPI beginning January 14, 2003 are included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $195,000 and is summarized
as follows:
Other current assets. . . . . . . . . . . . $ 280,067
Property and equipment. . . . . . . . . . . 11,340
Other non-current assets. . . . . . . . . . 18,000
Accounts payable and accrued
expenses, and other current liabilities (833,409)
Other long-term liabilities . . . . . . . . (868,998)
Patent, net of accumulated amortization . . 1,588,000
-------------
Purchase price. . . . . . . . . . . . . . . $ 195,000
=============
The following unaudited pro forma financial information presents the
consolidated operations of the Company as if the acquisitions of QPI and
Greenland had occurred as of the beginning of the periods presented. This
information is provided for illustrative purposes only, and is not necessarily
indicative of the operating results that would have occurred had the Acquisition
been consummated at the beginnings of the periods presented, nor is it
necessarily indicative of any future operating results.
(in thousands, except per share data) 9 Months Ended
March 31, 2003
--------------------------------------
Net revenue, as reported . . . . . . . $ 1,989
Net revenue, proforma. . . . . . . . . $ 3,829
Loss from operations, as reported. . . $ (2,662)
Loss from operations, proforma . . . . $ (6,511)
Loss per share, as reported. . . . . . $ (0.03)
Loss per share, proforma . . . . . . . $ (0.08)
Proforma information for the nine months ended March 31, 2002 is not available
due to the fact that accurate financial information has not been maintained by
QPI.
On March 1, 2003, the Company's Greenland subsidiary purchased a number of PEO
clients from StaffPro Plus, a Michigan Corporation for a non interest bearing
note which, when imputed for interest at 6% per annum, aggregates $254,709. This
investment was included in other assets and a corresponding note payable was
recorded. Interest and principal will be recorded as payments are made. The
term of the note consists of 24 payments and the final payment is due on April
18, 2005. The amount of the note payable can be adjusted if the client base so
acquired does not remain with the Greenland Corporation and Subsidiary.
NOTE 10. SEGMENT INFORMATION
During the three-month and nine-month period ended March 31, 2003, the
Company managed and internally reported the Company's business as three
reportable segments, principally, (1) products and accessories, (2) software,
and (3) PEO services.
Segment information for the period ended March 31, 2003 is as follows:
(in thousands)
PRODUCTS SOFTWARE PEO SERVICES TOTAL
---------- -------------- --------
3-months
---------------------------
Revenues. . . . . . . . $ 162 $ 62 $ 352 $ 576
Operating income (loss) (5) (65) (759) (829)
9-months
---------------------------
Revenues. . . . . . . . $ 742 $ 241 $ 1,006 $ 1,989
Operating income (loss) (58) (265) (2,781) (3,104)
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 three months and nine months ended March 31, 2003, no customer
accounted for more than 10% of consolidated accounts receivable or total
consolidated revenues.
NOTE 11. EXTINGUISHMENT OF DEBT
During the three months ended March 31, 2003, the Company had a gain on
extinguishment of debt of $1.3 million. The Company reviewed its accounts
payable and determined that $1.3 million was associated with unsecured
creditors. ITEC, based upon an opinion provided by independent legal counsel,
has been released as the obligator of these liabilities. Accordingly, management
has elected to adjust its accounts payable and to classify such adjustments as
extinguishment of debt.
NOTE 12. PROFORMA INFORMATION UNDER FASB STATEMENT NO. 148 -"ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE".
Pro forma information regarding the effect on operations is required by SFAS 123
and SFAS 148, has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement.
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period.
The Company did not grant any employee options during the three months and nine
months ended March 31, 2003; therefore, proforma information is not provided
NOTE 13. SUBSEQUENT EVENTS
Subsequent to March 31, 2003, the Company issued 96,008,433 shares of common
stock for the following purposes and related amounts: Acquisition activities,
1,000,000; Conversion of Convertible Debt, 84,608,433; Conversion of Warrants,
2,500,000; Office Rent, 1,650,000; and, Consulting Services, 6,250,000. The
shares were issued and valued at the average of the closing bid and ask price on
the date of issuance. The total value of common shares issued, which would
include both par value and additional paid-in-capital, was $966,353.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Quarterly Report on Form 10-Q. The statements contained in this Report on
Form 10-Q/A that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, hopes, intentions or strategies regarding
the future. Forward-looking statements include statements regarding: future
product or product development; future research and development spending and our
product development strategies, and are generally identifiable by the use of
the words "may", "should", "expect", "anticipate", "estimates", "believe",
"intend", or "project" or the negative thereof or other variations thereon or
comparable terminology. Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements (or industry results, performance or achievements)
expressed or implied by these forward-looking statements to be materially
different from those predicted. The factors that could affect our actual results
include, but are not limited to, the following: general economic and business
conditions, both nationally and in the regions in which we operate; competition;
changes in business strategy or development plans; our inability to retain key
employees; our inability to obtain sufficient financing to continue to expand
operations; and changes in demand for products by our customers.
OVERVIEW
Imaging Technologies Corporation (ITEC) develops and distributes imaging
software and distributes digital imaging products. The Company sells a range of
imaging products for use in graphics and publishing, digital photography, and
other niche business and technical markets. Our core technologies are related to
the design and development of software products that improve the accuracy of
color reproduction.
In November 2001, we embarked on an expansion program to provide more
services to help with tasks that have negatively impacted the business
operations of its existing and potential customers. To this end, ITEC, through
strategic acquisitions, became a professional employer organization ("PEO").
ITEC now provides comprehensive personnel management services through our
wholly-owned SourceOne Group and EnStructure subsidiaries. Each of these
subsidiaries provides a broad range of services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, and employer liability management to small and medium-sized
businesses.
In May 2002, ITEC entered into an agreement to acquire Dream Canvas, Inc.,
a Japanese corporation that has developed machines currently used for the
automated printing of custom stickers, popular in the Japanese consumer market.
We completed the acquisition of Dream Canvas Technology, Inc. (DCT) in October
2002 and paid the sum of $40,000 with the issuance of 100,000 shares of its
common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75,000 in cash. We reported this transaction on Form 8-K, filed on
December 19, 2002, which is incorporated by reference. (Also see Note 9 to the
Consolidated Financial Statements.)
In July 2002, ITEC entered into an agreement to acquire controlling
interest in Quik Pix, Inc. ("QPI"). QPI shares are traded on the National
Quotation Bureau Pink Sheets under the symbol QPIX. On January 14, 2003, we
completed the acquisition of shares, representing controlling interest, of Quik
Pix, Inc. The terms of the acquisitions were disclosed on Form 8-K filed January
21, 2003, and incorporated by reference.
In August 2002, ITEC entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of Greenland. The
terms of the acquisitions were disclosed on Form 8-K filed January 21, 2003, and
incorporated by reference.
Our business continues to experience operational and liquidity challenges.
Accordingly, year-to-year financial comparisons may be of limited usefulness now
and for the next several periods due to anticipated changes in our business as
these changes relate to potential acquisitions of new businesses, changes in
product lines, and the potential for suspending or discontinuing certain
components of the business.
Our current strategy is: to expand our PEO business and to commercialize
our own technology, which is embodied in our ColorBlind Color Management
software and other products obtained through strategic acquisitions.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent accountants accompanying
our June 30, 2002 financial statements includes an explanatory paragraph
indicating there is a substantial doubt about ITEC's ability to continue as a
going concern, due primarily to the decreases in our working capital and net
worth. We plan to overcome the circumstances that impact our ability to remain a
going concern through a combination of achieving profitability, raising
additional debt and equity financing, and renegotiating existing obligations.
Since the removal of the court appointed operational receiver in June 2000,
we have been able to reestablish relationships with some past customers and
distributors and to establish relationships with new customers. Additionally, we
have been working to reduce costs through the reduction in staff, the suspension
of certain research and development programs, such as the design and manufacture
of controller boards and printers, and the suspension of product sales and
marketing programs related to office equipment and services in favor of a
greater concentration on its PEO and imaging software businesses. We began a
program to reduce our debt through debt to equity conversions. We continue to
pursue the acquisition of businesses that will grow our business.
There can be no assurance, however, that we will be able to complete any
additional debt or equity financings on favorable terms or at all, or that any
such financings, if completed, will be adequate to meet our capital
requirements. Any additional equity or convertible debt financings could result
in substantial dilution to our shareholders. If adequate funds are not
available, we may be required to delay, reduce or eliminate some or all of our
planned activities, including any potential mergers or acquisitions. Our
inability to fund our capital requirements would have a material adverse effect
on the Company. Also see "Liquidity and Capital Resources." and "Risks and
Uncertainties - Future Capital Needs."
RESTRUCTURING AND NEW BUSINESS UNITS
From August 20, 1999 until June 21, 2000, we were under the control of an
operational receiver, appointed by the Court pursuant to litigation between ITEC
and Imperial Bank. The litigation has been dismissed and management has
reassumed control. However, management did not have operational control for
nearly all of fiscal 2000.
In July 2001, we suspended our printer controller development and
manufacturing operations in favor of selling products from other companies to
our customers.
In October 2002, we suspended our sales and marketing activities associated
with the distribution of office products, including printers, scanners,
plotters, and computer networking devices.
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 we are evaluating the future of this business unit.
In October 2001, we acquired certain assets, for stock, related to our
office products and services business activities, representing $250,000 of
inventories, fixed assets, and accounts receivable. We have since suspended
these operations in favor of concentrating on our software and PEO businesses
and the products and services offered by recent acquisitions.
In November 2001, we acquired SourceOne Group, Inc. (SOG) and operate it as
a wholly-owned subsidiary. SOG provides PEO services, including benefits and
payroll administration, health and workers' compensation insurance programs,
personnel records management, and employer liability management to small and
medium-sized businesses.
In March 2002, we acquired all of the outstanding shares of EnStructure,
Inc. ("EnStructure), a PEO company, for restricted ITEC common stock. The
purchase price may be increased or decreased based upon EnStructure's
representations of projected revenues and profits, which are defined in the
acquisition agreement, which was exhibited as part of the Company's Form 8-K,
dated March 28, 2002. EnStructure is operated as a wholly-owned subsidiary.
In May 2002, we entered into an agreement to acquire Dream Canvas, Inc., a
Japanese corporation that has developed machines currently used for the
automated printing of custom stickers, popular in the Japanese consumer market.
We completed the acquisition of Dream Canvas Technology, Inc. (DCT) in October
2002 and paid the sum of $40,000 with the issuance of 100,000 shares of its
common stock. In December 2002, we sold DCT to Baseline Worldwide Limited for
$75,000 in cash. We reported this transaction on Form 8-K, filed on December 19,
2002.
In July 2002, we entered into an agreement to acquire controlling interest
in Quik Pix, Inc. ("QPI"). QPI shares are traded on the National Quotation
Bureau Pink Sheets under the symbol QPIX. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of QPI. The terms of
the acquisitions were disclosed on Form 8-K filed January 21, 2003.
In August 2002, we entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of Greenland. The
terms of the acquisitions were disclosed on Form 8-K filed January 21, 2003
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to allowance for doubtful accounts, value of
intangible assets and valuation of non-cash compensation. We base our estimates
and judgments on historical experiences and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our consolidated financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts and estimated fair value of equity
instruments used for compensation. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
consolidated financial statements included in our Annual Report on Form l0-K for
the fiscal year ended June 30, 2002.
REVENUE RECOGNITION RELATED TO PEO SEGMENT
We recognize revenues associated with our PEO business pursuant to EITF 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent." Previously, we
reported our worksite employees as a component of direct costs, Our revenues are
now reported net of worksite employee payroll cost (net method). To conform to
the net method, we reclassified worksite employee payroll costs of $3.7 million
and $6.9 million for the three-month period ended March 31, 2003 and 2002,
respectively, from direct costs to revenues; and $8.0 million and $12.8 million
for the nine-month period ended March 31, 2003 and 2002, respectively. This
reclassification had no effect on gross profit, operating loss, or net loss.
RESULTS OF OPERATIONS
Revenues
--------
Revenues were $576 thousand and $2.5 million for the three-month period
ended March 31, 2003 and 2002, respectively, a decrease of $2.0 million (77%).
For the nine-month period ended March 31, 2003 and 2002, respectively, revenues
were $2.0 million and $5.7 million, a decrease of $3.7 million (65%). The
decrease in revenues was due primarily to changes in the customer structure of
our PEO activities in our Source One Group (SOG) subsidiary as well as the
changes associated with our revenue recognition policy. (Also see Note 6 to the
Consolidated Financial Statements.) Since the acquisition of SOG, we have lost
several customers due to changes in rates for services, particularly workers'
compensation insurance. Additionally, we elected to terminate certain customers
due to profitability concerns. New customers, particularly related to ExpertHR,
a wholly-owned subsidiary of Greenland, have been acquired, and more are
anticipated pursuant to signed agreements, which will contribute to revenues in
the fourth quarter of the current fiscal year. We acquired a controlling
interest in Greenland in January 2003.
Imaging Products
Sales of imaging products were $162 thousand and $814 thousand for the
three month period ended March 31, 2003 and 2002, respectively, a decrease of
$652 thousand or (80%). For the nine-month period ended March 31, 2003 and 2002,
sales of imaging products were $742 thousand and $2.6 million, respectively; a
decrease of $1.9 million, or 72%. The decrease in product sales from the
reported periods of 2002 to 2001 was due to the suspension of sales and
marketing activities associated with the resale of office products, including
copiers, printers, and network solutions. We plan to further evaluate our
position related to product sales and marketing during the fourth quarter.
However, there can be no assurance that product sales will not continue to
decrease in the future.
Revenue from software sales, licensing fees and royalties were $62 thousand
and $470 thousand for the three-month period ended March 31, 2003 and 2002
respectively, a decrease of $408 thousand, or 87%. For the nine-month period
ended March 31, 2003 and 2002, respectively, software sales, licensing fees and
royalties were $241 thousand and $820 thousand, respectively, a decrease of $579
thousand, or 71%. The reduction in software revenues was due to our lack of
sufficient working capital to support sales and marketing activities. Royalties
from the licensing of ColorBlind source code are insignificant and are reported
as part of software sales.
Royalties and licensing fees vary from quarter to quarter and are dependent on
the sales of products sold by OEM customers using ITEC technologies. These
revenues, however, continue to decline, and are expected to decline in the
future due to our focus on imaging product sales and our PEO operations as
opposed to technology licensing activities.
PEO Services
PEO revenues for the three-month period ended March 31, 2003 and 2002 were
$352 thousand and $1.2 million, respectively, a decrease of $891 thousand (72%).
PEO revenues for the nine-month period ended March 31, 2003 and 2002 were $1.0
million and $2.3 million, respectively, a decrease of $1.3 million (57%). The
decrease in revenues was due primarily to changes in the customer structure SOG.
Over the past year, we have lost several customers due to changes in rates for
services, particularly workers' compensation insurance. Additionally, we elected
to terminate certain customers due to profitability concerns.
COST OF PRODUCTS SOLD
Cost of products sold were $48 thousand (30% of product sales) and $614
thousand (75% of product sales) for the three-month period ended March 31, 2003
and 2002, respectively. For the nine-month period ended March 31, 2003 and 2002,
cost of products sold were $365 thousand (49% of product sales) and $1.83
million (71% of product sales), respectively. The increase in margins is due
primarily to the substantial reduction in product sales for the reported periods
as a result of the suspension of sales and marketing activities associated with
the resale of office products, including copiers, printers, and network
solutions.
Cost of software, licenses and royalties were $9 thousand (15% of
associated revenues) and $277 thousand (59% of associated revenues) for the
three-month period ended March 31, 2003 and 2002, respectively. For the
nine-month period ended March 31, 2003 and 2002, cost of software, licenses and
royalties were $71 thousand (30% of associated revenues) and $331 thousand (40%
of associated revenues). Increases in margins are attributable to stabilization
of retail prices of our ColorBlind software and increased licensing activities,
which do not carry significant product costs.
Cost of PEO services were $132 thousand (38% of PEO revenues) and $880
thousand (71% of PEO revenues) for the three-month period ended March 31, 2003
and 2002, respectively; and $275 thousand (27% of PEO revenues) and $1.7 million
(72% of PEO revenues) for the nine-month period ended March 31, 2003 and 2002,
respectively. The increase in margin is primarily due to the election of
management to self-insure workers' compensation coverage for worksite employees
during the three-month period ended March 31, 2003. The Company no longer
self-insures workers' compensation in order to reduce our financial risk; we
contract such coverage with third-party insurance carriers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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.
Selling, general and administrative expenses for the three-month period
ended March 31, 2003 and 2002, respectively, were $1.2 million and $1.86
million. In the current three-month period, selling, general, and administrative
expenses decreased $647 thousand (35%) from the year-earlier quarter. The
decrease was due primarily to reduced payroll and consulting expenses.
Selling, general and administrative expenses for the nine-month period ended
March 31, 2003 and 2002, respectively, were $4.4 million and $5.5 million. In
the current nine-month period, we reduced selling, general, and administrative
expenses $1.1 million (20%) due primarily to staff reductions.
COSTS OF RESEARCH AND DEVELOPMENT
Costs of research and development were $68 thousand for the three-month
period ended March 31, 2002 and $140 thousand for the nine-month period ended
March 31, 2003. There were no research and development costs in the three- and
nine-month periods ended March 31, 2003.
We have been reducing our research and development costs during the past
several quarters. We have suspended most of our engineering and licensing
activities associated with OEM printer products and have re-directed our
research and development costs toward the support of our ColorBlind software
products.
OTHER INCOME AND EXPENSE
Interest and financing costs were $390 thousand and $364 thousand for the
three months ended March 31, 2003 and 2002, respectively. For the nine-months
ended March 31, 2003 and 2002, interest and financing costs totaled $1.5 million
and $1.4 million; respectively.
During the three-month period ended March 31, 2003 we had a gain on
extinguishment of debt of $1.3 million. In the prior year, reported a gain on
extinguishments of debt of $411 thousand. Also see Note 11 to our consolidated
financial statements.
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. Additionally, in order to facilitate its growth and future
liquidity, we have made some strategic acquisitions.
As a result of some of our financing activities, there has been a
significant increase in the number of issued and outstanding shares. During the
three-month period ended March 31, 2003, we issued an additional 29.2 million
shares. During the nine-month period ended March 31, 2003, we issued 125.8
million shares. These shares of common stock were issued primarily for corporate
expenses in lieu of cash, and for the exercise of warrants.
As of March 31, 2003, we had negative working capital of $26 million, a decrease
in working capital of approximately $5.2 million (24%) as compared to June 30,
2002, due primarily to our net loss in each successive quarterly period since
the year ended June 30, 2002.
Net cash used by operating activities was $.7 million for the nine-month period
ended March 31, 2003 as compared to net cash used in operating activities of
$2.7 million for the nine months ended March 31, 2002, a decrease of $2 million
or 74%, due primarily to the suspension of cash-intensive business segments
associated with the sales of office products.
Cash used in investing activities was $101 thousand for the nine-month period
ended March 31, 2003, a decrease of $10 thousand (11%) from the year-earlier
period.
Net cash provided by financing activities was $.9 million for the nine month
period ended March 31, 2003 compared to cash provided by financing activities of
$2.9 million for the nine-month period ended March 31, 2003, a decrease of $2
million, or 69%. The decrease is due primarily to a reduction in the issuance of
notes payable and the reduction in long-term notes payable associated with our
ability to use revenues to fund more of our operations.
We have no material commitments for capital expenditures. Our 5%
convertible preferred stock (which ranks prior to ITEC'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 March 31, 2003, was
approximately $342 thousand.
Our capital requirements depend on numerous factors, including market
acceptance of our products and services, the resources we devote to marketing
and selling our products and services, and other factors. The report of our
independent auditors accompanying our June 30, 2002 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
the our working capital and net worth. (Also see Note 2 to the Consolidated
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, 2002 financial statements includes an explanatory
paragraph indicating there is a substantial doubt about the Company's ability to
continue as a going concern, due primarily to the decreases in 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
and services, seasonality, changes in our prices and in our competitors' prices,
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 and services. Accordingly, any
inaccuracy in our forecasts could adversely affect our financial condition and
results of operations. Demand for our products and services could be adversely
affected by a slowdown in the overall demand for imaging products and/or PEO
services. Our failure to complete shipments during a quarter could have a
material adverse effect on our results of operations for that quarter. Quarterly
results are not necessarily indicative of future performance for any particular
period.
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS FLUCTUATED
SIGNIFICANTLY.
Our stock price could fluctuate significantly in the future based upon any
number of factors such as: general stock market trends, announcements of
developments related to our business, fluctuations in our operating results, a
shortfall in our revenues or earnings compared to the estimates of securities
analysts, announcements of technological innovations, new products or
enhancements by us or our competitors, general conditions in the markets we
serve, general conditions in the worldwide economy, developments in patents or
other intellectual property rights, and developments in our relationships with
our customers and suppliers.
In addition, in recent years the stock market in general, and the market
for shares of technology and other stocks have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
SINCE OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN
WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for our products and services are highly competitive and
rapidly changing. Some of our current and prospective competitors have
significantly greater financial, technical, 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 and services introductions by us and by our
competitors, the selling prices of our products and services and of our
competitors' products and services, the performance of our products and of our
competitors' products, product distribution by us and by our competitors, our
marketing ability and the marketing ability of our competitors, and the quality
of customer support offered by us and by our competitors.
A key element of our strategy is to provide competitively priced, quality
products and services. We cannot be certain that our products and services 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 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 OUR DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS, OUR
BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our products are marketed and sold through a distribution channel of value
added resellers, manufacturers' representatives, retail vendors, and systems
integrators. We have a 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 February 7, 2002,
we directly employed 6 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 regard.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT.
Accordingly, the short-term nature of 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. On January 31, 2003, we executed a Stipulation of
Settlement, and the matter will be closed pending the distribution of the
settlement to the plaintiffs. The defense of this action was tendered to our
insurance carriers and has, subsequent to the period reported in this filing,
been settled for $200,000 in cash (paid by our insurance carrier) and 5,000,000
shares of ITEC common stock, the distribution of which is pending instructions
from the Court.
Throughout fiscal 2000, 2001, and 2002, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Several of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars.
Should we be required to pay the full amount demanded in each of these claims
and lawsuits, we may have to cease our operations. However, to date, the
superior security interest held by Imperial Bank has prevented nearly all of
these trade creditors from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING
CAPITAL AND A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING,
WE MAY BE FORCED TO DISCONTINUE OPERATIONS.
For several recent periods, up through the 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
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody
made a public announcement that they had filed a lawsuit against us and certain
current and past officers and/or directors, alleging violation of federal
securities laws and, in November 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. In January 2003, we entered into a Stipulation of
Settlement with the plaintiffs. We agreed to pay the plaintiffs 5,000,000 shares
of common stock and $200,000 in cash. The Parties have accepted the settlement.
We have committed the shares, and our insurance carrier has paid the $200,000
cash payment. Pursuant to a hearing in May 2003 the Court provided preliminary
approval to the settlement. It is still not determined, however, what percentage
of the settlement will be payable to the plaintiff's attorneys, nor whether that
percentage is to be applied before or after costs are deducted from the
settlement fund.
As reported on Form 8-K, filed July 22, 2003, under SFAS 5, we have not
been able to account for the associated liability as it does not meet the
criteria of SFAS 5 - the potential liability cannot be accurately determined
until after the Court makes its final ruling. We expect to report the financial
impact of this settlement in our Annual Report on Form 10-K for the year ended
June 30, 2003.
On August 22, 2002, the Company was sued by its former landlord, Carmel
Mountain #8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127.
The Company is also a party to a lawsuit filed by Symphony Partners, L.P.
related to its acquisition of SourceOne Group, LLC. As reported on Form 8-K,
dated July 22, 2003, the plaintiffs sought payment of $702,000. Subsequent to
the period reported in this filing, in June 2003, we entered into a settlement
with the plaintiffs for a cash payment of $274,000, which has been paid. We will
account for this settlement in our Annual Report on Form 10-K for the year ended
June 30, 2003.
The Company is one of dozens of companies sued by The Massachusetts
Institute of Technology, et.al, `related to a patent held by the plaintiffs that
may be related to part of the Company's ColorBlind software. Subsequent to the
period reported in this filing, in June 2003, we entered into a settlement with
the plaintiffs who have agreed to dismiss their claims against us with prejudice
in exchange for a settlement fee payment of $10,000, which is being paid over a
three-month period. We will account for this settlement in our Annual Report on
Form 10-K for the year ended June 30, 2003.
Throughout fiscal 2000, 2001, and 2002, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Several of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars.
In connection with the Company's acquisition of Greenland Corporation, the
following are the outstanding legal matter for Greenland Corporation:
Greenland, along with Seren Systems ("Seren"), its then current and primary
software developer and supplier for its own ABM terminals, was in the process of
completing development of the check cashing service interface to the Mosaic
Software host system being implemented to support a large network of V.com
terminals. In September 2000, Seren unilaterally halted testing and effectively
shut-down any further check cashing development for the V.com project. The
parties participating in this project may have been financially damaged, related
to the delay in performance by Greenland and Seren. None of the parties have
brought suit against Greenland and/or Seren at this time. There is no assurance,
however, that such suit(s) will not be brought in the future.
On May 23, 2001 Greenland filed a Complaint in San Diego County naming
Michael Armani as the defendant. The Complaint alleges breach of contract by
Michael Armani in connection with two separate stock purchase agreements.
Greenland seeks damages in the amount of $474,595. On August 7, 2001 Greenland
filed a request for Entry of Default against Mr. Armani in the amount of
$474,595 and the court granted entry of default. Subsequently Mr. Armani filed a
motion to set aside the entry of default and on October 26, 2001 the court
granted said motion and the entry of default was set aside. Greenland and Mr.
Armani participated in mediation and as a result entered into a settlement
agreement whereby Mr. Armani agreed to make certain cash payments to Greenland
and the parties entered into mutual release of all claims. Mr. Armani defaulted
in his obligation to make the first cash payment and consequently, Greenland
obtained a judgment against Mr. Armani for $100,000. Greenland is continuing its
efforts to collect on the judgment.
On May 23, 2001 Arthur Kazarian, Trustee for the General Wood Investment
Trust (the "Landlord") filed a Complaint in San Diego County naming Greenland as
a defendant. The Complaint alleges breach of contract pursuant to the terms of
the lease agreement between the Company and the Landlord for the real property
located at 1935 Avenida Del Oro, Oceanside, California and previously occupied
by Greenland. The Complaint seeks damages in the amount of approximately
$500,000. Although Greenland remains liable for the payments remaining for the
term of the lease, the Landlord has a duty to mitigate said damages. Greenland
recorded a lease termination liability of $275,000 during the year ended
December 31, 2001. Greenland entered into a settlement agreement with Arthur
Kazarian, Trustee for the General Wood Investment Trust (the "Landlord") where
by Greenland agreed to pay the sum of $220,000 to the Landlord in installments
payments of $20,000 in May 2002, $50,000 in October 2002 and the remaining
balance in December 2002. In the event Greenland defaults in any or all
scheduled payments, the Landlord is entitled to a stipulated judgment of
approximately $275,000. Greenland was unable to make the scheduled payments and
as a result, on July 8, 2002, the Landlord has entered a judgment lien against
Greenland in the amount of $279,654.
Greenland entered into an agreement with Intellicorp, Inc. ("Intellicorp")
whereby Intellicorp agreed to invest $3,000,000 in exchange for seats on the
board of directors and restricted shares of common stock of Greenland. After
making the initial payment of $500,000, Intellicorp defaulted on the balance.
Greenland sued for recovery of the unpaid $2,500,000. Greenland had issued
46,153,848 shares of common stock for the investment, which were returned to
Greenland and cancelled. A default judgment was entered against defendant
IntelliCorp, IntelliGroup, and Isaac Chang. In June 203, a judgment was entered
in the Superior Court of the State of California, County of San Diego, against
the defendants in favor of Greenland. The amount of the judgment was
$3,950,640.02 and was comprised of an award of $2,950,640.02 for compensatory
damages and an award of $1,000,000.00 for punitive damages. The Court found, by
clear and convincing evidence, that the Defendants acted maliciously and with
the intent to defraud Greenland when they entered into a private placement
transaction to fund Greenland.The defendant's ability to pay is unknown.
Max Farrow, a formal officer of Greenland, filed a Complaint in San Diego
County naming Greenland, Thomas J. Beener, Intelli-Group, Inc., Intelli-Group
LLC and Intelli-Corp, Inc. as defendants. The Complaint alleges breach of
contract in connection with Mr. Farrow's resignation as an officer and director
of the Company in January 2001. Greenland and Mr. Thomas Beener, entered into a
settlement agreement with Max Farrow whereby Mr. Farrow agreed to release Mr.
Beener from all claims, obligations etc., in exchange for the issuance of 8
million restricted shares of Greenland common stock. The good faith settlement
was approved by the court and the agreed upon consideration was delivered to Mr.
Farrow. Greenland entered into a settlement with Farrow whereby Greenland agreed
to a judgment of $125,000. However, the judgment will not be enforced until such
time as efforts to collect against IntelliCorp et al, have been exhausted. In
the event funds are collected from IntelliCorp. Mr. Farrow will receive the
first $125,000 plus 50% of the next $200,000 collected. Greenland will retain
all amounts collected thereafter.
Fund Recovery, a temporary staffing services filed a complaint against
Greenland alleging breach of contract. A summary judgment motion is pending.
Greenland recorded the liability amount of $14,000 in the consolidated financial
statements.
John Ellis has filed a demand for arbitration in San Diego County against
Greenland seeking damages of approximately $70,000 for an alleged breach of
contract action. Greenland believes it has valid defenses to the allegations.
Mr. Ellis appears to have abandoned this action in arbitration and has elected
to pursue a civil suit.
John Ellis has filed an action in San Diego County against Greenland
seeking damages of approximately $60,000 for an alleged breach of contract
action. Greenland believes it has valid defenses to the allegations. This amount
was recorded as a liability in the consolidated financial statements. Greenland
has filed a motion to quash service of the civil action and to compel
arbitration.
NKS Enterprises, Inc. commenced a legal action against Greenland in San
Diego Superior Court in Vista California seeking damages in connection with the
purchase and operation of a MaxCash ABM. The case was settled in December 2002.
The maximum amount to be paid under the settlement is $100,000. In exchange,
Greenland will receive the MaxCash ABM sold to NKS Enterprises. This amount was
recorded as a liability in the consolidated financial statements.
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. There were no exercises of warrants during
the period ended March 31, 2003.
Stock Split
------------
On August 9, 2002, the Company's board of directors approved and effected a
1 for 20 reverse stock split. All share and per share data have been
retroactively restated to reflect this stock split.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
---------
10(a) - Secured Promissory Note in the amount of $2,250,000 issued by ITEC to
Greenland, dated January 7, 2003. (Incorporated by reference to Form 8-K filed
January 21, 2003.)
10(b) - Security Agreement, dated January 7, 2003 between ITEC and Greenland.
(Incorporated by reference to Form 8-K filed January 21, 2003.)
10(c) - Agreement to Acquire Shares, dated August 9, 2002 between ITEC and
Greenland. (Incorporated by reference to Form 8-K filed January 21, 2003.)
10(d) - Closing Agreement, dated January 7, 2003 between ITEC and Greenland.
(Incorporated by reference to Form 8-K filed January 21, 2003.)
10(e) - Share Acquisition Agreement, dated June 12, 2002, between ITEC and QPIX.
(Incorporated by reference to Form 8-K filed January 21, 2003.)
10(f) - Closing Agreement , dated July 23, 2002 between ITEC and QPIX.
(Incorporated by reference to Form 8-K filed January 21, 2003.)
10(g) - Agreement and Assignment of Rights, dated February 1, 2003, between
Accord Human Resources, Inc., Greenland, and ITEC, incorporated by reference to
Exhibit 10(k) to Greenland Form 10-KSB filed April 7, 2003.
10(h) - Agreement and Assignment of Rights, dated March 1, 2003, between
StaffPro Leasing 2, Greenland, and ExpertHR, incorporated by reference to
Exhibit 10(l) to Greenland Form 10-KSB filed April 7, 2003.
10(i) - Promissory Note, dated March 1, 2003, payable to StaffPro Leasing 2 by
Greenland, incorporated by reference to Exhibit 10(m) to Greenland Form 10-KSB
filed April 7, 2003.
10(j) - Stock Purchase Agreement among Greenland, ITEC, and ExpertHR Oklahoma,
Inc., dated March 18, 2003. (Incorporated by reference to Form 10-Q. filed May
20, 2003.)
99.1 - Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 - Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K:
-----------------------
On January 16, 2003, the Company filed Form 8-K/A related to its change of
independent auditors.
On January 21, 2003, the Company filed Form 8-K related to the acquisition
controlling interest in Greenland Corporation and Quik Pix, Inc.
On March 14, 2003, the Company filed Form 8-K related to the acquisition
controlling interest in Greenland Corporation and Quik Pix, Inc. including pro
forma financial statements.
On July 22, 3003, the Company filed Form 8-K related to the settlement of
certain legal matters.
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: August 20, 2003
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /S/ Brian Bonar
_____________________________________
Brian Bonar
Chairman and Chief Executive Officer
By: /S/ James R. Downey, Jr.
_____________________________________
James R. Downey, Jr.
Chief Accounting Officer