UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-18450
COLOR IMAGING, INC.
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(Exact name of small business issuer in its charter)
Delaware 13-3453420
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4350 Peachtree Industrial Boulevard, Suite 100, Norcross, Georgia 30071
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(Address of principal executive offices)
Issuer telephone number, including area code: (770) 840-1090
Securities registered under Section 12(b) of the Act: None
Securities registered under Section
12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding12 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 past90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSBor any
amendment to this Form 10-KSB. [X]
The Issuer's revenues for the December 31, 2000 fiscal year were
$12,108,132.
The aggregate market value of the Common Stock of the Issuer held by
non-affiliates of the Issuer on March 1, 2001, based on the average closing bid
and asked price of the Common Stock as quoted on the OTC Bulletin Board on such
date, was approximately $12,542,840.
The number of shares of the Issuer's Common Stock outstanding as of March
1, 2001, was 7,574,219 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check One): Yes __; No X
EXPLANATORY NOTE
The accompanying financial statements for the twelve months ended December 31,
2000, have been restated to reflect the business combination with Image (see
Note 3 below) under the purchase method of accounting as opposed to the pooling
of interests method, as previously reported.
COLOR IMAGING, INC.
ANNUAL REPORT ON FORM 10-KSB/A
INDEX
PART II
Item 6. Management's Discussion and Analysis or Plan of Operation.............3
Item 7. Financial Statements.................................................11
Signatures...........................................................29
PART II
Item 6. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW (RESTATEMENT OF FINANCIAL STATEMENTS)
The Company has revised its accounting treatment for the merger completed
in June 2000 from a pooling-of-interests to the purchase method in accordance
with guidance provided by the Securities and Exchange Commission Staff
Accounting Bulletin Topic 2A and APB 16, regarding business combinations. The
financial information contained in this amended report is in conformity with the
purchase method of accounting for the merger. Accordingly, the accompanying
financial statements for the twelve months ended December 31, 2000, have been
restated to reflect the business combination with Image under the purchase
method of accounting as opposed to the pooling of interests method, as
previously reported. As a result, Image's financial statements are only
consolidated beginning with the date of acquisition, June 28, 2000.
Net sales, for the year that ended on December 31, 2000, were primarily
generated from the sale of our black text, color and MICR toners and related
consumable products, including toner cartridges and the re-filling of certain
toner cartridges. Revenue is recognized from the sale of products when the goods
are shipped to the customer. All sales are made through purchase orders.
Logical's sales for printing systems and related software and consumable
products for the year that ended on December 31, 2000 represented 6 percent of
the Company's net revenue.
Cost of goods sold includes direct material and labor, and manufacturing
and service overhead. Inventories are stated at the lower of cost (first-in,
first-out) or market. Equipment is depreciated using the straight-line method
over the estimated useful lives of the equipment.
Improvements to leased property are amortized over the lesser of the life
of the lease or the life of the improvements.
Selling, general and administrative expenses include marketing and customer
support staff, other marketing expenses, management and administrative personnel
costs, professional services, legal and accounting fees and administrative
operating costs. Selling, general and administrative costs are expensed when the
costs are incurred.
Research and development expenses include costs associated with the
development of new products and significant enhancements of existing products,
and consist primarily of employee salaries, benefits, consulting expenses and
depreciation of laboratory equipment.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from the Company's consolidated statements of operations and
expressed as a percentage of net sales:
DECEMBER 31,
2000 1999 1998
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(PERCENT OF NET SALES)
Net sales 100 100 100
Cost of goods sold 85 66 83
Gross profit 15 34 17
Administrative expense 7 73 75
Research and development 6 73 139
Sales and marketing 4 0 0
Operating income -2 -112 -197
Interest and Bond expense 2 3 8
Depreciation and amortization 3 1 3
Income before taxes -8 -113 -206
Provision for taxes (credit) -3 -45 0
Net Income (Loss) -5 -68 -206
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES. Our net sales were $12.1 million for the year ended December 31,
2000, or an increase of 2035% compared to $567,000 for the year ended December
31, 1999. The large increase in net sales for the year ended December 31, 2000
compared to the same period of 1999 was primarily the result of the
consolidation of Color Image, Inc.'s financial statements for the last half of
2000. Logical Imaging Solution, Inc.'s sales of high speed printing systems,
software and related consumable products represented 6% of our net sales for the
year ended December 31, 2000.
COST OF GOODS SOLD. Cost of goods sold increased by $9.9 million or 2475% to
$10.3 million in the year ended December 31, 2000 from $0.4 million in the year
ended December 31, 1999. This increase was primarily the result of the
consolidation of Color Image, Inc.'s financial statements for the last half of
2000. Cost of goods sold as a percentage of net sales increased to 85% in the
year ended December 31, 2000 from 66% in the year ended 1999. This increase was
due to the sale toner and related products of Color Image, Inc. at a reduced
profit margin.
GROSS PROFIT. As a result of the above factors, gross profit increased to $1.8
million in the year ended December 31, 2000 from $0.2 million in the year ended
December 31, 1999. Gross profit as a percentage of net sales, however, decreased
to 15% in the year ended December 31,2000, from 34% in the year ended December
31, 1999. As stated above, this decrease was due primarily to the consolidation
of Color Image, Inc.'s financial statements for the last half of 2000.
GENERAL AND ADMINISTRATIVE, SELLING, AND R&D EXPENSES. General and
administrative, selling and R&D expenses increased $1,296,000 or 156% to
$2,125,000 in the year ended December 31, 2000 from $829,000 in the year ended
December 31, 1999. General and administrative, selling and R&D expenses
decreased, as a percentage of net sales, to 17% in the year 2000 from 146% in
the year ended December 31, 1999. The large increase in operating expenses is
primarily due to the consolidation of Color Image, Inc.'s financial statements
for the last half of 2000.
OPERATING INCOME. As a result of the above factors the operating loss decreased
by $288,000, to a loss of $346,000 in the year ended December 31, 2000 from a
loss of $634,000 in the year ended December 31, 1999.
INTEREST AND FINANCE EXPENSE. Interest expense increased $224,000 in the year
ended December 31, 2000 from $17,000 in the year ended December 31, 1999. This
was primarily the result of the consolidation of Color Image, Inc.'s financial
statements for the last half of 2000.
OTHER INCOME AND EXPENSE. Other expenses increased by $148,000 in the year ended
December 31, 2000 from $6,000 in the year ended December 31, 1999. This increase
was primarily the result of the consolidation of the higher financing costs,
loss on disposal of assets and non-recurring moving expenses incurred by Color
Image, Inc. in the last half of 2000.
INCOME TAXES. As a result of our increased loss in the current year, income tax
credits increased to $333,000 for the year ended December 31, 2000 from a tax
credit of $256,000 for the comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company's working capital was approximately
$617,000 and its current ratio was 1.07 to 1. At the year ended December 31,
1999, working capital was approximately $1,607,000 and its current ratio was
5.67 to 1. The decrease in the Company's liquidity was primarily due to over
$2,000,000 of cash flow used in investing activities. $4.8 million of current
liabilities for inventory purchased on extended terms from suppliers to support
the increased business from our largest customer, contributed significantly to
the decrease in the current ratio at December 31, 2000.
Cash flows provided by operating activities were $815,000 in the year ended
December 31, 2000 compared to $772,000 used by operating activities in the year
ended December 31, 1999. The cash flows provided by operating activities in the
year ended December 31, 2000 were comparatively greater than in the year ended
December 31, 1999 due primarily to the consolidation of Color Image, Inc.'s
financial statements and expanded business operations for the last half of 2000.
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Cash flows used in investing activities were $2.4 million in the year ended
December 31, 2000, compared to $7,000 for the comparable 1999 period. These
investing activities were primarily to acquire capital assets to expand our
toner manufacturing operations and electron beam imaging test equipment.
Cash flows provided by financing activities for the twelve months ended
December 31, 2000 and December 31, 1999 were $720,000 and $1,000,000
respectively, and resulted primarily from proceeds from the sale of common
stock.
At December 31, 2000, we had a $1.5 million revolving line of credit with
an outstanding balance of $899,000, with interest at the Bank's prime interest
rate less .25 percent. The revolving line of credit then had a June 30, 2001
expiration date. Under the line of credit, the Company is permitted to borrow 85
percent of eligible accounts receivable and 50 percent of eligible inventories
(up to a maximum of $1.1 million).
Also as of December 31, 2000, the Bank made available to us an additional
line of credit of $500,000. The outstanding balance as of December 31, 2000 was
$500,000. The additional line of credit then had an expiration date of June 30,
2001, and bears an interest rate of the Bank's prime interest rate plus .5
percent. The Company has granted the Bank a security interest in all of the
Company's assets as security for the payment of the lines of credit.
The Bank has since combined the abovementioned lines of credit into a
larger $2.5 million revolving line of credit and extended its expiration date to
June 30, 2002.
To the extent that the funds generated from operating activities and
availability under credit facilities were insufficient to finance our operating
and investing activities since December 31, 2000, we raised additional funds
through private financings. There can be no assurance that additional financing
will be available on favorable terms, or at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements may be identified by the use of forward-looking
terms such as "believes," "expects," "may", "will," "should" or "anticipates" or
by discussions of strategy that involve risks and uncertainties. From time to
time, we have made or may make forward-looking statements, orally or in writing.
These forward-looking statements include statements regarding our ability to
borrow funds from financial institutions or affiliates and/or engage in sales of
our securities, our intention to repay certain borrowings from future sales of
our securities, the ability to expand capacity by placing in service additional
manufacturing equipment, the ability to commercialize our electron beam imaging
technologies and products, our expected acquisition of business or technologies,
our expectation that shipments to international customers will continue to
account for a material portion of net sales, anticipated future revenues, sales,
operations, demand, technology, products, business ventures, major customers,
major suppliers, competition, capital expenditures, credit arrangements, and
other statements regarding matters that are not historical facts, involve
predictions which are based upon a number of future conditions that ultimately
may prove to be inaccurate. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments and
their potential effects upon our business. We cannot predict whether future
developments affecting us will be those anticipated by management, and there are
a number of factors that could adversely affect our future operating results or
cause our actual results to differ materially from the estimates or expectations
reflected in such forward-looking statements, including without limitation,
those discussed in the sections titled "The Company" and "Management's
Discussion and Analysis" and the factors set forth below:
Risks related to our business:
We anticipate that we will need to raise additional capital or obtain funding to
finance certain of our planned operating activities over the next twelve months.
Our failure to raise additional capital may significantly limit our ability to
finance certain planned operating activities over the next twelve months that we
believe will generate additional revenues and reduce manufacturing costs. We
will need to borrow or raise additional funds to meet the additional planned
vendor commitments for product. We may not be able to obtain additional
financing at commercially reasonable rates, or at all. Our failure to obtain
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additional funds would significantly limit or eliminate our ability to conduct
the foregoing activities or we may have to curtail or eliminate other
activities. We anticipate that we will seek additional funding through the
public or private sales of our securities. That could include financing through
equity securities, or through commercial or private financing arrangements.
Adequate funds may not be available when needed or on terms acceptable to us, or
at all. In the event that we are not able to obtain additional funding on a
timely basis, we may be required to limit any proposed operations, research and
development or expansion.
The success of approximately 40% of our business depends on a supplier approved
by one of our customers for that business.
Some of our products incorporate technologies that are available from a
particular supplier that has been approved by one of our customers.
Approximately 40% of our sales are derived from products limited to a specific
supplier, and we purchased approximately 50% of our raw materials, components
and supplies from the same supplier. We do not have a written agreement with
this or any other supplier. We rely on purchase orders to provide us with the
supplies needed. Should we be unable to obtain the necessary materials from this
supplier, product shipments could be prevented or delayed, which could result in
a loss of sales. If we are unable to fulfill existing orders or accept new
orders because of a shortage of materials, we may lose revenues and risk losing
customers.
The success of our business depends on a limited number of customers.
Two customers account for approximately 70% of our net sales. We do not have
contracts with these customers and all of the sales to them are made through
purchase orders. While our products typically go through the customer's required
qualification process, which we believe gives us an advantage over other
suppliers, this does not guarantee that the customer will continue to purchase
from us. The loss of any of these customers, including through an acquisition or
other business combination could have a substantial and adverse effect on our
business. We have in the past, and may in the future, lose one or more major
customers. If we do not sell products or services to customers in the quantities
anticipated, or if a major customer terminates its relationship with us market
perception of our products and technology, growth prospects, and financial
condition and results of operation could be harmed.
Our success is dependent on our ability to successfully develop, or acquire from
third parties products that we can commercialize and that achieve market
acceptance.
The challenges we face in implementing our business model include establishing
market acceptance of existing products and services and successfully developing
or acquiring new product lines that achieve market acceptance. We must
successfully commercialize the products that are currently being developed, and
continue to acquire from third parties parts, materials and finished product
that can be integrated into finished products or sold as our products. While we
have successfully developed toners in the past and are in the late stages of
developing and testing several new toners and installing our first
DigitalColorPress employing electron beam imaging technologies, we have not
commercialized many of the toners that are under development or fully
commercialized for manufacturing the DigitalColorPress. While we have in the
past acquired from third parties materials and products that we have been
successful in selling, there can be no assurance that parts, materials or
products for new products will be available or will achieve market acceptance.
If we fail to successfully commercialize products we develop or acquire from
third parties, or if these products fail to achieve market acceptance, our
financial condition and results of operation would be seriously harmed.
Our success is dependent on our ability to utilize available manufacturing
capacity.
We recently expanded our manufacturing capacity by acquiring new manufacturing
equipment and moving to a larger location. We intend to continue to expand
capacity by placing in service additional manufacturing equipment during the
second quarter of 2002. To fully utilize these new additions to the factory, new
formulations for toner have to be developed specifically for manufacture on this
new equipment or orders for larger quantities of existing toners must be
obtained. While we have been successful in developing formulas for new equipment
in the past and increasing sales of many of our existing toner products, our
continued success will be dependent on our ability to develop additional
formulations or increase our sales from existing formulations and manufacture
the toners with the new equipment to achieve a reduction in production costs. We
cannot assure you that we will be successful in developing all of the
formulations needed in the future or that we will be able to manufacture toner
at a lower production cost on a regular basis or that such products will achieve
market acceptance. If we are not successful, or if our historical business
4
declines as the result of our efforts in this area, our business will be
materially and adversely affected.
We intend to grow revenues through an acquisition strategy that may prove
unsuccessful.
We intend to pursue acquisitions of businesses or technologies that management
believes complement or expand the existing business. Acquisitions of this type
involve a number of risks, including the possibility that the operations of any
business that are acquired will be unprofitable or that management attention
will be diverted from the day-to-day operation of the existing business. An
unsuccessful acquisition could reduce profit margins or otherwise harm our
financial condition, by, for example, impairing liquidity and causing
non-compliance with lending institution's financial covenants. In addition, any
acquisition could result in a dilutive issuance of equity securities, the
incurrence of debt or the loss of key employees. Certain benefits of any
acquisition may depend on the taking of one-time or recurring accounting charges
that may be material. We cannot predict whether any acquisition undertaken by us
will be successfully completed or, if one or more acquisitions are completed,
whether the acquired assets will generate sufficient revenue to offset the
associated costs or other adverse effects.
Our success depends on our ability to develop or acquire intellectual property
rights.
Our success depends in part on our ability to develop proprietary toner formulas
and manufacturing processes, obtain patents, copyrights and trademarks, maintain
trade secret protection and operate without infringing the proprietary rights of
others. Current or future claims of intellectual property infringement could
prevent us from obtaining technology of others and could otherwise adversely
affect our operating results, cash flows, financial position or business, as
could expenses incurred enforcing intellectual property rights against others or
defending against claims that our products infringe the intellectual property
rights of others.
Our intellectual property protection is limited.
While we have one patent and we have received the Notice of Allowance from the
U.S. Patent and Trademark Office for another patent, on the whole we do not rely
on patents to protect our proprietary rights. We do rely on a combination of
laws such as trade secrets and contractual restrictions such as confidentiality
agreements to protect proprietary rights. Despite any precautions we have taken:
.. laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies; and
.. policing unauthorized use of our products is difficult, expensive and
time-consuming and we might not be able to determine the extent of this
unauthorized use.
Therefore, there can be no assurance that we can meaningfully protect our rights
in such unpatented proprietary technology or that others will not independently
develop substantially equivalent proprietary products or processes or otherwise
gain access to the proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technology could enable
third parties to benefit from our technology without paying us, which could
significantly harm our business.
Acts of domestic terrorism and war have impacted general economic conditions and
may impact the industry and our ability to operate profitably.
On September 11, 2001, acts of terrorism occurred in New York City and
Washington, D.C. On October 7, 2001, the United States launched military attacks
on Afghanistan. As a result of those terrorist acts and acts of war, there has
been a disruption in general economic activity. The demand for printing products
and services may decline as layoffs in the transportation and other industries
affect the economy as a whole. There may be other consequences resulting from
those acts of terrorism, including civil disturbance, war, riot, epidemics,
public demonstration, explosion, freight embargos, governmental action,
governmental delay, restraint or inaction, quarantine restrictions,
unavailability of capital, equipment, personnel, which we may not be able to
anticipate. These terrorist acts and acts of war may continue to cause a slowing
of the economy, and in turn, reduce the demand of printing products and
services, which would harm our ability to make a profit. We are unable to
determine the long-term impact, if any, of these incidents or of any acts of war
or terrorism in the United States or worldwide on the U.S. economy, on us or on
the price of our common stock.
We depend on the efforts and abilities of certain officers and directors to
continue our operations and generate revenues.
5
Our success depends to a significant extent on the continued services of senior
management and other key personnel. While we do have employment, non-compete and
confidentiality agreements with executive officers and certain other key
individuals, either party upon giving the required notice may terminate the
employment agreement. The loss of the services of any of our executive officers
or other key employees could harm our business. Our success also depends on our
ability to attract, retain and motivate highly skilled employees. Competition
for qualified employees in the industries in which we operate is intense. If we
fail to hire and retain a sufficient number of qualified employees, our business
will be adversely affected.
Compliance with government regulations may cause us to incur unforeseen
expenses.
Our black text, color and magnetic character toner supplies and manufacturing
operations are subject to laws and regulations, particularly relating to
environmental matters that impose limitations on the discharge of pollutants
into the air, water and soil and establish standards for treatment, storage and
disposal of solid and hazardous wastes. We are subject to regulations for storm
water discharge, and as a requirement of the State of Georgia have developed and
implemented a Storm Water Pollution Prevention Plan. We are also required to
have a permit issued by the State of Georgia in order to conduct various aspects
of our business. Compliance with these laws and regulations has not in the past
had a material adverse affect on our capital expenditures, earnings or
competitive position. There can be no assurance, however, that future changes in
environmental laws or regulations, or in the criteria required to obtain or
maintain necessary permits, will not have a material adverse affect on our
operations.
We sell a significant portion of our products internationally, which exposes us
to currency fluctuations and collection and product recall risks.
We sell a significant amount of product to customers outside of the United
States. International sales accounted for 34% of net sales in the three months
ended March 31, 2002 and 9% in the three months ended March 31, 2001. We expect
that shipments to international customers will continue to account for a
material portion of net sales. Most products are priced in U.S. dollars, but
because we do sell products in Europe denominated in Euros, fluctuations in the
Euro could also cause our products there to become less affordable or less
competitive or we may sell some products at a loss to otherwise maintain
profitable business from a customer. Most of our products sold internationally
are on open account, giving rise to the added costs of collection in the event
of non-payment. Further, should a product shipped overseas be defective, the
Company would experience higher costs in connection with a product recall or
return and replacement. We cannot assure you that these factors will not have a
material adverse effect on our international sales and would, as the result,
adversely impact our results of operation and financial condition.
Our quarterly operating results fluctuate as a result of many factors.
Our quarterly operating results fluctuate due to various factors. Some of these
factors include the mix of products sold during the quarter, the availability
and costs of raw materials or components, the costs and benefits of new product
introductions, and customer order and shipment timing. Because of these factors,
our quarterly operating results are difficult to predict and are likely to vary
in the future.
Risks relating to our industry:
We operate in a competitive and rapidly changing marketplace.
There is significant competition in the toner, consumable imaging products and
color printing systems industries in which we operate. In addition, the market
for digital color printers and copiers and related consumable products is
subject to rapid change. Many competitors, both OEMs and other after market
firms, have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. These competitors may be able to devote substantially more resources
to developing their business than we can. Our ability to compete depends upon a
number of factors, including the success and timing of product introductions,
marketing and distribution capabilities and the quality of our customer support.
Some of these factors are beyond our control. In addition, competitive pressure
to develop new products and technologies could cause our operating expenses to
increase substantially.
Our products have short life cycles and are subject to frequent price
reductions.
The markets in which we operate are characterized by rapidly evolving
technologies, frequent new product introductions and significant price
competition. Consequently, our products have short life cycles, and we must
6
frequently reduce prices in response to product competition. Our financial
condition and results of operations could be adversely affected if we are unable
to manufacture new and competitive products in a timely manner. Our success
depends on our ability to develop and manufacture technologically advanced
products, price them competitively, and achieve cost reductions for existing
products. Technological advances require sustained research and development
efforts, which may be costly.
Our financial performance depends on our ability to successfully manage
inventory levels, which is affected by factors that may be beyond our control.
Our financial performance depends in part on our ability to manage inventory
levels to support the needs of new and existing customers. Our ability to
maintain appropriate inventory levels depends on factors that may be beyond our
control, including unforeseen increases or decreases in demand for our products
and production and supply difficulties. Demand for our products can be affected
by product introductions or price changes by competitors or by us, the life
cycle of our products, or delays in the development or manufacturing of our
products. Our operating results and ability to increase the market share of our
products may be adversely affected if we are unable to address inventory issues
on a timely basis. In addition, competitive pressure to develop new products and
technologies could cause our operating expenses to increase substantially.
Risks relating to owning our common stock:
Our officers, directors and principal stockholders own approximately 50% of the
outstanding shares of common stock, allowing these stockholders to control
matters requiring approval of the stockholders.
As a result of such ownership by our officers, directors and principal
stockholders, investors will have limited control over matters requiring
approval by the stockholders, including the election of directors. Such
concentrated control may also make it difficult for the stockholders to receive
a premium for their shares of our common stock in the event we enter into
transactions that require stockholder approval. In addition, certain provisions
of Delaware law could have the effect of making it more difficult or more
expensive for a third party to acquire, or of discouraging a third party from
attempting to acquire control of us.
Exercise of warrants and options will dilute existing stockholders and could
decrease the market price of our common stock.
As of March 31, 2002, we had issued and outstanding 10,099,880 shares of common
stock and outstanding warrants and options to purchase 2,328,352 additional
shares of common stock. The existence of the remaining warrants and options may
adversely affect the market price of our common stock and the terms under which
could obtain additional equity capital.
Our ability to raise additional capital through the sale of our securities may
be harmed by competing resales of our common stock by our stockholders.
The price of our common stock could fall if stockholders sell substantial
amounts of our common stock. Such sales could make it more difficult for us to
sell securities at the time and price we deem appropriate. To the extent
stockholders offer to and sell their shares of common stock to investors for
less than the price offered by us, our attempt to sell our securities may be
adversely affected. In addition, potential investors may not be interested in
purchasing shares of our common stock on any terms if stockholders sell
substantial amounts of our common stock.
Effectiveness of our registration statement on Form SB-2 will dilute existing
stockholders and could decrease the market price of our common stock.
Once our registration statement is declared effective, certain stockholders will
be able to sell approximately 4 million shares of our common stock and we will
be able to sell the equivalent of 7 million shares of our common stock. The sale
of common stock and warrants covered by the registration statement by us or
Selling Stockholders will dilute existing stockholders and may adversely affect
the market price of our common stock.
Our common stock is listed on the Over-The-Counter Bulletin Board, which may
make it more difficult for stockholders to sell their shares and may cause the
market price of our common stock to decrease.
Because our common stock is listed on the Over-The-Counter (OTC) Bulletin Board,
the liquidity of our common stock is impaired, not only in the number of shares
7
that are bought and sold, but also through delays in the timing of transactions,
and coverage by security analysts and the news media, if any, of us. As a
result, prices for shares of our common stock may be lower than might otherwise
prevail if our common stock was traded on NASDAQ or a national securities
exchange, like the American Stock Exchange.
Our stock price may be volatile and an investment in our common stock could
suffer a decline in value.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. These factors
include:
.. progress of our products through development and marketing;
.. announcements of technological innovations or new products by our competitors;
or us
.. government regulatory action affecting our products or competitors' products
in both the United States and foreign countries;
.. developments or disputes concerning patent or proprietary rights;
.. actual or anticipated fluctuations in our operating results;
.. the loss of key management or technical personnel;
.. the loss of major customers or suppliers;
.. the outcome of any future litigation;
.. changes in our financial estimates by securities analysts;
.. fluctuations in currency exchange rates;
.. general market conditions for emerging growth and technology companies;
.. broad market fluctuations; . recovery from natural disasters; and
.. economic conditions in the United States or abroad.
Our charter documents and Delaware Law may have the effect of making it more
expensive or more difficult for a third party to acquire, or to acquire control,
of us.
Our certificate of incorporation makes it possible for our Board of Directors to
issue preferred stock with voting or other rights that could impede the success
of any attempt to change control of us. Our certificate of incorporation and
bylaws eliminate cumulative voting, which may make it more difficult for a
minority shareholder to gain a seat on our Board of Directors and to influence
Board of Directors' decision regarding a takeover. Delaware Law prohibits a
publicly held Delaware corporation from engaging in certain business
combinations with certain persons, who acquire our securities with the intent of
engaging in a business combination, unless the proposed transaction is approved
in a prescribed manner. This provision has the effect of discouraging
transactions not approved by our Board of Directors as required by the statute
which may discourage third parties from attempting to acquire us or to acquire
control of us even if the attempt would result in a premium over market price
for the shares of common stock held by our stockholders. The information
referred to above should be considered by investors when reviewing any
forward-looking statements contained in this report, in any of our public
filings or press releases or in any oral statements made by us or any of our
officers or other persons acting on our behalf. The important factors that could
affect forward-looking statements are subject to change, and we disclaim any
obligation or duty to update or modify these forward-looking statements.
8
Item 7. Financial Statements.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Color Imaging, Inc.
Norcross, Georgia
We have audited the accompanying consolidated balance sheet of Color Imaging,
Inc. (a Delaware corporation) and subsidiary as of December 31, 2000 (as
restated - see Note 3), and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Color Imaging, Inc.
and subsidiary as of December 31, 2000 (as restated), and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the Unites States of America.
We previously audited and reported on the balance sheet of Color Imaging, Inc.
(formerly Advatex Associates, Inc.) as of December 31, 1999 and the related
statements of operations, stockholders' equity and cash flows for the year then
ended, prior to the restatement for the 2000 acquisition using the purchase
method of accounting. Separate financial statements of the other companies
included in the 1999 restated consolidated balance sheet and consolidated
statements of operations and cash flows were audited and reported on separately
by other auditors who issued unqualified opinions thereon. We also audited the
combination of the accompanying consolidated balance sheet and consolidated
statements of operations and cash flows for the year ended December 31, 1999 (as
restated) after restatement for the 2000 acquisition using the purchase method
of accounting. In our opinion, such consolidated statements have been properly
combined on the basis described in Note 1 of the notes to the consolidated
financial statements.
LAZAR LEVINE & FELIX LLP
New York, New York
February 9, 2001, except for
the fourth paragraph of Note 6,
the date of which is March 26, 2001
and Note 3 the date of which is
February 15, 2002
F-1
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------- -------------
- ASSETS - (As restated)
CURRENT ASSETS:
Cash $ 339,348 $ 1,183,874
Accounts receivable - net of allowance for doubtful accounts
of $100,000 and $0, for 2000 and 1999, respectively 3,562,120 157,622
Inventory 5,181,248 329,227
Deferred taxes 155,526 23,200
Related party portion of bonds - current 76,032 --
Other current assets 401,143 256,648
------------- -------------
TOTAL CURRENT ASSETS 9,715,417 1,950,571
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - NET 8,256,430 25,726
------------- -------------
OTHER ASSETS:
Patent/intellectual property 5,000 --
Deferred income tax 467,984 232,800
Related party portion of bonds 898,096 --
Other assets 269,626 3,124
------------- -------------
1,640,706 235,924
------------- -------------
$ 19,612,553 $ 2,212,221
============= =============
- LIABILITIES & STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Revolving credit lines $ 1,399,000 $ --
Accounts payable 6,665,322 238,336
Current portion of notes payable 343,408 --
Current portion of bonds payable 320,000 --
Other current liabilities 370,765 105,739
------------- -------------
TOTAL CURRENT LIABILITIES 9,098,495 344,075
------------- -------------
LONG TERM LIABILITIES:
Notes payable 1,698,058 94,534
Bonds payable 3,780,000 --
------------- -------------
LONG TERM LIABILITIES 5,478,058 94,534
------------- -------------
TOTAL LIABILITIES 14,576,553 438,609
------------- -------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000,000
shares; 7,490,948 and 4,000,000 shares issued
and outstanding on December 31, 2000 and 199 respectively 74,909 40,000
Additional paid-in capital 7,229,293 3,343,430
Accumulated deficit (2,268,202) (1,609,818)
------------- -------------
5,036,000 1,773,612
------------- -------------
$19,612,553 $ 2,212,221
============= =============
See notes to consolidated financial statements.
F-2
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
(As restated)
SALES $ 12,108,132 $ 567,199
COST OF SALES 10,329,418 372,528
------------ ------------
GROSS PROFIT 1,778,714 194,671
------------ ------------
OPERATING EXPENSES:
Administrative 889,742 413,990
Research and development 764,286 414,674
Sales and marketing 470,625 --
------------ ------------
2,124,653 828,664
------------ ------------
(LOSS) FROM OPERATIONS (345,939) (633,993)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income (147,988) 10,494
Interest and financing costs (241,037) (16,712)
Non-recurring moving expenses (256,212) --
------------ ------------
(645,237) (6,218)
------------ ------------
(LOSS) BEFORE PROVISION FOR INCOME TAXES (991,176) (640,211)
(BENEFIT) FOR INCOME TAXES (332,792) (256,000)
------------ ------------
NET (LOSS) $ (658,384) $ (384,211)
============ ============
(LOSS) PER COMMON SHARE:
Basic $ (.09) $ (.10)
Diluted * $ (.09) $ (.10)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,490,948 4,000,000
Diluted * 7,490,948 4,000,000
* Antidilutive
See notes to consolidated financial statements.
F-3
COLOR IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Additional Stock Total
Common Paid-In Subscription Accumulated Stockholders'
Shares Stock Capital Receivable Deficit Equity
---------- --------- ----------- ------------ ------------ -------------
Balance at
December 31, 1999
(as restated - see Note 3) 3,999,987 $ 40,000 $ 3,058,241 $ -- $(1,609,818) $ 1,488,423
Acquisition of Image 3,000,000 30,000 3,194,039 -- -- 3,224,039
Exercise of
stock warrants 46,211 462 91,960 -- -- 92,422
Common stock issued
in private placement 444,750 4,447 885,053 -- -- 889,500
Net loss for the year -- -- -- -- (658,384) (658,384)
---------- -------- ---------- ------------- ----------- -----------
Balance at December 31, 2000
(as restated - see Note 3) 7,490,948 74,909 7,229,293 -- (2,268,202) 5,036,000
========== ======== =========== ============ =========== ============
See notes to consolidated financial statements.
F-4
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
(as restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (658,384) $ (384,211)
Adjustments to reconcile net (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 379,117 6,671
Deferred income taxes (154,294) (256,000)
Decrease (increase) in:
Accounts and other receivables 207,672 (101,918)
Inventories 683,183 (152,801)
Prepaid expenses and other assets 63,065 (4,371)
Due from related party under bonds 81,706
Increase (decrease) in:
Accounts payable and accrued liabilities 212,450 72,689
Deferred revenue -- 48,050
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 814,515 (771,891)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,319,955) (6,951)
Other assets (53,805)
Patents and intellectual properties (5,000) --
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (2,378,760) (6,951)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit (644,135) --
Proceeds from issuance of long-term debt 500,000 86,334
Proceeds from sale of stock 981,922 1,197,500
Principal payments of long-term debt (118,068) --
Advances from related parties -- (283,980)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 719,719 999,854
----------- -----------
NET (DECREASE) INCREASE IN CASH (844,526) 221,012
Cash at beginning of year 1,183,874 12,862
----------- -----------
CASH AT END OF YEAR $ 339,348 $ 233,874
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ -- $ --
=========== ===========
Interest $ 241,037 $ 16,712
=========== ===========
See notes to consolidated financial statements.
F-5
COLOR IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1. DESCRIPTION OF COMPANY:
On May 16, 2000, Color Imaging, Inc., formerly known as Advatex
Associates, Inc. (Advatex), Logical Acquisition Corp. (LAC), Color
Acquisition Corp. (CAC), Logical Imaging Solutions, Inc. (Logical) and
Color Image, Inc. (Image) entered into a Merger Agreement and Plan of
Reorganization, as amended (Merger Agreement), pursuant to which LAC
merged with and into Logical and CAC merged with and into Image (the
Merger) and Logical and Image became wholly-owned subsidiaries of
Advatex. Pursuant to the Merger Agreement, stockholders of Logical and
Image exchanged their common stock for shares of common stock of
Advatex. A reverse stock split of one share of common stock for 6.0779
shares of common stock was simultaneously approved for the then
existing Advatex common stock. Subsequently, the equity interests in
Logical were converted by virtue of the Logical Merger into
approximately 3,000,000 newly issued shares of Advatex common stock,
on the basis of 1.84843 Advatex Common Shares for each one share of
common stock of Logical. The equity interests in Image were converted
by virtue of the Image Merger into approximately 3,000,000 newly
issued shares of the Advatex common stock on the basis of 15 Advatex
common shares for each one share of common stock of Image. The above
transactions were consummated on June 28, 2000.
Prior to the completion of the above referenced transaction, Advatex
was a non-operating, fully reporting, public shell, and both Logical
and Image were privately owned operating enterprises. By the terms of
the Merger Agreement and Plan of Reorganization, the combination was
contingent upon the agreement of all of the enterprises, and it was,
therefore considered a single business combination.
Image and Logical each received the same number of shares and both the
board of directors and executive officers of the Company were equally
divided between the managements of Logical and Image. However, since
the majority of the voting stock was held by directors coming from
Logical or including former Logical directors, Logical was determined
to be the accounting acquirer in the reverse merger with Advatex,
based upon guidance provided by Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) Topic 2A and APB 16, regarding
Business Combinations.
The fair market value of the shares being issued in the reverse
acquisition transaction could not be determined and accordingly, the
transaction was valued at the fair market value of the issuer's net
assets, which approximated their carrying value. As a result, and
consistent with treatment of a merger between a non-operating public
shell and privately held entity, no goodwill was recognized.
Concurrently with the above transaction, Advatex, the legal acquirer,
issued 3,000,000 shares of common stock (with a per share value of
$1.00 as determined in the aforementioned reverse acquisition by
Logical of Advatex) in exchange for the outstanding shares of Image.
This transaction was accounted for under the purchase method of
accounting (see Note 3 - Restatement). The fair value of Image's
assets was reviewed to determine the allocation of the cost of the
purchase to tangible and intangible assets, including goodwill.
Management determined that no adjustment to the financial statements
of Image was necessary, and that the fair value of the tangible and
intangible assets of Image was equivalent to their respective book
values and no goodwill was recognized in this transaction. The
historical financial statements are those of Logical, and the assets,
liabilities and operating results of Image are only included in the
consolidated financial statements of the Company from the date of
acquisition, June 28, 2000.
F-6
NOTE 1. DESCRIPTION OF COMPANY (CONTINUED):
The following unaudited pro forma results of operations were developed
assuming the acquisition had occurred at the beginning of the earliest
period presented.
Year Ended December 31,
2000 1999
---- ----
(Proforma Data)
Net sales $ 21,204,435 $ 11,191,120
Net loss (517,934) (948,436)
Loss per share $ (0.07) $ (0.14)
On July 7, 2000, by a vote of the majority of stockholders, Advatex
Associates, Inc. (Advatex), changed its name to Color Imaging, Inc.
(the Company or Color) and approved the reverse stock split. On
December 31, 2000, Image merged into Color with Color being the
surviving entity. At December 31, 2000, there were 7,490,948 shares of
the common stock of the Company issued and outstanding.
Color develops, manufactures and markets products used in electronic
printing and photocopying. Color designs, manufactures and delivers
black text toners, specialty toners, including color and MICR
(magnetic ink characters used on checks and other financial
documents). Color also supplies other consumable products used in
electronic printing and photocopying, including toner cartridges,
cartridge components, photoreceptors and imaging drums.
Logical's development efforts have focused on creating a digital
variable printing process that provides high-speed, color printing
systems for commercial applications. Logical designs, manufactures and
delivers complete printing systems, including software, control units
and print engines to its customers.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Logical Imaging Solutions,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
B. ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
C. FINANCIAL INSTRUMENTS:
The carrying amount of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable,
accounts payable and long-term debt, approximates their fair value at
December 31, 2000 and 1999.
F-7
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
D. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash equivalents, marketable
securities and accounts receivable. The Company attempts to limit its
credit risk associated with cash equivalents and marketable securities
and at December 31, 2000 its investments were in cash held in highly
rated financial institutions. With respect to accounts receivable, the
Company limits its credit risk by performing ongoing credit
evaluations and, when deemed necessary, requiring cash in advance,
payment by credit card, letters of credit or guarantees. The Company's
customer base is comprised principally of domestic distributors and
commercial printers. Management does not believe significant risk
exists in connection with the Company's concentrations of credit at
December 31, 2000.
E. CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
F. INVENTORIES:
Inventories are stated at the lower of cost or market with cost
determined by the first-in, first-out ("FIFO") method for raw
materials, work-in-process and finished goods. Costs in inventory
include materials, direct labor, and applied manufacturing overhead.
G. PROPERTY, PLANT AND EQUIPMENT:
Property, plant, and equipment are recorded at cost. Replacements and
major improvements are capitalized; maintenance and repairs are
expensed as incurred. Gains or losses on asset dispositions are
included in the determination of net income.
Depreciation of the Company's property, plant, and equipment is
computed using the straight-line method. The average estimated useful
lives are as follows:
Years
------
Leasehold improvements 10
Machinery and equipment 5 - 10
Research and development equipment 5 - 10
Furniture and fixtures 7 - 10
H. INTANGIBLE ASSETS:
Intangible assets are comprised of patents and intellectual property.
All intangible property is amortized by the straight line method, over
their respective useful lives, commencing upon completion of
commercialization. Intangibles are periodically reviewed to assess
recoverability from future operations using undiscounted cash flows in
accordance with SFAS 121 "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of". To the extent
carrying values exceed fair values, an impairment loss is recognized
in operating results.
F-8
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
I. STOCK-BASED COMPENSATION:
The Company grants stock options for a fixed number of shares of
common stock to employees with an exercise price equal to the fair
value of the common stock at the date of grant. The Company accounts
for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
Interpretations because the Company believes the alternative fair
value accounting provided for under FASB Statement No. 123, Accounting
for Stock-Based Compensation, (FAS 123) requires the use of option
valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
J. INCOME TAXES:
The asset and liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized
for operating loss and tax credit carry forwards and for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax
assets unless it is more likely than not that such assets will be
realized.
K. REVENUE RECOGNITION:
Revenue from product sales is recognized when the related goods are
shipped and all significant obligations of the Company have been
satisfied.
L. ADVERTISING COSTS:
In accordance with SOP No. 93-7, "Reporting on Advertising Costs," the
Company expenses all advertising expenditures as incurred. The Company
incurred $33,226 and $0 in advertising costs during 2000 and 1999,
respectively.
M. RESEARCH AND DEVELOPMENT EXPENSES:
Research and development costs are charged to expense when incurred
and aggregated $764,286 and $414,674 for 2000 and 1999, respectively.
N. EARNINGS (LOSS) PER COMMON SHARE:
Earnings per common share are calculated under the provisions of SFAS
No. 128, "Earnings per Share," which established new standards for
computing and presenting earnings per share. Adopted by the Company
during 1998, SFAS No. 128 requires the Company to report both basic
earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is
based on the weighted-average number of common shares outstanding plus
all potential dilutive common shares outstanding. Since the Company is
reporting losses from operations, the exercise of stock options and
warrants is not assumed since the result would be antidilutive.
Earnings per share amounts for all periods are presented.
F-9
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
O. NEW ACCOUNTING STANDARDS:
Accounting standards adopted during 1999 include SFAS No. 130,
"Reporting Comprehensive Income," SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." The adoption of these standards had no effect on the
Company's consolidated results of operations, financial position, or
cash flows.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, which is defined as all changes in stockholders'
equity during a period except those resulting from investments by and
distributions to stockholders. The standard requires reporting certain
transactions that result in a change in stockholders' equity to be
included in other comprehensive income and displayed as a separate
component in the consolidated statement of stockholders' equity.
SFAS No. 131 establishes new standards for determining operating
segments and disclosure requirements for those segments, products,
geographic areas, and major customers. As required by SFAS No. 131,
the Company has revised certain disclosures included in its Business
Segments footnote.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises the disclosure requirements related
to pension and other postretirement benefits. The new standard does
not change the measurement or accounting recognition for such plans.
As required by SFAS No. 132, the Company has revised the disclosures
included in its Pension Plans and Postretirement Benefits footnote.
The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which
requires that certain costs related to developing or obtaining
internal use software should be capitalized. The adoption of this
standard did not have a material effect on the Company's consolidated
results of operations, financial position, or cash flows.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions
involving Stock Compensation, an Interpretation of APB Opinion No.
25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options
assumed in business combinations. FIN 44 became effective on July 1,
2000, but is applicable for certain transactions dating back to
December 1998. The adoption of FIN 44 did not have a material impact
on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." (SAB No. 101). SAB No. 101 expresses the views
of the SEC staff in applying generally accepted accounting principles
to certain revenue recognition issues. Subsequently, SAB Nos. 101A and
101B were issued delaying the implementation of SAB No. 101 to the
fourth quarter of 2001. The SAB requires companies to report any
changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with Accounting
Principles Board ("APB") Opinion 20, "Accounting Changes". The Company
does not believe that the adoption of SAB No. 101 will have a material
impact on the Company's financial position or results of operations.
F-10
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
O. NEW ACCOUNTING STANDARDS (CONTINUED):
New accounting standards issued include SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes a
comprehensive standard for the recognition and measurement of
derivatives and hedging activities. The new standard requires that all
derivatives be recognized as assets or liabilities in the statement of
financial position and measured at fair value. Gains or losses
resulting from changes in fair value are required to be recognized in
current earnings unless specific hedge criteria are met. SFAS No. 133
will become effective for the Company beginning in the first quarter
of fiscal year 2001. The Company has not determined the effect of this
new standard; however, due to the Company's limited use of
derivatives, the impact is not expected to be material.
NOTE 3. RESTATEMENT OF YEAR 2000 FINANCIAL STATEMENTS:
The accompanying financial statements for the year ended December 31,
2000, have been restated to reflect the business combination with
Image (see Note 1) under the purchase method of accounting as opposed
to the pooling of interests method, as previously reported.
Accordingly, Image's financial statements are only consolidated
beginning with the date of acquisition, June 28, 2000. In addition,
the Company reclassified certain tangible assets that were erroneously
classified as Patent/Intellectual Property. The following tables
present the impact of the restatement.
As Previously
Reported As Restated
-------- -----------
Year Ended December 31, 2000:
Balance Sheet:
Deferred taxes - current $ 159,426 $ 155,526
Related party portion bonds - current 100,832 76,032
Property, plant and equipment, net 7,384,679 8,256,430
Patent/intellectual property 876,751 5,000
Deferred income tax, non-current 464,085 467,984
Related party portion bonds - non-current 873,296 898,096
Accounts payable 6,640,402 6,665,322
Current portion of notes payable 351,150 343,408
Other current liabilities 400,276 370,765
Notes payable - non-current 1,685,725 1,698,058
Additional paid-in capital 6,986,003 7,229,293
Accumulated deficit (2,024,912) (2,268,202)
As Previously
Reported As Restated
-------- -----------
Year Ended December 31, 2000:
Statement of Operations:
Sales $ 21,204,435 $ 12,108,132
Cost of sales 17,946,605 10,329,418
Administrative expenses 1,478,075 889,742
Research and development 1,003,565 764,286
Sales and marketing 881,176 470,625
Interest and other income (expense) 351,062 (147,988)
Interest and financing costs 488,948 241,037
Non-recurring moving expenses 488,854 256,212
Benefit for income taxes (213,792) (332,792)
Net loss (517,934) (658,384)
Basic and diluted loss per share $ (.07) $ (.09)
See also Note 1 - Proforma Data
F-11
NOTE 4. INVENTORIES:
Inventories consisted of the following components as of December 31,
2000 and 1999:
2000 1999
----------- -----------
Raw materials $ 794,128 $ 329,227
Work-in-process 1,275,545 --
Finished goods 3,234,230 --
Obsolescence allowance (122,655) --
----------- -----------
Total $ 5,181,248 $ 329,227
=========== ===========
NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31,
2000 and 1999:
2000 1999
------------ ------------
Furniture and fixtures $ 129,955 $ 49,686
Equipment - research and development 412,325 --
Machinery and equipment 6,865,206 --
Leasehold improvements 1,252,021 --
------------ ------------
8,659,507 49,686
Less: accumulated depreciation and amortization (403,077) (23,960)
------------ ------------
$ 8,256,430 $ 25,726
============ ============
Depreciation and amortization expense amounted to $397,117 and $6,671
in 2000 and 1999, respectively.
NOTE 6. PATENT AND INTELLECTUAL PROPERTY:
The Company has capitalized $5,000 of acquisition cost in connection
with a patent through December 31, 2000.
NOTE 7. BORROWING ARRANGEMENTS:
As a condition of its Bank's consent to the merger, on August 30,
2000, the Company entered into an amended and restated borrowing
arrangement, granting to the bank a security interest in all of the
Company's assets as security for the payment of the obligations owed
the bank.
The Company has a $1.5 million revolving line of credit with an
outstanding balance as of December 31, 2000 of $899,000, which bears
interest at the Bank's prime interest rate (9.5% as of December 31,
2000) less .25%. The revolving line of credit has a June 30, 2001
expiration date. Under the line of credit, the Company is permitted to
borrow 85% of eligible accounts receivable and 50% of eligible
inventories (up to a maximum of $1.1 million).
The Bank has made available an additional line of credit of $500,000.
The outstanding balance as of December 31, 2000 was $500,000. The
additional line of credit has an expiration date of June 30, 2001, and
bears an interest rate of the Bank's prime interest rate plus .5
percent.
F-12
NOTE 7. BORROWING ARRANGEMENTS (CONTINUED):
The Bank agreement contains various covenants which the Company is
required to maintain; fixed charge and cash flow leverage ratios of
not less than 1.20:1 and not greater than 4.00:1, respectively, a
minimum tangible net worth of $4.1 million and a capital expenditure
limit of $1.6 million. As of December 31, 2000, the Company was not in
compliance with these covenants and has received a waiver from the
bank as regards these requirements
Long-term debt was comprised of the following as of December 31:
2000 1999
---------- ----------
Term note payable to a financial institution due in monthly
installments of principal and interest of $848 through March 2003;
bears interest at 8.0%, collateralized by automobile with a
net book value of $26,386 $ 20,810 $ --
Term note payable to a financial institution due in monthly
installments of principal and interest of $10,676 through November
2005; bears interest at 10.215%; collateralized by
inventory, accounts receivable and equipment 500,000 --
Term note payable to a financial institution in monthly
installments of principal and interest of $27,205 through June
2006 bears interest at 7.90%; collateralized by inventory,
accounts receivable and equipment (see Note 7) 1,444,105 --
Various equipment notes maturing in 2002 71,960 --
---------- ----------
2,036,875 --
Less current maturities 351,150 --
---------- ----------
$1,685,725 $ --
========== ==========
The aggregate scheduled maturities of long-term debt for each of the
next five years are as follows:
2001 $ 351,150
2002 359,034
2003 357,651
2004 389,375
2005 424,312
Thereafter 155,353
------------------
Total $ 2,036,875
==================
NOTE 8. INDUSTRIAL DEVELOPMENT REVENUE BOND:
On June 1, 1999, the Development Authority of Gwinnett County (the
"Authority"), issued $4,100,000 of industrial development revenue
bonds on behalf of the Company and a Related Party. The 3.5% revenue
bonds are payable in varying annual principal and monthly interest
payments through July 2019. The bond is secured by all the assets of
the Company and by real property owned by the Related Party. The bonds
along with the line of credit and term loan (see Note 6) are held by
two related financial institutions.
A loan agreement between the Authority and the Company and a Related
Party allows funds to effectively pass through the Authority to the
Company. The majority of the proceeds, $3,125,872, were used by the
Company to purchase and install certain manufacturing equipment, while
$974,128 was used by the Related Party to pay down the mortgage on the
real property leased to the Company. The Company and the Related Party
are jointly obligated to repay any outstanding debt. Under the Joint
Debtor Agreement of June 26, 2000, between the Company and the Related
Party, each has agreed to be responsible to the other for their share
of the bond obligations. The amount for which the Related Party is
responsible to the Company is reflected in current and other assets of
the Company. As of December 31, 2000, the bond principal outstanding
was $4,100,000 and the portion due from the Related Party was
$974,128.
F-13
NOTE 8. INDUSTRIAL DEVELOPMENT REVENUE BOND (CONTINUED):
The aggregate maturities of bonds payable for each of the next five
years are as follows:
Company Related Party Total
---------- ------------- ----------
2001 $ 243,200 $ 76,800 $ 320,000
2002 254,600 80,400 335,000
2003 266,000 84,000 350,000
2004 281,200 88,800 370,000
2005 296,400 93,600 390,000
Thereafter 1,774,600 560,400 2,335,000
---------- ---------- ----------
Total $3,116,000 $ 984,000 $4,100,000
========== ========== ==========
NOTE 9. STOCKHOLDERS' EQUITY:
A. COMMON STOCK:
As discussed in Note 1, the Company issued an aggregate of 6,000,000
shares of its common stock to the stockholders of Logical and Image in
exchange for their shares in Logical and Image in a merger transaction
accounted for retroactively as a recapitalization. Simultaneously with
this recapitalization, the Company effected a reverse stock split of
one for 6.0779 shares of common stock. All share and per share amounts
have been restated to reflect the stock split and recapitalization for
all periods presented.
See also Note 8c regarding additional sale of equity securities.
B. STOCK OPTION PLANS:
After the Merger, the Company granted options to acquire 500,000
shares of the common stock of the Company to senior members of the
Company's management at an exercise price of $2.00 per share. The
options will vest over a two to four year period.
Pro forma information regarding net income and earnings per share is
required by Financial Accounting Standards Board Statement 123, and
has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant
using Black-Scholes option pricing model with the following weighted
average assumptions for 2000, risk-free interest rate of 6.02%,
dividend yield of 0%, volatility factor of the expected market price
of the Company's common stock of .49, and a weighted-average expected
life of the option of 3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. 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 models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
F-14
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED):
B. STOCK OPTION PLANS (CONTINUED):
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
2000
----------
Pro forma net loss $(840,587)
Pro forma loss per common share:
Basic (.11)
Diluted (.11)
A summary of the Company's stock option activity, and related
information for the year ended December 31 follows:
2000
----------------------
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
------- ---------
Outstanding at the beginning of the year -- $ --
Granted 500,000 2.00
Exercised -- --
-------
Outstanding at the end of the year 500,000 2.00
=======
Exercisable at the end of the year 250,000 $ 2.00
=======
Weighted-average fair value of options granted
during the year $ 2.05
=======
The weighted-average remaining contractual life of these options is 3
years.
C. STOCK WARRANTS:
As part of the Merger, the Company granted warrants (the "New
Warrant") to purchase up to 100,000 shares of the common stock of the
Company to professional advisors to the Merger. The New Warrant
entitles the warrant holder to purchase, at any time and for a
five-year period, a share of common stock of the Company for $2.00 per
share. In addition, current stockholders at December 31, 2000, own
225,507 similar warrants (the "Old Warrant"). The Old Warrant entitles
the warrant holder to purchase, at any time until September 15, 2001,
a share of common stock of the Company for $2.70 per share. On August
29,2000, the Board of Directors approved a warrant exercise price of
$2.00 per share on the Old Warrant, provided it is exercised by
November 15, 2000. As of December 31, 2000, the Company had received
$92,421 in proceeds from the exercise of warrants.
The Company issued warrants to purchase shares of common stock of the
Company to investors in a private placement approved by the Board of
Directors on August 29, 2000. Each Unit in the private placement was
priced at $2.00 and consisted of one common share of the Company's
common stock and one warrant to purchase one share of common stock at
an exercise price of $2.00. From October 22, 2000 to December 31,
2000, the Company issued and sold 444,750 Units for a total of
$889,500. The warrants expire November 30, 2003. No underwriting
discounts or commissions were paid to any person.
D. RETAINED EARNINGS:
The Company is limited in its ability to declare and pay dividends by
the terms of certain debt agreements.
F-15
NOTE 10. PENSION PLANS AND POSTRETIREMENT BENEFITS:
The Company has adopted the Color Image, Inc. Profit Sharing
Retirement Plan. Under this defined contribution plan, employees with
one year or more of service who have worked at least 1,000 hours and
have reached age 21 are eligible for participation. Participants may
contribute between 1% and 15% of their compensation as basic
contributions. The Company will match 50% of the first 3% deferred by
any participant. Company contributions vest from 20% in the second
year of service to 100% in the sixth year. For the years ended
December 31, 2000 and 1999, the Company incurred expense of $12,476
and $0, respectively.
NOTE 11. RELATED-PARTY TRANSACTIONS:
A. LEASE
The Company leases certain facilities under a ten-year real property
lease agreement from Kings Brother LLC. (the "Related Party" - see
Note 7) which expires on April 30, 2009. The lease term provides for
three phases as the Company increases its use of space. The Company is
currently in its third and final phase which commenced on May 1, 2000
and will terminate upon expiration of the lease. The monthly rental
cost throughout this phase aggregates approximately $35,000. See also
Note 12.
B. PURCHASES
The Company purchases copies and laser printer products from two
entities in which a director has a beneficial ownership interest.
Purchases for the 2000 and 1999 years aggregated approximately
$1,277,723 and $0 respectively.
NOTE 12. INCOME TAXES:
The provision for income taxes is composed of the following
2000 1999
--------- ----------
Current:
Federal $(367,265) $(111,932)
State (93,930) (21,768)
Deferred:
Federal 102,251 (210,440)
State 26,152 (51,660)
--------- ----------
$(332,792) $(395,800)
========== ==========
The components of the net deferred income tax asset as of December 31,
2000 and 1999, are as follows:
2000 1999
--------- ---------
Deferred tax assets:
Inventory $ 65,602 $ 58,695
Accounts receivable 35,980 23,748
Accrued expenses 58,313 77,654
Federal tax credits 195,915 193,648
Net operating loss carryforward 537,600 256,000
--------- ---------
893,410 609,745
Valuation allowance for deferred tax assets (90,000) --
--------- ---------
803,410 609,745
Deferred tax liabilities:
Fixed assets (179,900) (178,215)
--------- ---------
Net deferred tax asset $ 623,510 $ 431,530
========= =========
F-16
NOTE 12. INCOME TAXES (CONTINUED):
At December 31, 2000, the Company has recorded a net deferred tax
asset of $623,510, which is reflected in "Current Assets" and "Other
Assets" in the consolidated balance sheet. Realization of the asset is
dependent on generating sufficient taxable income in future periods.
At this time management believes that it is more likely than not that
a substantial portion of the deferred tax asset will be realized, and
consequently, has established a valuation allowance of only $90,000 as
of December 31, 2000.
At December 31, 2000, the Company had net operating loss carryforwards
(NOLs) of $821,000 for income tax purposes that expire in years
beginning 2020.
The reconciliation of income tax computed at the U.S. federal
statutory tax rates to income tax expense attributable to income
before cumulative effect of accounting changes is:
2000 1999
------ ------
Tax at U.S. statutory rates (34.00)% (34.00)%
State income taxes net of federal tax benefit (4.26) (4.29)
Other - net 4.68 8.84
------ ------
(33.58)% (29.45)%
====== ======
NOTE 13. COMMITMENTS AND CONTINGENCIES:
A. LEASES:
The Company currently leases approximately 180,000 square feet in
Norcross, Georgia that serves as executive headquarters and houses
manufacturing facilities, research and development and sales and
marketing under a lease that expires April 2009. The lease includes
three options to extend the term for five years each, and contains
provisions for annual rent increases through each term. The Company
also leases approximately 4,000 square feet in Santa Ana, California
under a lease that expired October 2001 and is month-to-month.
Minimum lease commitments are as follows:
2001 $ 536,566
2002 518,481
2003 531,444
2004 544,730
2005 558,348
Thereafter 1,914,280
-----------
Total minimum lease payments $ 4,603,849
===========
Rental expense aggregated $332,760 and $281,936 for 2000 and 1999,
respectively.
F-17
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
B. EMPLOYMENT AGREEMENTS:
On June 28, 2000, the Company entered into employment agreements with
its Chief Executive Officer, Michael W. Brennan, President, Dr.
Sueling Wang, Executive Vice President and Chief Financial Officer,
Morris E. Van Asperen, and Vice President of Marketing and Sales
Charles R. Allison. All four of the employment agreements have a 5
year term. The Company is obligated to pay Mr. Brennan and Dr. Wang
annual salaries of $150,000 with a guaranteed increase of 5% per annum
over the term of the agreements. The Company is obligated to pay Mr.
Van Asperen an annual salary of $144,000 with a guaranteed increase of
5% over the term of his agreement. In addition to commissions earned
under the Company's sales incentive program, the Company is obligated
to pay Mr. Allison an annual salary of $89,250 with a guaranteed
increase of 5% per annum over the term of his agreement. Each employee
may terminate the agreement upon 6 months notice to the Company. The
Company may terminate each employee upon 6 months notice by the
Company; provided, however, that the Company is obligated to pay to
the employee his annual base salary, commissions or bonuses earned,
and benefits for a period of 12 months after the date of such notice.
The employment agreements with the above named officers also commits
the Company to purchasing for their benefit certain life insurance
plans. For the year ended December 31, 2000, the Company did not have
in place for Mr. Van Asperen such supplemental life insurance plans,
and the plan in place for Mr. Brennan has since been cancelled. The
Company owns and is the beneficiary of a life insurance policy on Mr.
Allison and maintains it to fund the deferred compensation agreement
with Mr. Allison. Upon Mr. Allison's retirement, he, or his
beneficiaries, are to receive 120 monthly payments of $2,500 per month
or, as provided, the net present value of any unpaid amounts. The life
insurance premiums paid by the Company to fund Mr. Allison's deferred
compensation agreement in 2000 and 1999 were $11,238 and $0,
respectively. The Company pays the premiums and is the collateral
assignee of four split dollar life insurance policies owned by Dr.
Wang. Pursuant to the policies the Company will, upon his death or
earlier liquidation of each such policy, be entitled to the refund of
all premium payments made by the Company on the policies, and the
balance of the proceeds will be paid to Mr. Wang's designated
beneficiaries. The split dollar life insurance premiums were $8,253
and $0 during 2000 and 1999, respectively. The monies due from Dr.
Wang in connection with these life insurance policies at the years
ended December 31, 2000 and 1999 was $98,578 and $0, respectively.
NOTE 14. SIGNIFICANT CUSTOMERS:
For the year ended December 31, 2000, a reseller of imaging supplies
accounted for 57% of net sales. The Company does not have a written or
oral contract with this customer. All sales are made through purchase
orders.
NOTE 15. SIGNIFICANT SUPPLIERS:
For the year ended December 31, 2000, the Company purchased 38% of its
raw materials, components and supplies from one supplier in connection
with sales to its largest customer.
NOTE 16. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry
segment and involve the development and manufacture of products used
in electronic printing. All of the Company's assets are domestic. The
sales to unaffiliated customers by geographic region are as follows:
2000 1999
---- ----
Sales to Unaffiliated Customers
United States $10,453,477 $ 535,650
Europe 524,291 5,026
All Other 1,130,364 26,523
---------- ----------
Total $12,108,132 $ 567,199
F-18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Color Imaging, Inc.
Date: May 24, 2002 /S/ MICHAEL W. BRENNAN
---------------------------------------
Michael W. Brennan, Chairman and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: May 24, 2002 /S/ MICHAEL W. BRENNAN
---------------------------------------
Michael W. Brennan, Chairman and
Chief Executive Officer
Date: May 24, 2002 /S/ MORRIS E. VAN ASPEREN
--------------------------------------
Morris E. Van Asperen, Chief Financial
Officer and Director
Date: May 24, 2002 /S/ SUELING WANG
---------------------------------------
Dr. Sueling Wang, Vice-Chairman,
President and Chief Operating Officer
Date: May 24, 2002 /S/ CHARLES R. ALLISON
---------------------------------------
Charles R. Allison, Director
Date: May 24, 2002 /S/ EDWIN C. ST. AMOUR
---------------------------------------
Edwin C. St. Amour, Director
Date: May 24, 2002 /S/ ROBERT L. LANGSAM
---------------------------------------
Robert L. Langsam, Director
Date: May 24, 2002 /S/ VICTOR A. HOLLANDER
----------------------------------------
Victor A. Hollander, Director
Date: May 24, 2002
----------------------------------------
Jui-Hung Wang, Director
Date: May 24, 2002
----------------------------------------
Jui-Kung Wang, Director
Date: May 24, 2002
----------------------------------------
Jui-Chi Wang, Director