UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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 February
10, 2004 was 341,818,798
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet - December 31, 2003 (unaudited). . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations - 3 months ended December 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Operations-6 months ended December 31, 2003 and 2002 (unaudited). 5
Consolidated Statements of Cash Flows - 6 months ended December 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited). . . . . . . . . . . . . . . . . . . . 8
ITEM 2. Management's Discussion and Analysis or Plan of Operations. . . . . . . . . . . . . . . . 17
ITEM 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 2. Changes In Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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
EXHIBITS
CERTIFICATIONS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
ASSETS
DECEMBER 31, 2003
-------------------
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68
Accounts receivable, net of allowance of $392. . . . . . . . . . . . . . . . . . . . 750
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . 53
-------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,822
Patent, net of accumulated amortization of $120. . . . . . . . . . . . . . . . . . . . . . 1,498
PEO contracts, net of accumulated amortization of $168 . . . . . . . . . . . . . . . . . . 1,007
Property and equipment, net of accumulated depreciation. . . . . . . . . . . . . . . . . . 259
Workers' compensation deposit and other assets . . . . . . . . . . . . . . . . . . . . . . 135
-------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,607
===================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Borrowings under bank notes payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,145
Notes payable, current portion (including related party note of $1,500) . . . . . . . 2,644
Convertible debentures, net of discounts of $124. . . . . . . . . . . . . . . . . . . 952
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,779
Obligations under capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
PEO payroll taxes and other payroll deductions. . . . . . . . . . . . . . . . . . . . 8,281
Advances from related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,337
-------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,530
-------------------
Long-term liabilities:
Long-term capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Long-term convertible debentures, less discounts of $755. . . . . . . . . . . . . . . 400
Long-term notes payable (including related party note of $250). . . . . . . . . . . . 482
-------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,463
-------------------
Preferred stock - minority interest in subsidiary. . . . . . . . . . . . . . . . . . . . . 921
Shareholders' deficiency
Series A convertible, redeemable preferred stock, $1,000 par value, 7,500 shares
authorized, 20.5 shares issued and outstanding. . . . . . . . . . . . . . . . . . . . 420
Common stock, $0.005 par value, 500,000,000 shares authorized; 317,587,999
shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588
Common stock warrants and options . . . . . . . . . . . . . . . . . . . . . . . . . . 475
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,302
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112,562)
-------------------
Total shareholders' deficiency . . . . . . . . . . . . . . . . . . . . . . . . . (26,777)
-------------------
Total liabilities and shareholders' deficiency. . . . . . . . . . . . . . . . . . . . . . $ 6,607
===================
The accompanying notes are an integrated part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(in thousands, except share data)
(unaudited)
(In thousands, except per share amounts)
2003 2002
--------------- ---------------
Revenues
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324 $ 94
Software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . . . . . - 41
Temporary staffing services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,669 -
PEO services (gross billings of $14,254 and $2,139
respectively; less worksite employee payroll costs of $15,641
and $1,877, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,597 262
--------------- ---------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,590 397
--------------- ---------------
Costs of revenues
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 82
Cost of software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . - 29
Cost of temporary staffing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 -
Cost of PEO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,984 1
--------------- ---------------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,530 112
--------------- ---------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060 285
Operating expenses
Selling, general, and administrative. . . . . . . . . . . . . . . . . . . . . . . . 3,408 1,124
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- ---------------
3,408 1,124
--------------- ---------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,343) (839)
--------------- ---------------
Other income (expense):
Interest and finance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . (694) (490)
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 518 656
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 21
--------------- ---------------
(82) 187
--------------- ---------------
Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (2,430) (652)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- ---------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,430) (652)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (5)
--------------- ---------------
Net loss attributed to common shareholders . . . . . . . . . . . . . . . . . . . . . . . $ (2,435) $ (657)
=============== ===============
Loss per common shares
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.01)
=============== ===============
Weighted average common shares - basic and diluted . . . . . . . . . . . . . . . . . . . 288,935 66,284
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(in thousands, except share data)
(unaudited)
(In thousands, except per share amounts)
2003 2002
--------------- ---------------
Revenues
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 455 $ 580
Software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . . . . . 36 179
Temporary staffing services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,436 -
PEO services (gross billings of $34,333 and $4,961
respectively; less worksite employee payroll costs of $36,316
and $4,307, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,549 654
--------------- ---------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,476 1,413
--------------- ---------------
Costs of revenues
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 317
Cost of software sales, licenses and royalties. . . . . . . . . . . . . . . . . . . 3 62
Cost of temporary staffing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,194 -
Cost of PEO services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,135 143
--------------- ---------------
Total cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,460 522
--------------- ---------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,016 891
Operating expenses
Selling, general, and administrative. . . . . . . . . . . . . . . . . . . . . . . . 6,413 3,165
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- ---------------
6,413 3,165
--------------- ---------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,397) (2,274)
--------------- ---------------
Other income (expense):
Interest and finance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . (929) (1,111)
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 518 656
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 25
--------------- ---------------
(386) (430)
--------------- ---------------
Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (4,783) (2,704)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------------- ---------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,783) (2,704)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (10)
--------------- ---------------
Net loss attributed to common shareholders . . . . . . . . . . . . . . . . . . . . . . . $ (4,793) $ (2,714)
=============== ===============
Loss per common shares
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.06)
=============== ===============
Weighted average common shares - basic and diluted . . . . . . . . . . . . . . . . . . . 264,745 45,473
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(in thousands, except share data)
(unaudited)
2003 2002
---------------- -------------
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,783) $ (2,704)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 229 48
Writedown of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 55
Stock issued for services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 671
Amortization of debt discount. . . . . . . . . . . . . . . . . . . . . . . . . . 475 450
Value of service for exercise of warrants. . . . . . . . . . . . . . . . . . . . - 166
Value of warrants issued for services. . . . . . . . . . . . . . . . . . . . . . - 70
Gain on extinguishments of debt. . . . . . . . . . . . . . . . . . . . . . . . . - (656)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (243) 286
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 139
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (115)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . 1,436 857
PEO liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018 942
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 -
---------------- -------------
Net cash provided by (used in) operating activities . . . . . . . . . . . (1,500) 209
---------------- -------------
Cash flows from investing activities
Purchase of furniture & equipment. . . . . . . . . . . . . . . . . . . . . . . . . . (158) -
---------------- -------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (158) -
---------------- -------------
Cash flows from financing activities
Change in cash overdraft, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . (87) -
Net borrowings under bank notes payable. . . . . . . . . . . . . . . . . . . . . . . (25) (100)
Issuance of convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . 650 -
Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (170) -
Repayment of capital lease obligation. . . . . . . . . . . . . . . . . . . . . . . . (20) -
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . 155 25
---------------- -------------
Net cash provided by (used in) financing activities . . . . . . . . . . . 503 (75)
---------------- -------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . (1,155) 134
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . 1,223 43
---------------- -------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . $ 68 $ 177
================ =============
The accompanying notes are an integral part of these consolidated financial statements.
IMAGING TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(in thousands, except share data)
(unaudited)
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended December 31, 2003, the Company issued: (1) 6,470,000
shares of its common stock for services valued at $148,150; (2) 10,272,110
shares of its common stock for compensation valued at $140,332; (3) 20,260,000
shares of its common stock for debt of $405,200; and (4) 95,000,208 shares of
its common stock for the conversion of convertible debentures in the amount of
$994,385.
During the six months ended December 31, 2002, the Company (1) rescinded the
$70,000 conversion of convertible notes payable into common stock, (2) converted
$80,000 of debt into 8,000,000 shares of common stock and (3) issued 100,000
shares of common stock in connection with the acquisition of Dream Canvas
Technologies, Inc.
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 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-QSB 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, 2003, 2002, and 2001 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.
ePEO Link
----------
In its Form 10QSB for the period ended September 30, 2003, the Company disclosed
an intent to acquire the line of business of ePEO Link and a draft definitive
agreement was included as an exhibit thereto. As of the date of this filing, the
agreement between the Company and ePEO Link has not been finalized and is still
under negotiation. Accordingly, no results of operations relating to ePEO Link
have been included in the Company's financial statements incorporated in this
Form 10QSB.
Jackson Staffing
-----------------
Effective September 1, 2003, the Company acquired, through hiring two key
persons, the operations and results thereof of the temporary staffing service
then owned by Jackson Staffing, LLC.
At that time, there was no specific acquisition agreement, except for the hiring
of the two owners as employees of SourceOne Group, Inc., a wholly-owned
subsidiary of the Company. Subsequently, a definitive agreement dated September
1, 2003 has been negotiated to purchase the business of Jackson Staffing. The
results of operations for the three months ended December 31, 2003 are included
in the consolidated financial statements of the Company.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the six months
ended December 31, 2003, the Company had a net loss of $4,783,000. As of
December 31, 2003, the Company had a negative working capital deficiency of
$30,644,000 and had a shareholders' deficiency of $26,777,000. In addition, the
Company is in default on certain note payable obligations and is being sued by
numerous trade creditors for nonpayment of amounts due. The Company is also
deficient in its payments relating to payroll tax liabilities. These conditions
raise substantial doubt about 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. STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees". Under APB 25, the Company does not recognize compensation expense
related to options issued under the Company's employee stock option plans,
unless the option is granted at a price below market price on the date of grant.
In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became
effective for the Company. SFAS No. 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if certain pro forma disclosures
are made assuming hypothetical fair value method, for which the Company uses the
Black-Scholes option-pricing model.
For non-employee stock based compensation, the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards, the value
is based on the market value for the stock on the date of grant and if the stock
has restrictions as to transferability, a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. The Company has opted
under SFAS No. 123 to disclose its stock-based compensation with no financial
effect. The pro forma effects of applying SFAS No. 123 in this initial phase-in
period are not necessarily representative of the effects on reported net income
or loss for future years. Had compensation expense for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS
No. 123, the Company's pro forma net loss and net loss per share would have been
as follows for the six months ended December 31:
(In thousands, except share amounts). . . . 2003 2002
------------- -------------
Net loss
As reported . . . . . . . . . . . . . . . . $ (4,783) $ (2,704)
Compensation recognized under APB No. 25. . - -
Compensation recognized under SFAS No. 123. - (250)
------------- -------------
Pro forma . . . . . . . . . . . . . . . . . $ (4,783) $ (2,954)
============= =============
Basic earnings (loss) per share
As reported . . . . . . . . . . . . . . . . $ (0.02) $ (0.06)
============= =============
Pro forma . . . . . . . . . . . . . . . . . $ (0.02) $ (0.06)
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
The weighted average fair value of the options granted during fiscal years 2004
and 2003 is estimated on the date of grant using the Black-Scholes
option-pricing model. All options granted in fiscal years 2004 and 2003 vested
immediately. The weighted average fair values and weighted average assumptions
used in calculating the fair values were as follows for the years ended June 30:
2004 2003
----- ----
Fair Value of options granted. $N/A $0.01
Risk free interest rate. . . . 3.5%
Expected life (years). . . . . 3 3
Expected volatility. . . . . . 421%
Expected dividends . . . . . . - 0%0-
NOTE 4. LOSS PER COMMON SHARE
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share have not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect. The following potential
common shares have been excluded from the computation of diluted net loss per
share for the six months ended December 31, 2003: warrants - 18,563,435 and
stock options - 33,408,100.
NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 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.
During 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity.
In December 2003 the FASB concluded to revise certain elements of FIN 46, which
will be issued shortly. The FASB also modified the effective date of FIN 46. For
all entities that were previously considered special purpose entities, FIN 46
should be applied in periods ending after December 15, 2003. Otherwise, FIN 46
is to be applied for registrants who file under Regulation SX in periods ending
after March 15, 2004, and for registrants who file under Regulation SB, in
periods ending after December 15, 2003. The Company does not expect the adoption
to have a material impact on the Company's financial position or results of
operations.
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 for each of its quarters in the fiscal year
ended June 30, 2003 and its Form 10K for the year ended June 30, 2002. These
reclassifications had no effect on gross profit, operating loss, or net loss.
NOTE 7. CONVERTIBLE NOTES PAYABLE
Listed below is a roll-forward schedule of the convertible debentures:
(In Thousands)
Balance at June 30, 2003 . . . . . . . . . . . . . . . . . . $ 1,857
Issuance of convertible debentures during the six months
ended December 31, 2003. . . . . . . . . . . . . . . . . 650
Increase in debt discount and beneficial conversion feature. (636)
Converted into common stock. . . . . . . . . . . . . . . . . (994)
Amortization of value of warrants and preferential
conversion feature . . . . . . . . . . . . . . . . . . . . 475
--------------
Balance at December 31, 2003 . . . . . . . . . . . . . . . . $ 1,352
==============
NOTE 8. SHAREHOLDERS' DEFICIENCY
Amendment To The Certificate Of Incorporation.
---------------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any shareholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
On 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.
Stock Issuances
----------------
During the six months ended December 31, 2003, ITEC issued the following:
- 6,470,000 shares of its common stock for legal and consulting services
valued at $148,150. The value of the services was determined using the market
value of ITEC's common stock on the date of issuance;
- 10,272,110 shares of its common stock for compensation valued at $140,332.
The value of the services was determined using the market value of ITEC's common
stock on the date of issuance;
- 20,260,000 shares of its common stock for debt of $405,200;
- 95,000,208 shares of its common stock for the conversion of convertible
debentures in the amount of $994,385; and
- 750,000 shares of its common stock upon the exercise of options.
NOTE 9. SEGMENT INFORMATION
The Company managed and internally reported the Company's business as three
reportable segments, principally, (1) products and accessories, (2) software,
(3) temporary staffing, and (4) PEO services.
Segment information for the six months ended December 31, 2003 is as follows:
(in thousands)
TEMPORARY
PRODUCTS SOFTWARE STAFFING PEO SERVICES TOTAL
----------- ---------- ---------- -------------- --------
6-months ended 12/31/03
---------------------------
Revenues. . . . . . . . $ 455 $ 36 $ 3,436 $ 6,549 $10,476
Operating income (loss) (536) (2,080) (122) (1,659) (4,397)
6-months ended 12/31/02
---------------------------
Revenues. . . . . . . . $ 580 $ 179 $ - $ 654 $ 1,413
Operating income (loss) (1,362) (86) - (826) (2,274)
NOTE 10. SUBSEQUENT EVENTS
From January 1, 2004 to February 10, 2004, the Company issued 24,230,801 shares
of its common stock to consultants, for warrant exercises, for conversion of
convertible debt, and for the reduction of debt.
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-QSB. The statements contained in this Report on Form
10-QSB that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
regarding our expectations, hopes, intentions or strategies regarding the
future. Forward-looking statements include statements regarding: future
product or product development; future research and development spending and our
product development strategies, and are generally identifiable by the use of the
words "may", "should", "expect", "anticipate", "estimates", "believe", "intend",
or "project" or the negative thereof or other variations thereon or comparable
terminology. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements (or industry results, performance or achievements) expressed or
implied by these forward-looking statements to be materially different from
those predicted. The factors that could affect our actual results include, but
are not limited to, the following: general economic and business conditions,
both nationally and in the regions in which we operate; competition; changes in
business strategy or development plans; our inability to retain key employees;
our inability to obtain sufficient financing to continue to expand operations;
and changes in demand for products by our customers.
OVERVIEW
We provide a variety of financial services to small and medium-size businesses.
These services allow our customers to outsource many human resources tasks,
including payroll processing, workers' compensation insurance, health insurance,
employee benefits, 401k investment services, personal financial management, and
income tax consultation. In November 2001, we began to provide these services to
relieve some of the negative impact they have on the business operations of our
existing and potential customers. To this end, through strategic acquisitions,
we became a professional employer organization ("PEO").
We provide financial services principally through our wholly-owned SourceOne
Group, Inc. ("SOG") subsidiary, which includes several operating units,
including ProSportsHR , MedicalHR , and CallCenterHR . These units provide a
broad range of financial services, including: benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, and (in the case of MedicalHR
and CallCenterHR), temporary staffing services, to small and medium-sized
businesses.
In January 2003, we completed the acquisition of controlling interest
(approximately 85%) in the shares of Greenland Corporation. Greenland shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC. Greenland is
a financial services company, whose wholly-owned ExpertHR subsidiary provides
the same services as SOG. Greenland's wholly-owned Check Central, Inc.
subsidiary Greenland's Check Central subsidiary is an information technology
company that has developed the Check Central Solutions' transaction processing
system software and related MAXcash Automated Banking Machine (ABM kiosk
designed to provide self-service check cashing and ATM-banking functionality.
In January 2003, we completed the acquisition of a controlling interest (85%) in
the shares of Quik Pix, Inc. ("QPI"). QPI shares are traded on the National
Quotation Bureau Pink Sheets under the symbol QPIX. QPI is a visual marketing
support firm located in Buena Park, California. Its principal service is to
provide photographic and digital images mounted for customer displays in
tradeshow and other displays .Its principal product, PhotoMotion is a patented
color medium of multi-image transparencies. The process uses existing originals
to create the illusion of movement, and allows for three to five distinct images
to be displayed with an existing lightbox.
In prior years, we were principally involved in the development and distribution
of imaging products. Our core technologies are related to the design and
development of software products that improve the accuracy of color
reproduction. Our ColorBlind software provides color management to improve the
accuracy of color reproduction - especially as it relates to matching color
between different devices in a network, such as monitors and printers. These
products are supported and distributed by QPI. Additionally, we market our
ColorBlind software products on the Internet through our color.com website.
In November 2003, the Company entered into an agreement to acquire, through
hiring two key persons and a one year promissory note of $600,000 and the
assumption of certain unpaid insurance provider claims, the amount of which is
not to exceed $1,500,000.00, the operations and results thereof of the PEO
business operations then owned by ePEO Linc, Inc.
In September 2003, the Company acquired, through hiring two key persons, the
operations and results thereof of the temporary staffing service then owned by
Jackson Staffing, LLC. There is no specific acquisition agreement, except for
the hiring of the two owners as employees of SourceOne Group, Inc., a
wholly-owned subsidiary of the Company. The Company did not acquire Jackson
Staffing, but only assumed its business and employees. Accordingly, only the
results of Jackson Staffing for the month ended September 30, 2003 are included
in the Company's financial statements.
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 auditors accompanying
our June 30, 2003 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 temporarily suspended our printer controller development and
manufacturing operations in favor of selling products from other companies to
its customers. We continue to sell proprietary imaging products, including our
ColorBlind suite of color management software.
During the year-ended June 30, 2003, we suspended our sales efforts related to
the resale of products from other manufacturers, including printers, copiers,
and other digital imaging products. We may begin selling such products again, in
the future, principally to our financial services customer base.
ACQUISITION AND SALE OF BUSINESS UNITS
In December 2000, we acquired all of the shares of EduAdvantage.com, Inc., an
internet sales organization that sells computer hardware and software products
to educational institutions and other customers via its websites:
www.eduadvantage.com and www.soft4u.com. During fiscal 2001, we began
integrating EduAdvantage operations. However, these operations were not
profitable. At present, and until we can determine our comprehensive strategy
related to internet marketing, we have suspended these operations.
In October 2001, we acquired certain assets, for stock, related to our office
products and services business activities, representing $250,000 of inventories,
fixed assets, and accounts receivable. These assets have been written off.
In November 2001, we acquired SOG and we operate it as a wholly-owned
subsidiary. SOG provides financial services, including payroll administration,
employer and employee benefit plans, health and workers' compensation insurance
programs, personnel records management, employer liability management, and other
services to small and medium-sized businesses. SOG also includes several
operating units, including MedicalHR, CallCenterHR, and ProSportsHR.
In March 2002, we acquired all of the outstanding shares of EnStructure, Inc.
("EnStructure), a PEO company, for restricted IMTO common stock. The terms of
the acquisition were defined in the acquisition agreement, which was exhibited
as part of our Form 8-K, dated March 28, 2002. EnStructure has no operations at
this time.
In May 2002, we entered into an agreement to acquire Dream Canvas, Inc.,
("DCT"), a Japanese corporation, that developed machines used for the automated
printing of custom stickers, popular in the Japanese consumer market. We
completed the acquisition of DCT in October 2002 and paid the sum of $40,000
with the issuance of 100,000 shares of IMTO common stock. In December 2002, we
sold DCT to Baseline Worldwide Limited for $75,000 in cash, and reported the
transaction on Form 8-K, filed on December 19, 2002.
In July 2002, we entered into an agreement to acquire controlling interest in
Quik Pix, Inc. ("QPI"). QPI shares are traded on the National Quotation Bureau
Pink Sheets under the symbol QPIX. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of QPI. The terms of
the acquisitions were disclosed on Form 8-K filed January 21, 2003.
In August 2002, we entered into an agreement to acquire controlling interest in
Greenland Corporation. Greenland shares are traded on the Electronic Bulletin
Board under the symbol GRLC. On January 14, 2003, we completed the acquisition
of shares, representing controlling interest, of Greenland. The terms of the
acquisitions were disclosed on Form 8-K filed January 21, 2003
In March 2003, we purchased certain PEO contracts from Staff Pro Leasing 2 and
Staff Pro Leasing, Inc. for $269,000. The purchase price was paid via an initial
cash payment of $45,000 and the remainder of the purchase price is in the form
of a promissory note to be paid over 24 months. The value attributed to the
purchased PEO contracts is included as a component of intangible assets in the
accompanying consolidated balance sheet and is being amortized over the expected
life of the contracts of 5 years.
In April 2003, we formed a wholly-owned subsidiary of Greenland Corporation,
ExpertHR Oklahoma. Subsequent to its formation, the new Company purchased a
group of PEO clients for $921,000 of convertible preferred stock of Greenland
Corporation. ExpertHR of Oklahoma, Inc., at that time, was a newly formed
corporation whose only asset was the PEO contracts purchased by Greenland. The
value attributed to the purchased PEO contracts of $921,000 is included as a
component of intangible assets in the accompanying consolidated balance sheet
and is being amortized over the expected life of the contracts of 5 years.
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, 2003.
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 for each of its
quarters within the fiscal year ended June 30, 2003 and the annual report on
Form 10K for the year ended June 30, 2002. These reclassifications had no effect
on gross profit, operating loss, or net loss.
RESULTS OF OPERATIONS
Revenues
--------
Revenues were $10,476,000 and $1,413,000 for the six month period ended December
31, 2003 and 2002, respectively, an increase of $9,063,000 or 641%. The increase
in revenues was due primarily to the increase in our PEO customer base and the
addition of temporary staffing operations that began on September 1, 2003. Since
the acquisition of SOG, we have lost several customers, primarily due to changes
in rates for services, especially workers' compensation insurance. Additionally,
we elected to terminate certain customers due to profitability concerns. New
customers have been acquired, and more are anticipated pursuant to signed
agreements, which we expect will contribute to increased revenues in the current
fiscal year.
PEO Services
PEO revenues for the six month period ended December 310, 2003 and 2002 were
$6,549,000 and $654,000, respectively, an increase of $5,895,000 or 901%. The
increase in revenues was due primarily to the increase in our PEO customer base.
Temporary Staffing
On September 1, 2003, we hired certain employees who had previously worked in
the temporary staffing business. As a result, these new employees were able to
bring to us their books of business, which resulted in revenues of $3,436,000
since the date of their hire.
Imaging Products
Sales of imaging products were $455,000 and $580,000 for the six month period
ended December 31, 2003 and 2002, respectively, a decrease of $125,000 or 22%.
The decrease in product sales 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.
Revenue from software sales, licensing fees and royalties were $36,000 and
$179,000 for the six month period ended December 31, 2003 and 2002 respectively,
a decrease of $143,000 or 80%. 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 our PEO operations as opposed to technology licensing
activities.
COST OF PRODUCTS SOLD
Cost of PEO services were $7,135,000 (109% of PEO revenues) and $143,000 (22% of
PEO revenues) for the six month period ended December 31, 2003 and 2002,
respectively. The decrease in gross profit is due primarily to increased costs
of workers' compensation insurance premiums, which could not be passed on to our
clients. These costs tend to vary from period-to-period, depending on timing of
new contracts and employee risk classifications.
Cost of temporary staffing was $1,194,000 (34% of temporary staffing revenue).
There were no such revenues in the prior-year period.
Cost of products sold were $128,000 (28% of product sales) and $317,000 (55% of
product sales) for the six month period ended December 31, 2003 and 2002,
respectively. The increase in margins is due primarily to the sale of higher
margin products.
Cost of software, licenses and royalties were $3,000 (8% of associated revenues)
and $62,000 (35% of associated revenues) for the six month period ended December
31, 2003 and 2002, respectively. The increase is due primarily to increased
business activity, which also included increased duplication and packaging
costs.
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 six month period ended
December 31, 2003 and 2002, respectively, were $6,413,000 and $3,165,000 an
increase of $3,248,000 or 102%. The increase is due to the acquisition of
Greenland and QPI, the increased overhead associated with operating a larger
company, and the cost of outside consultants to assist in the integration of the
companies.
COSTS OF RESEARCH AND DEVELOPMENT
There were no costs incurred for research and development in the six months
ended December 31, 2003 and 2002. 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 $929,000 and $1,111,000 for the six months
ended December 31, 2003 and 2002, respectively. The decrease is due to less
amortization of debt discounts in the current period.
GAIN ON EXTINGUISHMENT OF DEBT
Gain on the extinguishment of debt was $518,000 and $656,000 for the six months
ended December 31, 2003 and 2002, respectively. The amounts related to accounts
payable, which had become stale and uncollectible under the Statute of
Limitations in the State of California and upon obtaining a legal opinion with
respect to the State of California Statute of Limitations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through cash
generated from operations, debt financing, and from the sale of equity
securities. Additionally, in order to facilitate its growth and future
liquidity, the Company has made some strategic acquisitions.
As a result of some of the Company's financing activities, there has been a
significant increase in the number of issued and outstanding shares. During the
six month period ended December 31, 2003, the Company issued an additional
136,355,936 shares. These shares of common stock were issued primarily for
corporate expenses in lieu of cash, for the conversion of convertible debentures
and other debt, and for the exercise of warrants.
As of December 31, 2003, the Company had negative working capital of
$30,644,000, a decrease in working capital of approximately $5,127,000 as
compared to June 30, 2003, due primarily to our net loss for the six months
ended December 31, 2003.
Net cash used in operating activities was $1,500,000 for the six months ended
December 31, 2003 as compared to cash provided by operating activities of
$209,000 for the six months ended December 30, 2002, a decrease of $1,709,000,
due primarily to the increased net loss as a result of the acquisition of
Greenland and QPI.
Cash used in investing activities was $158,000 for the six month period ended
December 31, 2003, an increase of $158,000 (100%) from the year-earlier period.
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 December 31, 2003, was
approximately $391,000.
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, 2003 financial statements includes an
explanatory paragraph indicating there is a substantial doubt about our ability
to continue as a going concern, due primarily to the decreases in our working
capital and net worth. (Also see Note 2 to the Consolidated Financial
Statements.)
RISKS AND UNCERTAINTIES
Risks Relating to our Business:
-----------------------------------
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE OUR
OPERATIONS.
Our business has not been profitable in the past and it may not be profitable in
the future. We may incur losses on a quarterly or annual basis for a number of
reasons, some within and others outside our control. See "Potential Fluctuation
in Our Quarterly Performance." The growth of our business will require the
commitment of substantial capital resources. If funds are not available from
operations, we will need additional funds. We may seek such additional funding
through public and private financing, including debt or equity financing.
Adequate funds for these purposes, whether through financial markets or from
other sources, may not be available when we need them. Even if funds are
available, the terms under which the funds are available to us may not be
acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
the Company's June 30, 2003 financial statements includes an explanatory
paragraph indicating there is a substantial doubt about the Company's ability to
continue as a going concern, due primarily to the decreases in our working
capital and net worth. The Company plans to overcome the circumstances that
impact our ability to remain a going concern through a combination of increased
revenues and decreased costs, with interim cash flow deficiencies being
addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
Our quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a negative impact on our results
of operations. We may experience significant quarterly fluctuations in revenues
and operating expenses as we introduce new products and services. Accordingly,
any inaccuracy in our forecasts could adversely affect our financial condition
and results of operations. Demand for our products and services could be
adversely affected by a slowdown in the overall demand for imaging products
and/or financial and PEO services. Our failure to complete shipments during a
quarter could have a material adverse effect on our results of operations for
that quarter. Quarterly results are not necessarily indicative of future
performance for any particular period.
SINCE MANY OF OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES
THAN WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for our products and services are highly competitive and rapidly
changing. Some of our current and prospective competitors have significantly
greater financial, technical, and marketing resources than we do. Our ability to
compete in our markets depends on a number of factors, some within and others
outside our control. These factors include: the frequency and success of product
and services introductions by us and by our competitors, the selling prices of
our products and services and of our competitors' products and services, the
performance of our products and of our competitors' products, product
distribution by us and by our competitors, our marketing ability and the
marketing ability of our competitors, and the quality of customer support
offered by us and by our competitors.
The PEO industry is highly fragmented. While many of our competitors have
limited operations, there are several PEO companies equal or substantially
greater in size than ours. We also encounter competition from "fee-for-service"
companies such as payroll processing firms, insurance companies, and human
resources consultants. The large PEO companies have substantially more resources
than us and provide a broader range of resources than we do.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR
OVERALL FINANCIAL PERFORMANCE.
In order to grow our business, we may acquire businesses that we believe are
complementary. To successfully implement this strategy, we must identify
suitable acquisition candidates, acquire these candidates on acceptable terms,
integrate their operations and technology successfully with ours, retain
existing customers and maintain the goodwill of the acquired business. We may
fail in our efforts to implement one or more of these tasks. Moreover, in
pursuing acquisition opportunities, we may compete for acquisition targets with
other companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than we do. Competition
for these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. Our overall financial performance will be materially and adversely
affected if we are unable to manage internal or acquisition-based growth
effectively. Acquisitions involve a number of risks, including: integrating
acquired products and technologies in a timely manner, integrating businesses
and employees with our business, managing geographically-dispersed operations,
reductions in our reported operating results from acquisition-related charges
and amortization of goodwill, potential increases in stock compensation expense
and increased compensation expense resulting from newly-hired employees, the
diversion of management attention, the assumption of unknown liabilities,
potential disputes with the sellers of one or more acquired entities, our
inability to maintain customers or goodwill of an acquired business, the need to
divest unwanted assets or products, and the possible failure to retain key
acquired personnel.
Client satisfaction or performance problems with an acquired business could also
have a material adverse effect on our reputation, and any acquired business
could significantly under perform relative to our expectations. We cannot be
certain that we will be able to integrate acquired businesses, products or
technologies successfully or in a timely manner in accordance with our strategic
objectives, which could have a material adverse effect on our overall financial
performance.
In addition, if we issue equity securities as consideration for any future
acquisitions, existing stockholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY MANNER, WE
MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY HURT OUR
ABILITY TO CONTINUE OPERATIONS.
The markets for our products are characterized by rapidly evolving technology,
frequent new product introductions and significant price competition.
Consequently, short product life cycles and reductions in product selling prices
due to competitive pressures over the life of a product are common. Our future
success will depend on our ability to continue to develop new versions of our
ColorBlind software, and to acquire competitive products from other
manufacturers. We monitor new technology developments and coordinate with
suppliers, distributors and dealers to enhance our products and to lower costs.
If we are unable to develop and acquire new, competitive products in a timely
manner, our financial condition and results of operations will be adversely
affected.
IF WE ARE FOUND TO BE INFRINGING ON A COMPETITOR'S INTELLECTUAL PROPERTY RIGHTS
OR IF WE ARE REQUIRED TO DEFEND AGAINST A CLAIM OF INFRINGEMENT, WE MAY BE
REQUIRED TO REDESIGN OUR PRODUCTS OR DEFEND A LEGAL ACTION AT SUBSTANTIAL COSTS
TO US.
We currently hold only one patent through our QPI subsidiary for its Photomotion
product. Our software products are copyrighted. However, copyright protection
does not prevent other companies from emulating the features and benefits
provided by our software. We protect our software source code as trade secrets
and make our proprietary source code available to OEM customers only under
limited circumstances and specific security and confidentiality constraints.
IF OUR DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS, OUR BUSINESS
MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our products are marketed and sold through a distribution channel of value added
resellers, manufacturers' representatives, retail vendors, and systems
integrators. We have a small network of dealers and distributors in the United
States and internationally. We support our worldwide distribution network and
end-user customers through operations headquartered in San Diego.
Portions of our sales are made through distributors, who may carry competing
product lines. These distributors could reduce or discontinue sales of our
products, which could adversely affect us. These independent distributors may
not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are dependent upon the continued
viability and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique factors
affecting our markets.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES, AND WORKERS'
COMPENSATION RATES WILL HAVE A SIGNIFICANT EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Health insurance premiums, state unemployment taxes, and workers' compensation
rates are, in part, determined by our PEO companies' claims experience, and
comprise a significant portion of our direct costs. We employ risk management
procedures in an attempt to control claims incidence and structure our benefits
contracts to provide as much cost stability as possible. However, should we
experience a large increase in claims activity, the unemployment taxes, health
insurance premiums, or workers' compensation insurance rates we pay could
increase. Our ability to incorporate such increases into service fees to clients
is generally constrained by contractual agreements with our clients.
Consequently, we could experience a delay before such increases could be
reflected in the service fees we charge. As a result, such increases could have
a material adverse effect on our financial condition or results of operations.
WE CARRY SUBSTANTIAL LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS.
Under our client service agreements, we become a co-employer of worksite
employees and we assume the obligations to pay the salaries, wages, and related
benefits costs and payroll taxes of such worksite employees. We assume such
obligations as a principal, not merely as an agent of the client company. Our
obligations include responsibility for (a) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to us of the associated service fee; and (2) providing
benefits to worksite employees even if the costs incurred by us to provide such
benefits exceed the fees paid by the client company. If a client company does
not pay us, or if the costs of benefits provided to worksite employees exceed
the fees paid by a client company, our ultimate liability for worksite employee
payroll and benefits costs could have a material adverse effect on the our
financial condition or results of operations.
AS A MAJOR EMPLOYER, OUR OPERATIONS ARE AFFECTED BY NUMEROUS FEDERAL, STATES,
AND LOCAL LAWS RELATED TO LABOR, TAX, AND EMPLOYMENT MATTERS.
By entering into a co-employer relationship with employees assigned to work at
client company locations, we assume certain obligations and responsibilities or
an employer under these laws. However, many of these laws (such as the Employee
Retirement Income Security Act ("ERISA") and federal and state employment tax
laws) do not specifically address the obligations and responsibilities of
non-traditional employers such as PEOs; and the definition of "employer" under
these laws is not uniform. Additionally, some of the states in which we operate
have not addressed the PEO relationship for purposes of compliance with
applicable state laws governing the employer/employee relationship. If these
other federal or state laws are ultimately applied to our PEO relationship with
our worksite employees in a manner adverse to us, such an application could have
a material adverse effect on our financial condition or results of operations.
While many states do not explicitly regulate PEOs, over 20 states have passed
laws that have licensing or registration requirements for PEOs, and several
other states are considering such regulation. Such laws vary from state to
state, but generally provide for monitoring the fiscal responsibility of PEOs
and, in some cases, codify and clarify the co-employment relationship for
unemployment, workers' compensation, and other purposes under state law. There
can be no assurance that we will be able to satisfy licensing requirements of
other applicable relations for all states. Additionally, there can be no
assurance that we will be able to renew our licenses in all states.
THE MAINTENANCE OF HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT COVER
WORKSITE EMPLOYEES IS A SIGNIFICANT PART OF OUR BUSINESS.
The current health and workers' compensation contracts are provided by vendors
with whom we have an established relationship, and on terms that we believe to
be favorable. While we believe that replacement contracts could be secured on
competitive terms without causing significant disruption to our business, there
can be no assurance in this regard.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT.
Accordingly, the short-term nature of our client service agreements make us
vulnerable to potential cancellations by existing clients, which could
materially and adversely affect our financial condition and results of
operations. Additionally, our results of operations are dependent, in part, upon
our ability to retain or replace client companies upon the termination or
cancellation of our agreements.
A NUMBER OF PEO INDUSTRY LEGAL ISSUES REMAIN UNRESOLVED WITH RESPECT TO THE
CO-EMPLOYMENT AGREEMENT BETWEEN A PEO AND ITS WORKSITE EMPLOYEES, INCLUDING
QUESTIONS CONCERNING THE ULTIMATE LIABILITY FOR VIOLATIONS OF EMPLOYMENT AND
DISCRIMINATION LAWS.
Our client service agreement establishes a contractual division of
responsibilities between our clients and us for various personnel management
matters, including compliance with and liability under various government
regulations. However, because we act as a co-employer, we may be subject to
liability for violations of these or other laws despite these contractual
provisions, even if we do not participate in such violations. Although our
agreement provides that the client is to indemnify us for any liability
attributable to the conduct of the client, we may not be able to collect on such
a contractual indemnification claim, and thus may be responsible for satisfying
such liabilities. Additionally, worksite employees may be deemed to be our
agents, subjecting us to liability for the actions of such worksite employees.
IF THE SUPERIOR SECURITY INTEREST HELD BY IMPERIAL BANK IS REMOVED AND IF ALL OF
THE LAWSUITS CURRENTLY FILED WERE DECIDED AGAINST US AND/OR ALL THE JUDGMENTS
CURRENTLY OBTAINED AGAINST US WERE TO BE IMMEDIATELY COLLECTED, WE WOULD HAVE TO
CEASE OUR OPERATIONS.
Throughout fiscal 2001, 2002 and 2003, and through the date of this filing,
approximately fifty trade creditors have made claims and/or filed actions
alleging the failure of us to pay our obligations to them in a total amount
exceeding $3 million. These actions are in various stages of litigation, with
many resulting in judgments being entered against us. Several of those who have
obtained judgments have filed judgment liens on our assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars. Should we be
required to pay the full amount demanded in each of these claims and lawsuits,
we may have to cease our operations. However, to date, the superior security
interest held by Imperial Bank has prevented nearly all of these trade creditors
from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING CAPITAL AND
A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING, WE MAY BE
FORCED TO DISCONTINUE OPERATIONS.
For several recent periods, up through the present, we had a net loss and
negative working capital, which raises substantial doubt about our ability to
continue as a going concern. Our losses have resulted primarily from an
inability to achieve revenue targets due to insufficient working capital. Our
ability to continue operations will depend on positive cash flow, if any, from
future operations and on our ability to raise additional funds through equity or
debt financing. Although we have reduced our work force, suspended some of our
operations, and entered into new market segments (financial services), if we are
unable to achieve the necessary revenues or raise or obtain needed funding, we
may be forced to discontinue operations.
IF AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE MAY NOT
BE ABLE TO CARRY OUT OUR BUSINESS PLAN.
On August 20, 1999, at the request of Imperial Bank, our primary lender, the
Superior Court, San Diego appointed an operational receiver to us. On August 23,
1999, the operational receiver took control of our day-to-day operations. On
June 21, 2000, the Superior Court, San Diego issued an order dismissing the
operational receiver as a part of a settlement of litigation with Imperial Bank
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. This agreement does not
require us to pay any interest unless we default on the settlement agreement and
fail to cure the default. Regardless, we have continued to accrue interest on
this debt until it has been paid and there is no possibility that such interest
will become due and payable. However, in the future, without additional funding
sufficient to satisfy Imperial Bank and our other creditors, as well as
providing for our working capital, there can be no assurances that an
operational receiver may not be reinstated. If an operational receiver is
reinstated, we will not be able to expand our products nor will we have complete
control over sales policies or the allocation of funds.
The penalty for noncompliance of the Settlement Agreement is a stipulated
judgment that allows Imperial Bank to immediately reinstate the operational
receiver and begin liquidation proceedings against us. Our current arrangement
with Imperial Bank reduces are monthly payments to $50,000. The remaining
balance due is approximately $3.1 million.
WE HAVE NOT REMAINED CURRENT IN OUR PAYMENT OF FEDERAL AND STATE INCOME AND
OTHER PAYROLL-RELATED TAXES WITHHELD IN OUR PEO BUSINESS.
We have not been able to remain current in our payments of federal and state tax
obligations related to our PEO operations. We are currently working with the
Internal Revenue Service and state agencies to resolve these issues and
establish repayment plans. If we are not able to establish repayment plans that
allow us to continue our operations, we may be forced to cease doing business in
the financial services marketplace.
Risks Relating to our Stock:
-------------------------------
THE ISSUANCE OF THE SHARES PURSUANT TO OUTSTANDING CONVERTIBLE NOTES WILL RESULT
IN DILUTION.
There are a large number of shares underlying convertible notes and warrants
that may be available for future sale and the sale of these shares may depress
the market price of our common stock and may cause substantial dilution to
existing stockholders.
The number of shares of common stock issuable upon conversion of convertible
notes may increase if the market price of our stock declines. Nearly all of the
shares issuable upon conversion of notes and debentures and upon exercise of
warrants may be sold without restriction. The sale of these shares may adversely
affect the market price of our common stock. The issuance of shares upon
conversion of convertible notes and debentures and exercise of outstanding
warrants will also cause immediate and substantial dilution to existing
stockholders and may make it difficult to obtain additional capital.
THE OVERHANG AFFECT FROM THE RESALE OF SELLING SHAREHOLDERS' SECURITIES ON THE
MARKET COULD RESULT IN LOWER STOCK PRICES WHEN CONVERTED
Overhang can translate into a potential decrease in our market price per share.
The common stock underlying unconverted debentures represents overhang. These
outstanding debentures are converted into common stock at a discount to the
market price providing the debenture holder the ability to sell his or her stock
at or below market and still make a profit, which is incentive for the holder to
sell the shares as quickly as possible to ensure as much profit as possible in
case the stock price falls. If the share volume cannot absorb the discounted
shares, our market price per share will likely decrease. As the market price
decreases, each subsequent conversion will require a larger quantity of shares.
SHORT SELLING COMMON STOCK BY WARRANT AND DEBENTURE HOLDERS MAY DRIVE DOWN THE
MARKET PRICE OF OUR STOCK.
The warrant and debenture holders may sell shares of our common stock on the
market before exercising the warrant or converting the debenture. The stock is
usually offered at or below market since the warrant and debenture holders
receive stock at a discount to market. Once the sale is completed the holders
exercise or convert a like dollar amount of shares. If the stock sale lowered
the market price, upon exercise or conversion, the holders would receive a
greater number of shares then they would have absent the short sale. This
pattern may result in the spiraling down of our stock's market price.
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.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
Our shares of Common Stock are "penny stocks" as defined in the Exchange Act,
which are quoted in the over-the-counter market on the OTC Bulletin Board. As a
result, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the Common Stock being registered
hereby. In addition, the "penny stock" rules adopted by the Commission under the
Exchange Act subject the sale of the shares of the Common Stock to certain
regulations which impose sales practice requirements on broker-dealers. For
example, broker-dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in this document are: (1) the bid and
offer price quotes for the penny stock, and the number of shares to which the
quoted prices apply; (2) the brokerage firm's compensation for the trade; and
(3) the compensation received by the brokerages firm's salesperson for the
trade.
In addition, the brokerage firm must send the investor: (1) monthly account
statement that gives an estimate of the value of each penny stock in your
account; (2) a written statement of your financial situation and investment
goals; and (3) legal remedies, which may be available to you, are as follows:
(a) if penny stocks are sold to you in violation of your rights listed above, or
other federal or state securities laws, you may be able to cancel your purchase
and get your money back.; (b) if the stocks are sold in a fraudulent manner, you
may be able to sue the persons and firms that caused the fraud for damages; and
(c) if you have signed an arbitration agreement, however, you may have to pursue
your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker-dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of the Common Stock.
RESALE RESTRICTIONS ON TRANSFERRING "PENNY STOCKS" ARE SOMETIMES IMPOSED BY SOME
STATES, WHICH MAY MAKE TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE
VALUE OF AN INVESTMENT IN OUR STOCK.
Various state securities laws impose restrictions on transferring "penny stocks"
and as a result, investors in the Common Stock may have their ability to sell
their shares of the Common Stock impaired. For example, the Utah Securities
Commission prohibits brokers from soliciting buyers for "penny stocks", which
makes selling them more difficult.
OUR ABSENCE OF DIVIDENDS OR THE ABILITY TO PAY THEM PLACES A LIMITATION ON ANY
INVESTORS RETURN.
We anticipate that, for the foreseeable future, earnings will be retained for
the development of its business. Accordingly, we do not anticipate paying
dividends on the common stock in the foreseeable future. The payment of future
dividends will be at the sole discretion of our Board of Directors and will
depend on our general business condition.
Information about forward-looking statements
-----------------------------------------------
This report contains certain forward-looking statements, which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified because the context of the statement includes words such
as "may," "will," "except," "anticipate," "intend," "estimate," "continue,"
"believe," or other similar words. Similarly, this prospectus also contains
forward-looking statements about our future. Forward-looking statements include
statements about our plans, objectives, goals, strategies, expectations for the
future, future performance and events, underlying assumptions for all of the
above, and other statements, which are not statements of historical facts.
These forward-looking statements involve risks and uncertainties discussed in
the risk factor section, which could cause our actual results to materially
differ from our forward-looking statements. We make these forward-looking
statements based on our analysis of internal and external historical trends, but
there can be no assurance that we will achieve the results set forth in these
forward-looking statements. Our forward-looking statements are expressed in good
faith and we believe that there is a reasonable basis for us to make them.
We have no obligation to update or revise these forward-looking statements to
reflect future events.
ITEM 3. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the end of the period
covered by this report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no changes in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody made
a public announcement that they had filed a lawsuit against us and certain
current and past officers and/or directors, alleging violation of federal
securities laws and, in November 1999, the lawsuit, filed in the name of Nahid
Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on us. In January 2003, we entered into a Stipulation of
Settlement with the plaintiffs. We agreed to pay the plaintiffs 5,000,000 shares
of common stock and $200,000 in cash. The Parties have accepted the settlement.
We have issued the shares, and our insurance carrier has paid the $200,000 cash
payment. Pursuant to a hearing in May 2003 the Court provided approval to the
settlement.
On August 22, 2002, we were sued by our former landlord, Carmel Mountain #8
Associates, L.P. or past due rent on its former facilities at 15175 Innovation
Drive, San Diego, CA 92127. The amount related to this obligation was included
as an expense in the year ended June 30, 2003.
ITEC was a party to a lawsuit filed by Symphony Partners, L.P. related to its
acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July 22,
2003, the plaintiffs sought payment of $702 thousand. In June 2003, we entered
into a settlement with the plaintiffs for a cash payment of $274 thousand, which
has been paid.
ITEC is one of dozens of companies sued by The Massachusetts Institute of
Technology, et.al, `related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, we entered into a settlement with the
plaintiffs who have agreed to dismiss their claims against us with prejudice in
exchange for a settlement fee payment of $10,000, which has been paid.
We have been sued in Illinois state court along with AIA/Merriman, our insurance
brokers, by the Arena Football League-2 ("AF2"). Damages payable to AF2, should
they win the suit, could exceed $700,000. We expect to defend our position and
rely on representations of our insurance brokers. We have also issued a counter
suit against the AF2 for failure to disclose information required by our
contract and other material misrepresentations management believes the AF2 has
made.
Throughout fiscal 2000, 2001, and 2002, and through the date of this filing,
approximately fifty trade creditors have made claims and/or filed actions
alleging the failure of us to pay our obligations to them in a total amount
exceeding $3.0 million, which has been reduced to $1.8 million during the 2003.
These actions are in various stages of litigation, with many resulting in
judgments being entered against us. Several of those who have obtained judgments
have filed judgment liens on our assets. These claims range in value from less
than one thousand dollars to just over one million dollars, with the great
majority being less than twenty thousand dollars.
In connection with ITEC's acquisition of controlling interest of Greenland
Corporation, the following are the outstanding legal matters for Greenland
Corporation:
Greenland, along with Seren Systems ("Seren"), its then current and primary
software developer and supplier for its own ABM terminals, was in the process of
completing development of the check cashing service interface to the Mosaic
Software host system being implemented to support a large network of V.com
terminals. In September 2000, Seren unilaterally halted testing and effectively
shut-down any further check cashing development for the V.com project. The
parties participating in this project may have been financially damaged, related
to the delay in performance by Greenland and Seren. None of the parties have
brought suit against Greenland and/or Seren at this time. There is no assurance,
however, that such suit(s) will not be brought in the future.
On May 23, 2001 Greenland filed a Complaint in San Diego County naming Michael
Armani as the defendant. The Complaint alleges breach of contract by Michael
Armani in connection with two separate stock purchase agreements. Greenland
seeks damages in the amount of $474,595. On August 7, 2001 Greenland filed a
request for Entry of Default against Mr. Armani in the amount of $474,595 and
the court granted entry of default. Subsequently Mr. Armani filed a motion to
set aside the entry of default and on October 26, 2001 the court granted said
motion and the entry of default was set aside. Greenland and Mr. Armani
participated in mediation and as a result entered into a settlement agreement
whereby Mr. Armani agreed to make certain cash payments to Greenland and the
parties entered into mutual release of all claims. Mr. Armani defaulted in his
obligation to make the first cash payment and consequently, Greenland obtained a
judgment against Mr. Armani for $100,000. Greenland is continuing its efforts to
collect on the judgment.
On May 23, 2001 Arthur Kazarian, Trustee for the General Wood Investment Trust
(the "Landlord") filed a Complaint in San Diego County naming Greenland as a
defendant. The Complaint alleges breach of contract pursuant to the terms of the
lease agreement between the Company and the Landlord for the real property
located at 1935 Avenida Del Oro, Oceanside, California and previously occupied
by Greenland. The Complaint seeks damages in the amount of approximately
$500,000. Although Greenland remains liable for the payments remaining for the
term of the lease, the Landlord has a duty to mitigate said damages. Greenland
recorded a lease termination liability of $275,000 during the year ended
December 31, 2001. Greenland entered into a settlement agreement with Arthur
Kazarian, Trustee for the General Wood Investment Trust (the "Landlord") where
by Greenland agreed to pay the sum of $220,000 to the Landlord in installments
payments of $20,000 in May 2002, $50,000 in October 2002 and the remaining
balance in December 2002. In the event Greenland defaults in any or all
scheduled payments, the Landlord is entitled to a stipulated judgment of
approximately $275,000. Greenland was unable to make the scheduled payments and
as a result, on July 8, 2002, the Landlord has entered a judgment lien against
Greenland in the amount of $279,654.
Greenland entered into an agreement with Intellicorp, Inc. ("Intellicorp")
whereby Intellicorp agreed to invest $3,000,000 in exchange for seats on the
board of directors and restricted shares of common stock of Greenland. After
making the initial payment of $500,000, Intellicorp defaulted on the balance.
Greenland sued for recovery of the unpaid $2,500,000. Greenland had issued
46,153,848 shares of common stock for the investment, which were returned to
Greenland and cancelled. A default judgment was entered against defendant
IntelliCorp, IntelliGroup, and Isaac Chang. In June 2003, a judgment was
entered in the Superior Court of the State of California, County of San Diego,
against the defendants in favor of Greenland. The amount of the judgment was
$3,950,640.02 and was comprised of an award of $2,950,640.02 for compensatory
damages and an award of $1,000,000.00 for punitive damages. The Court found, by
clear and convincing evidence, that the Defendants acted maliciously and with
the intent to defraud Greenland when they entered into a private placement
transaction to fund Greenland. The defendant's ability to pay is unknown. The
appeal period has expired and we are beginning the collection process.
Max Farrow, a formal officer of Greenland, filed a Complaint in San Diego County
naming Greenland, Thomas J. Beener, Intelli-Group, Inc., Intelli-Group LLC and
Intelli-Corp, Inc. as defendants. The Complaint alleges breach of contract in
connection with Mr. Farrow's resignation as an officer and director of the
Company in January 2001. Greenland and Mr. Thomas Beener, entered into a
settlement agreement with Max Farrow whereby Mr. Farrow agreed to release Mr.
Beener from all claims, obligations etc., in exchange for the issuance of 8
million restricted shares of Greenland common stock. The good faith settlement
was approved by the court and the agreed upon consideration was delivered to Mr.
Farrow. Greenland entered into a settlement with Farrow whereby Greenland agreed
to a judgment of $125,000. However, the judgment will not be enforced until such
time as efforts to collect against IntelliCorp et al have been exhausted. In the
event funds are collected from IntelliCorp. Mr. Farrow will receive the first
$125,000 plus 50% of the next $200,000 collected. Greenland will retain all
amounts collected thereafter.
Fund Recovery, a temporary staffing service filed a complaint against Greenland
alleging breach of contract. A summary judgment motion is pending. Greenland
recorded the liability amount of $14,000 in the consolidated financial
statements.
John Ellis has filed a demand for arbitration in San Diego County against
Greenland seeking damages of approximately $70,000 for an alleged breach of
contract action. Greenland believes it has valid defenses to the allegations.
Mr. Ellis appears to have abandoned this action in arbitration and has elected
to pursue a civil suit. However, arbitration action is proceeding .In addition,
the parties are attempting mediation to avoid the cost and time of an
arbitration proceeding.
John Ellis has filed an action in San Diego County against Greenland seeking
damages of approximately $60,000 for an alleged breach of contract action.
Greenland believes it has valid defenses to the allegations. This amount was
recorded as a liability in the consolidated financial statements. Greenland has
filed a motion to quash service of the civil action and to compel arbitration.
The court has stayed the proceedings pending the progress and/or outcome of
arbitration.
NKS Enterprises, Inc. commenced a legal action against Greenland in San Diego
Superior Court in Vista California seeking damages in connection with the
purchase and operation of a MaxCash ABM. The case was settled in December 2002.
The maximum amount to be paid under the settlement is $100,000. In exchange,
Greenland will receive the MaxCash ABM sold to NKS Enterprises. This amount was
recorded as a liability in the consolidated financial statements.
In connection with the Company's acquisition of controlling interest of Quik
Pix, Inc., we are unaware of any pending litigation.
From time to time, Greenland and QPI may be involved in litigation relating to
claims arising out of their operations in the normal course of business.
ITEM 2. CHANGES IN SECURITIES
Common Stock
-------------
During the six months ended December 31, 2003, ITEC issued the following:
- 6,470,000 shares of its common stock for legal and consulting services
valued at $148,150. The value of the services was determined using the market
value of ITEC's common stock on the date of issuance;
- 10,272,110 shares of its common stock for compensation valued at $140,332.
The value of the services was determined using the market value of ITEC's common
stock on the date of issuance;
- 20,260,000 shares of its common stock for debt of $405,200;
- 95,000,208 shares of its common stock for the conversion of convertible
debentures in the amount of $994,385; and
- 750,000 shares of its common stock upon the exercise of options.
Stock Split
------------
On August 9, 2002, the Company's board of directors approved and affected 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
The Company is currently in default on certain bank loans that have an aggregate
outstanding balance at December 31, 2003 of $3,145,000.
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
(a) Exhibits
10(a) Alpha Capital Aktiengsellschaft December 17, 2003 convertible note
10(b) Alpha Capital Aktiengsellschaft December 17, 2003 warrant
10(c) Gamma Opportunity Capital Partners, LP December 17, 2003 convertible
note
10(d) Gamma Opportunity Capital Partners, LP December 17, 2003 warrant
10(e) Longview Fund, LP December 17, 2003 convertible note
10(f) Longview, LP December 17, 2003 warrant
10(g) Stonestreet Limited Partnership December 17, 2003 convertible note
10(h) Stonestreet Limited Partnership December 17, 2003 warrant
10(i) Subscription Agreement December 17, 2003
10(j) Acquisition Agreement between the Company and Jackson Staffing, Inc.,
dated September 1, 2003.
31.1 Rule 13a-14(a) Certification
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On October 14, 2003, the Registrant filed a Current Report on Form 8-K
announcing that the Registrant would be late in filing its Form 10-K for the
year ended June 30, 2003. The delay was due to recent changes in the
Registrant's independent accountants. Additionally, due to changes in the
Registrant's independent accountants, the Form 10-K required review of the
Registrant's two prior independent accountants before the document can be filed.
On January 13, 2004, the Registrant filed a Current Report on Form 8-K
announcing that on December 4, 2003, the Registrant announced that Thomas Brown
had been appointed to the position of Senior Vice President and Chief Financial
Officer. Mr. Brown subsequently resigned his positions with the Registrant, on
or about December 30, 2004. Brian Bonar, Chairman and Chief Executive Officer of
the Registrant will serve as Chief Financial Officer until a suitable
replacement can be found.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 13, 2004
IMAGING TECHNOLOGIES CORPORATION (Registrant)
By: /S/ Brian Bonar
_____________________________________
Brian Bonar
Chairman, Chief Executive Officer, and Acting Chief Financial Officer