SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or
15(d) of the Securities Exchange
Act of 1934 For the fiscal year
ended December 31, 2002
Commission file number 0-18450
COLOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3453420
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4350 Peachtree Industrial Blvd, Suite 100
Norcross, GA 30071
(Address of Principal Executive Offices) (Zip Code)
(770) 840-1090
(770) 242-3494 Facsimile
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark 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 preceding 12 months (or for such shorter period that the
registrant was required by file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ]
The aggregate market value of the voting common equity held by non-affiliates
(3,450,063 shares) was approximately $3,001,555 at March 7, 2003 based on the
closing price of our common stock of $0.87. The number of common shares
outstanding as of March 7, 2003 was 8,425,005.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS.............................................................3
ITEM 2 PROPERTIES..........................................................17
ITEM 3 LEGAL PROCEEDINGS...................................................17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................17
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS.............................................18
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA................................19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................20
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........26
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................28
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................49
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................49
ITEM 11 EXECUTIVE COMPENSATION..............................................50
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.....................................52
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................53
ITEM 14 CONTROLS AND PROCEDURES.............................................55
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....56
SIGNATURES..........................................................60
CERTIFICATION.......................................................61
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Since 1989, Color Imaging, Inc. ("Color Imaging") has developed, manufactured
and marketed products used in electronic printing. Color Imaging formulates and
manufactures black text and specialty toners, including color and magnetic
character recognition toners for numerous laser printers, facsimile machines and
analog and digital photocopiers. Color Imaging's toners permit the printing of a
wide range of user-selected colors and also the full process color printing of
cyan, yellow, magenta and black. Magnetic character recognition toners enable
the printing of magnetic characters which are required for the high-speed
processing of checks and other financial documents. Color Imaging also supplies
other consumable products used in electronic printing and photocopying,
including toner cartridges, cartridge components, photoreceptors and imaging
drums.
Color Imaging has continually expanded its product line and manufacturing
capabilities. This expansion has led to the creation of more than 130 different
black text, color, magnetic character recognition and specialty toner
formulations, including aftermarket toners and imaging products for printers and
facsimile machines manufactured by Brother(TM), Canon(TM), Delphax(TM), Hewlett
Packard(TM), IBM(TM), Lexmark(TM), Sharp(TM), Xerox(TM), Minolta(TM), Mita(TM),
Panafax(TM), Pentax(TM), Pitney Bowes(TM), Epson(TM), Fuji-Xerox(TM),
Toshiba(TM), Kyocera(TM), Okidata(TM), and Panasonic(TM). Color Imaging also
manufactures and or markets toners for use in Ricoh(TM), Sharp(TM), Xerox(TM),
Canon(TM), Lanier(TM) and Toshiba(TM) copiers. Color Imaging also offers product
enhancements, including imaging supplies that enable standard laser printers to
print magnetic character recognition data. Color Imaging markets branded
products directly to OEMs and its aftermarket products worldwide to distributors
and remanufacturers of laser printer toner cartridges and to dealers and
distributors of copier products.
Color Imaging's business is derived from a single segment, imaging supplies and
related spare parts and consumables, used in copiers, printers and facsimile
machines. The percentage of our net sales derived from finished products, both
manufactured and purchased from others for resale, for the years ended December
31, 2002, 2001 and 2000 were 61.7%, 79.6% and 83.7%, respectively, while our
sales of bulk toners and parts for the same periods were 38.3%, 20.4% and 16.3%,
respectively. While we intend to increase our net sales of bulk toners that we
manufacture to more fully utilize our plant capacity, we believe that the net
sales of finished products will continue to be the majority of our net sales.
BACKGROUND.
Color Imaging, formerly known as Advatex Associates, Inc., was incorporated in
Delaware in 1987. On May 16, 2000, Advatex, Logical Acquisition Corp., Color
Acquisition Corp., Logical Imaging Solutions, Inc. and Color Image, Inc. entered
into a Merger Agreement and Plan of Reorganization pursuant to which Logical
Acquisition Corp. merged with and into Logical Imaging Solutions and Color
Acquisition Corp. merged with and into Color Image. Pursuant to the Merger
Agreement, stockholders of Logical Imaging Solutions and Color Image exchanged
their shares for shares of common stock of Advatex. Logical Imaging Solutions
stockholders converted their shares into shares of common stock of Advatex at
the ratio of 1.84843 shares of common stock of Advatex for each one share of
Logical Imaging Solutions. Color Image stockholders converted their shares into
shares of common stock of Advatex at the ratio of 15 shares of common stock of
Advatex for each one share of Color Image. Following the conversion of shares by
Logical Imaging Solutions and Color Image stockholders, stockholders of Logical
Imaging Solutions and Color Image owned approximately 85% of the outstanding
shares of common stock of Advatex and stockholders of Advatex before the merger
owned approximately 15% and Logical Imaging Solutions and Color Image became
wholly-owned subsidiaries of Advatex. The purpose of the merger was to combine
Color Image's toner and consumable expertise and manufacturing plant with
Logical Imaging Solutions' advanced printing system capabilities to offer a
wider product range and ensure product supply for Logical Imaging Solutions'
Solution Series printing systems. Management also anticipated that the merger
with a company that was subject to the Securities Exchange Act of 1934 would
also permit the reorganized business to offer shares to other acquisition
candidates, in lieu of cash.
On July 7, 2000, pursuant to a vote of our stockholders, we changed our name to
Color Imaging, Inc. On December 31, 2000, Color Image, Inc. was merged with and
into Color Imaging. On September 11, 2002, we entered into a share exchange
agreement with Digital Color Print, Inc. and four of our directors to divest our
wholly owned subsidiary, Logical Imaging Solutions, Inc. On September 30, 2002,
the share exchange transaction was completed and Color Imaging disposed of its
wholly-owned subsidiary, Logical Imaging Solutions, Inc., in a common stock
share exchange with Digital Color Print, Inc., which is owned by four former
directors. Since its founding in 1993, Logical Imaging Solutions, Inc.'s
development efforts have focused on creating a high-speed digital variable data
printing system for commercial printing applications that combines software,
hardware and consumable products not only for black text for image printing but
also in color. See "Discontinued Operations", and Note 3 of Notes to Financial
Statements.
3
MARKET OVERVIEW AND INDUSTRY
Color Imaging's market for imaging products is the installed base of electronic
printing devices: laser printers and facsimile machines and analog and digital
copiers. Color Imaging competes within this market with products supplied by the
OEM manufacturers and with other suppliers of aftermarket imaging products.
Additional products in this category include enhancement products that extend
the capabilities of the OEM's product, such as magnetic character recognition
toners that enable the printing of magnetic characters on checks and other
financial documents. We market our products worldwide and regionally primarily
to distributors of imaging products who sell to dealers and large end-users. To
a lesser extent, we sell to OEMs, re-manufacturers and a few dealers directly.
We believe the trends in the electronic printing and photocopying industry, and
of original equipment manufacturers of these devices, are (1) the introduction
of products utilizing digital and color printing technologies as opposed to
analog and black text printing, (2) offering business color printing solutions
at a cost per page that are increasingly competitive, (3) reduce the selling
price of their devices while increasing their printing speed, functionality and
networkability, (4) increase the technological barriers through the use of
specialized toners (chemical toners incorporating polyesters and proprietary raw
materials), patents and microprocessors (machine readable microchips with
internet connectivity for supplies management) and (5) endeavor to control the
market for consumable supplies through the use of their technologies as barriers
to market entry for re-manufacturers of these products or manufacturers of like,
new, aftermarket products. Over time, we believe that digital printers and
photocopy machines that print at speeds of up to 100 pages per minute will merge
into one device, delivering multifunctional capability and color printing, that
are net-workable at both lower prices and operating costs to the end user.
Consumables for these devices will become increasing difficult to remanufacture,
thereby reducing the market share of re-manufacturers and increasing the
opportunity of increased market share for newly manufactured finished product
from aftermarket suppliers, such as Color Imaging. In our experience, new
aftermarket consumable products are typically 25% cheaper than OEM's consumables
with like functionality - a savings to the consumer. As the aftermarket has
increasingly gained acceptance as product quality has steadily improved, we
believe that Color Imaging is positioning itself to take advantage of these
trends.
Color Imaging's solution is, through its own technological capability and that
of strategic suppliers, to develop and introduce compatible, newly manufactured,
aftermarket products, ahead of other aftermarket competitors, at a price
significantly below that of the OEM and make these products increasingly
available through distribution channels closer to the end-user.
GROWTH STRATEGY
Our strategy for growing revenue and operating profit is to expand, including
through strategic acquisition(s), our printer and copier products business. The
key elements of our strategy are (1) increasing vertical integration by
supplying complete toner and cartridge devices, (2) capitalizing on our research
and development expertise of producing specialty, color and digital copier and
or multifunctional device toners, (3) exploiting the efficiencies associated
with the investment made in manufacturing facilities, (4) expanding our sources
for products from strategic suppliers that we can add value to or resell that
complement our product lines and (5) expanding into new geographic markets, and
broadening our sales channels.
Color Imaging's development of new toner products is focused on providing an
aftermarket product for electronic printing devices that achieves a high level
of market acceptance. Color Imaging endeavors to offer equivalent toner products
with equal or better quality at lower prices than the OEM's toner product.
Color Imaging is committed to increasing the value added of its toner products
to the end user by providing not only the toners but also the toner cartridge or
canister that is compatible with the OEM's equipment. Color Imaging believes
that by developing toner cartridge and canister devices for specific electronic
printing or copying machines, and integrating those devices with compatible
toners, the market for Color Imaging's toner products will expand. Color Imaging
believes that this approach will also result in increased gross margins.
Color Imaging will continue to emphasize its high margin specialty toner
capability, primarily color and magnetic character recognition toners, while
providing lower margin black text toners in commodity bulk to a number of large
customers. The bulk quantity of black text toners are currently being offered to
maximize the efficiencies of Color Imaging's manufacturing plant. The
availability of this complete research and development and manufacturing
facility allows for the continued expansion of specialty toner products.
During 2003, Color Imaging expects to increase its sales of higher margin
digital, color and magnetic character recognition toners and introduce new
all-in-one toner cartridges for certain popular personal copiers and laser
printers. The introduction of new products in 2002 and the expansion of our
sales channels helped Color Imaging avoid a substantial revenue decline in 2002,
and are expected to largely offset the loss of revenues from our largest
customer in 2003. While the all-in-one cartridges will be at margins lower than
those realized on products utilizing our digital, color and magnetic character
recognition toners, we expect these products to contribute to improved gross and
net profitability during 2003.
4
RECENT DEVELOPMENTS
On January 23, 2003 Color Imaging's registration statement on Form SB-2 offering
of up to 7 million shares of its common stock was declared effective by the
Securities and Exchange Commission. On March 6, 2003, Color Imaging received
subscription proceeds of $6,075,000 for the public sale of 4,500,000 shares of
its common stock from an affiliate. The acquisition of our common stock by this
affiliate is for investment purposes.
Subject to acceptance by Color Imaging of the investment in accordance with the
offering procedures, Color Imaging will terminate the offering effective March
13, 2003 and accept no additional subscriptions. Based upon the shares issued
and outstanding as of this date and upon the issuance of 4,500,000 shares of
common stock pursuant to the registration statement, Color Imaging will have
12,925,005 shares of common stock issued and outstanding.
DISCONTINUED OPERATIONS
On June 10, 2002, the board of directors, to better focus executive management
energies on each of our operating units, reaffirmed Director Michael W. Brennan
as Chairman and Chief Executive Officer of our subsidiary Logical Imaging
Solutions, Inc., and elected Jui-Hung Wang Chairman of Color Imaging. Dr.
Sueling Wang continues to serve as Vice-Chairman and President of Color Imaging
Mr. Brennan also resigned from the board of directors of Color Imaging effective
September 10, 2002, to dedicate himself to the furthering of the business
interests of Logical Imaging Solutions, including the potential reorganization
of it as a standalone company separate and apart from Color Imaging. The board
of directors and management realized that the difficulties surrounding the
raising of significant equity capital from non-affiliates for Color Imaging in
this market environment is such that a restructure of Logical Imaging Solutions
had to be considered. We did not, at that time, specifically allocate any of the
proceeds of our pending offering filed with the Securities and Exchange
Commission on Form SB-2 to the furthering of Logical Imaging Solutions'
technology, since we were considering several alternatives with regard to the
potential restructuring of Logical Imaging Solutions.
Four of our directors, Messrs. Brennan, St. Amour, Langsam and Hollander
expressed concern over the potential restructure or reorganization of Logical
Imaging Solutions and the lack of the planned use of any proceeds from our
pending offering on Form SB-2 for the further development of its technology, as
they are of the opinion that Logical Imaging Solutions' business prospects
demanded a greater investment. After informal discussion with Dr. Sueling Wang
and Mr. Van Asperen beginning this past July, they submitted an informal
proposal whereby a new company, Digital Color Print, Inc., to be initially owned
by Messrs. Brennan, St. Amour, Langsam and Hollander, would acquire the capital
stock of Logical Imaging Solutions in exchange for shares of our common stock
and warrants to purchase shares of the common stock of Logical Imaging Solutions
and/or Digital Color Print approximating up to 15% of its then outstanding
shares.
During the initial negotiations Messrs. Brennan, St. Amour, Langsam and
Hollander offered to acquire Logical Imaging Solutions at a price equivalent to
the net book value of Logical Imaging Solutions, after converting intercompany
advances to capital, such that Color Imaging did not incur a loss on the
transaction, and Color Imaging was to receive the number of shares of its common
stock, at the market price at closing, equivalent to that amount. At the time of
the initial discussions, the market price had averaged approximately $1.65/share
and Color Imaging was to have received about 1,333,000 shares, subject to
adjustment should the market price change.
As negotiations continued, numerous terms and conditions were discussed,
including a minimum and maximum number of shares of Color Imaging's stock that
was to be exchanged at closing based on the then market price. Given the
difficulty of establishing a market price that could be agreed upon, and the
resultant minimum and maximum number of our shares to be exchanged for the
shares of Logical Imaging Solutions, it was then agreed that Color Imaging would
accept 1,600,000 of its shares which at the then market price was roughly
equivalent to Color Imaging's estimated fair value of the transaction: the fair
value (approximating the net book value of Logical Imaging Solutions, after
converting intercompany advances to capital) plus the transaction costs. On
August 23, 2002, the board of directors, by unanimous written consent,
authorized our entering into a definitive share exchange arrangement to be
negotiated by management and appointed a committee of disinterested directors,
Mr. Van Asperen and Mr. Allison, to conduct due diligence as appropriate and to
engage, at their option, an independent consultant to evaluate the fairness,
from a financial point of view, of the transaction. There were also several
important conditions, such as the consent of our bank and the release of the
bank's security interest in the assets of Logical Imaging Solutions, a
recommendation by the committee of disinterested directors with an opinion of an
independent financial consultant of the fairness to Color Imaging and its
stockholders from a financial point of view of the transaction, if obtained, and
the approval to close the transaction of not only a majority of the board of
directors but also of a majority of the disinterested members of board of
directors. On September 11, 2002, after management concluded its negotiations,
we signed the share exchange agreement.
Later, the agreement was amended on September 20, 2002, when Messrs. Brennan,
St. Amour, Langsam and Hollander wanted a minimum of $100,000 of cash to be on
hand for Logical Imaging Solutions, and not in the form of a loan, the number of
shares to be received was increased from 1.6 million to 1.7 million. In
addition, Mr. Brennan agreed that his employment agreement would be immediately
terminated upon the transaction's closing and severance of $6,057.69 per
two-week period, plus reimbursement of health and life premium costs, formerly
payable through June 10, 2003 terminates as of March 10, 2003.
5
The Committee of disinterested directors, recognizing that the transaction with
directors of Color Imaging requires approval by a majority of the independent
directors of Color Imaging and receipt of a fairness opinion indicating that the
transaction is fair, from a financial point of view, to Color Imaging and its
stockholders who are unaffiliated with Digital Color Print, engaged CBIZ
Valuation Counselors to render an opinion as to whether the share exchange
agreement was fair. For the purpose of establishing a basis for rendering its
opinion, CBIZ Valuation Counselors, among other things, read the share exchange
agreement and internal memoranda and minutes of the board of directors of Color
Imaging in connection with Logical Imaging Solutions technology and operations,
reviewed the unconsolidated and consolidating financial statements of Color
Imaging, including past and forward looking budgets and projections and general
conditions, visited the facilities and interviewed the managements of both Color
Imaging and Logical Imaging Solutions, analyzed the products and technologies of
Digital Color Print/Logical Imaging Solutions, considered public data, Color
Imaging's stock price history, stock market performance and conducted other
studies and analyses, while relying on the accuracy and completeness of the
financial and other data provided by Color Imaging and Logical Imaging
Solutions.
CBIZ Valuation Counselors analyzed Color Imaging, Logical Imaging Solutions and
the warrant offered by Digital Color Print and Logical Imaging Solutions as a
means of valuing each. The analysis, given the effect to the transaction of
Logical Imaging Solutions, included:
o pro forma adjusted historical earnings,
o the market value of the common stock of each,
o discounted cash flows, and
o capital markets.
Further, CBIZ Valuation Counselors' conclusion noted that the share exchange
agreement was one of many alternatives considered by Color Imaging's management
and its board with respect to the ultimate decision to restructure the
operations of Logical Imaging Solutions.
Color Imaging's 1,700,000 shares and the warrant to purchase approximately 15%
of Digital Color Print or Logical Imaging Solutions common stock to be received
for all of the outstanding common stock of Logical Imaging Solutions was valued
by CBIZ Valuation Counselors in their report to the committee of disinterested
directors of Color Imaging. The CBIZ Valuation Counselors' report indicated a
market value for Color Imaging's common stock ranging from $0.73 to $2.32 per
share for values of approximately $1 million to $3.9 million. The discounted
cash flow analysis resulted in a value of $1.80 per share, or $3.1 million, and
the capital market analysis indicated a value based on the inclusion and
deduction of Color Imaging's long-term debt of from $1.07 to $1.28 per share
which is approximately $1.8 million and $2.2 million. Color Imaging's trailing
20-day average closing price for its common shares was $1.61, indicating a value
of approximately $2.7 million for the shares it was to receive. Including the
value of the warrant to be received by Color Imaging with an approximate value
of $24,000 and not considering the lowest or highest value developed by the
analysis as being as representative of the indicated value as the other values,
the range of the value of its common stock and the warrant it was to receive was
approximately $1.3 million to $3.1 million based on the values determined by the
analysis and $2.7 million based on the 20-day trailing trading average price of
$1.61 for its shares and $2.1 million based on its closing price of $1.25 per
share on September 25, 2002.
On the other hand, the 1,630,000 shares of Logical Imaging Solutions common
stock delivered to Digital Color Print was valued by CBIZ Valuation Counselors
from $.9 million to $2.5 million. CBIZ Valuation Counselors adjusted asset
analyses of Logical Imaging Solutions resulted in a value of approximately $.9
million and $2.5 million, or $.55 and $1.54 per share, respectively. Logical
Imaging Solutions is not publicly traded and did not meet the listing
requirement of the OTCBB and because of factors that included its business plan
relying upon the raising of additional capital and the development of new
products, CBIZ Valuation Counselors did not rely on either the market or income
approaches to valuing the Logical Imaging Solutions' common stock.
The directors, not including the directors acquiring Logical Imaging Solutions,
and the committee of disinterested directors following the completion of its due
diligence and the receipt of a fairness opinion that the share exchange
transaction, as amended, is fair to Color Imaging and its stockholders from a
financial point of view, who were unaffiliated with the stockholders of Digital
Color Print determined that the transaction was fair to Color Imaging and its
stockholders, because they believed that the "fair value" of Logical Imaging
Solutions was likely less than its net book value. Color Imaging and its special
committee believe that Logical Imaging Solutions was possibly, in the near term
and perhaps before year-end, facing a substantial impairment to its two largest
assets:
o the electron beam test fixtures for products that it had yet to
commercialize with a book value of some $1.3 million, and
o the deferred tax asset with a book value of $415,000 that depended solely
on future profitability of Logical Imaging Solutions.
Further, given:
o Logical Imaging Solutions' existing products had not yet achieved
sufficient market acceptance for it to be profitable,
o its development of its primary products is still not completed and it could
not be determined with any certainty that it ever would be completed or
made manufacturable and could be sold profitably once developed,
o competing technologies continue to advance,
6
o the company that developed the technology has achieved limited success
after more than 20 years, and
o given all of the foregoing, and the continuing prospects of losses,
negative cash flows and the potential for significantly impaired assets in
connection with Logical Imaging Solutions, the special committee and the
disinterested directors concluded the Share Exchange Agreement was
preferable to other alternative courses of action.
In connection with the share exchange, Mr. Brennan transferred to Digital Color
Print 724,215 shares and Mr. St. Amour, together with his daughter, transferred
to Digital Color Print an aggregate of 1,053,595 shares of Color Imaging common
stock held by them as trustees of certain trusts.
After having met all of the conditions, including the approval of the majority
of the disinterested directors and having obtained a fairness opinion that
indicated the transaction was fair to Color Imaging and its stockholders
unaffiliated with Digital Color Print, the divestiture of Logical Imaging
Solutions and the share exchange was completed on September 30, 2002. Effective
upon the closing, Messrs. St. Amour, Langsam and Hollander resigned as directors
of Color Imaging. Mr. Brennan had previously resigned as a director of Color
Imaging effective September 10, 2002. As the result of the foregoing, Logical
Imaging Solutions' operations and research and development activities will
remain in Santa Ana, California and are not being consolidated with ours at our
headquarters in Norcross, Georgia.
Based upon guidance provided by APB 29 in connection with accounting for
nonmonetary transactions, the 1,700,000 million shares of our common stock
exchanged for all of the shares of common stock of Logical Imaging Solutions was
valued at approximately $2.68 million: the fair value (approximating the net
book value) of Logical Imaging Solutions, after converting approximately $2.35
million of intercompany advances to capital, plus the transaction costs
incurred. The warrants that we received for approximately 15% of Logical Imaging
Solutions, or Digital Color Print, have not been assigned any value, since they
are not cashless, increase from $1.50, to $2.25 and then to $3.25 per share each
year over three years, expire after three years, are not registered for resale
and have no current market.
Now that the share exchange transaction has closed, Digital Color Print intends
to offer to exchange shares of its common stock for shares of common stock held
by our stockholders who are, per a press release of Digital Color Print, holders
of record as of October 1, 2002. We are not sponsoring, encouraging, or
responsible for the proposed offering by Digital Color Print. Conditions of the
share exchange agreement include that Digital Color Print shall be solely
responsible for such offering, including compliance with all applicable laws,
and it shall not accept the tender of more than an aggregate of 2,600,000
shares, inclusive of the 1,700,000 of our common shares that Digital Color Print
exchanged for all of the common stock of Logical Imaging Solutions. If Digital
Color Print completes its intended tender offer for a total of 2.6 million
shares of our issued and outstanding common stock, inclusive of the 1.7 million
exchanged for all of the common stock of Logical Imaging solutions, it will have
900,000 shares of our publicly traded shares which it could sell in the market
to fund its operations. Further, neither Logical Imaging Solutions nor Digital
Color Print shall take any action in connection with their offering that could
have the effect of reducing the number of our stockholders below 325. As of
February 28, 2003, we had 325 holders of record of our common stock.
PRODUCTS
Our aftermarket product net revenues for each of our fiscal years ended December
31, 2002, 2001 and 2000, by category, from continuing operations are:
Category 2002 2001 2000 Primary Product Function
------------------------------------------------------------------------------------------------------------------------------------
Cartridges & Bottles
Photocopiers $16,580,635 $18,579,212 $ 7,515,802 Black text and color toners for digital
and analog photocopiers.
Printers and Facsimiles 3,533,074 3,934,059 2,018,264 Black text, color, specialty and
magnetic character recognition toners
for laser and thermal printing devices
Bulk Toner & Parts: 7,886,600 7,456,497 1,851,002 Filling new or remanufactured OEM
printer or copier cartridges or bottles
and new replacement parts for printers
and photocopiers.
------------------ ----------------- -----------------
$28,000,309 $29,969,768 $11,385,069
------------------ ----------------- -----------------
7
RESEARCH AND DEVELOPMENT
Our research and development activities for the past several years have focused
on black text, specialty, color and magnetic character toner formulations, and
more recently polyester-based toners for full-color digital printing and
photocopying. Our commitment to increasing revenues through new product
introductions requires research and development expenditures, innovative
designs, significant development and testing activities and functional
solutions.
For the twelve months ended December 31, 2002, our research and development
expenditures increased approximately $155,000, or 20%, from approximately
$791,000 for the twelve months ended December 31, 2001. Our research and
development expenditures for the twelve months ended December 31, 2001,
increased approximately $240,000, or 44%, to $791,000 in 2001 from $551,000 in
2000.
It is necessary to make strategic decisions from time to time as to which
technologies will produce products with the greatest future potential.
Occasionally, a customer will ask Color Imaging to develop toner products for
their exclusive resale, and in that event the customer will generally
financially support Color Imaging's development activities. In turn, Color
Imaging will also occasionally work with suppliers to develop proprietary
technology for Color Imaging's exclusive use. These strategic relationships have
benefited us in the past, and we intend to continue to pursue such relationships
for new products.
Our chemists and consultants are focused on development of imaging products and
manufacturing systems that will increase efficiency, lower production costs or
improve the quality of our products. With certain products, we may elect to
purchase key components from third party suppliers, such as toner, bottles and
or print cartridges. We cannot predict whether we can continue to develop the
technologically advanced products required to remain competitive or that such
products will achieve market acceptance.
INTELLECTUAL PROPERTY
Color Imaging relies upon trade secrets and unpatented proprietary technology.
Color Imaging seeks to maintain the confidentiality of such information by
requiring employees, consultants and other parties to sign confidentiality
agreements and by limiting access by parties outside Color Imaging to such
information. There can be no assurance, however, that these measures will
prevent the unauthorized disclosure or use of this information or that others
will not be able to independently develop such information. Additionally, there
can be no assurance that any agreements regarding confidentiality and
non-disclosure will not be breached, or, in the event of any breach, that
adequate remedies would be available to Color Imaging.
We seek to protect technology, inventions and improvements that we consider
important through the use of trade secrets. While we do not believe that any of
our products infringe any valid claims of patents or other proprietary rights
held by third parties, there can be no assurance that these products do not
infringe any patents or other proprietary rights held by third parties. If an
infringement claim were made, the costs incurred to defend the claim could be
substantial and adversely affect us, even if we were ultimately successful in
defending the claim. If our products were found to infringe any proprietary
right of a third party, we could be required to pay significant damages or
license fees to the third party or cease production. Litigation may also be
necessary to enforce patent rights held by us, or to protect trade secrets or
techniques owned by us. Any such claims or litigation could result in
substantial costs and diversion of effort by management.
Specifically, we believe patent protection is of limited usefulness for our
technologies, because competitors have the ability (even if we had a patent) to
develop substantially equivalent technology. Therefore, we rely on trade secrets
and other unpatented proprietary technology. 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 our proprietary technology. We
also seek to protect our trade secrets and proprietary know-how, in part, with
confidentiality agreements with employees and consultants. There can be no
assurance that the agreements will not be breached, that we will have adequate
remedies for any breach or that our trade secrets will not otherwise become
known to or independently developed by competitors.
MARKETING AND DISTRIBUTION
We market and distribute our products worldwide through both our direct sales
force and manufacturer's representatives. Color Imaging's products are marketed
primarily to distributors, OEMs and re-manufacturers.
In the twelve months ended December 31, 2002, 2001 and 2000, our net sales were
primarily generated from the sale finished consumable products for electronic
printers and photocopying machines and comprised approximately 71.8%, 75.1% and
83.7% of net sales, respectively. For the twelve months ended December 31, 2002,
2001 and 2000, our two largest imaging products customers accounted for 47% and
20%, 41% and 16% and 0% and 0% of net sales, respectively. During the twelve
months ended 2002, there were no sales to our third largest customer of 2001 who
accounted for 12% of 2001 and was are largest customer accounting for 57% of
2000 net sales, since these sales were made directly to our largest customer
during 2002. Though our sales are on purchase orders, these customers typically
issue purchase orders three months in advance of the product delivery date and
provide us with an additional two month rolling forecast.
8
We believe that our operations are in a single industry segment involving the
development and manufacture of products used in electronic printing. All of our
assets are domestic. Our sales to unaffiliated customers by geographic region
are as follows:
2002 2001 2000
------------------------------ ------------------------------- -----------------------------
United States $ 17,728,982 63% $ 22,600,553 75% $ 10,164,567 89%
Europe 5,638,161 20% 5,255,415 18% 743,749 7%
Asia 1,253,862 5% 647,146 2% 375,020 3%
Other 3,379,304 12% 1,466,654 5% 101,733 1%
----------------- --------- ----------------- ---------- ----------------- ---------
Total $ 28,000,309 100% $ 29,969,768 100% $ 11,385,069 100%
================= ========= ================= ========== ================= =========
COMPETITION
The markets for our products are competitive and subject to rapid changes in
technology. Color Imaging in particular competes principally on the basis of
quality, flexibility, and service with a pricing strategy that reflects quality
and reliability.
Color Imaging's competitors in the toner market include large businesses with
significantly greater resources in the high-volume commodity toner market, as
well as smaller companies in the specialty, color and magnetic character toner
markets. In addition, other companies offer remanufactured toner cartridges and
printer parts that are lower priced.
Color Imaging's strategy requires that it continue to develop and market new and
innovative products at competitive prices. New product announcements by our
principal competitors, however, can have, and in the past have had, a material
adverse effect on our financial results. Such new product announcements can
quickly undermine any technological competitive edge that one manufacturer may
enjoy over another and set new market standards for quality, speed and function.
Furthermore, knowledge in the marketplace about pending new product
announcements by our competitors may also have a material adverse effect on us
inasmuch as purchasers of these products may defer purchasing decisions until
the announcement and subsequent testing of such new products.
In recent years, Color Imaging and its principal competitors, which have
significantly greater financial, marketing and technological resources than
Color Imaging, have regularly lowered prices on both printer and copier imaging
supplies and are expected to continue to do so in the future. Color Imaging is
vulnerable to these pricing pressures which, if not mitigated by cost and
expense reductions, may result in lower profitability and could jeopardize our
ability to grow or maintain market share. We expect that, as we compete more
successfully with our larger competitors, our increased market presence may
attract more frequent challenges, both legal and commercial, from our
competitors, including claims of possible intellectual property infringement.
Canon(TM), Xerox(TM) and Ricoh(TM) are the market leaders in the toner market
whose aggregate sales we believe represent approximately 75% to 85% of worldwide
toner sales. As with our other products, if pricing pressures are not mitigated
by cost and expense reductions, our ability to maintain or build market share
and profitability could be adversely affected.
Like certain of our competitors, Color Imaging is a supplier of laser printer
kits and parts. We cannot assure you that we will be able to compete effectively
for a share of this business. In addition, we cannot assure you that our
competitors will not develop new compatible laser printer products that may
perform better or sell for less than our products. Independent manufacturers
compete for the aftermarket business under either their own brand, private
label, or both, using price, aggressive marketing programs, and flexible terms
and conditions to attract customers. Depending on the product, prices for
compatible products produced by other manufacturers are offered below our
prices, in some cases significantly below our prices.
MANUFACTURING
We operate a toner manufacturing facility in Norcross, Georgia that we moved
into during 1999 and 2000. We have made significant capital investment in this
facility to increase production capacity and improve manufacturing efficiencies
to lower processing costs of our toner products. The installation of additional
equipment was completed in the second quarter 2002, and the equipment was placed
in service during the fourth quarter of 2002. This equipment is an integral part
of our plan to further increase production capacity, improve quality and
efficiency and to significantly lower the costs of our toner products. Our goal
for the last three years has been to reduce average toner product costs by
one-half, in response to management's assessment of the continuing price
reductions for these products in the marketplace.
MATERIALS AND SUPPLIERS
We procure a wide variety of components for use in our manufacturing processes,
including raw materials, such as chemicals and resins, electro-mechanical
components and assemblies. Although many of these components are standard
off-the-shelf parts that are available from multiple sources, we often utilize
preferred supplier relationships to ensure more consistent quality, cost and
9
delivery. Often Color Imaging's toner formulations are dependent on one or more
materials produced by only one vendor, since the formula was developed based on
that material's unique characteristics. Alternative materials exist, but the
differences in performance characteristics could require Color Imaging to modify
the original formula and/or its manufacturing processes to obtain a marketable
product based on the new material. Further, some chemicals are only available
from one supplier. Should these chemicals not be available from any one of these
suppliers, there can be no assurance that production of certain of our products
would not be disrupted. Some of our products incorporate technologies that are
available from a particular supplier that has been approved by one of our
customers. Approximately 47% of our sales for the year ended December 31, 2002
were derived from products limited to a specific supplier. For the year ended
December 31, 2002, we purchased 44% of our materials and supplies from that same
supplier. In the event that these materials and supplies, as well as those other
raw materials that are sourced from a single supplier, are not available to us,
our production could be disrupted. Such a disruption could materially harm our
business.
BACKLOG
Our backlog increased approximately $800,000 or 33% to $3.2 million as of
December 31, 2002, from $2.4 million at the same date of the previous year. The
increase in the backlog was primarily due to increased demand being experienced
during the middle of 2002 for certain copier products coupled with the loss of
business experienced by our largest customer during the fourth quarter of 2002
and the extension of the related delivery dates for those products previously
ordered. Other than orders from our larger customers, Color Imaging does not
usually get orders for delivery at a future date. The orders included in our
backlog are generally credit approved customer purchase orders usually scheduled
to ship in the next twelve months. Color Imaging schedules production of its
products based on order backlog, customer commitments and forecasts and demand.
However, customers may delay delivery of products or cancel orders suddenly and
without sufficient notice, subject to possible cancellation penalties. Due to
possible customer changes in delivery schedules and cancellations of orders, and
the fact that not all of our customers give us orders for future delivery, Color
Imaging's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period. Delays in delivery schedules and/or a reduction
of backlog during any particular reporting period could have a material adverse
effect on our business and results of operations. In addition, a backlog does
not provide any assurance that Color Imaging will realize a profit from those
orders or indicate in which period revenue will be recognized. See the
disclosures in Item 7 under the captions "General" and "Results of Continuing
Operations" of this report for a breakdown of our backlog and net sales by
product category.
GOVERNMENT REGULATION
Color Imaging's manufacturing operations are subject to laws and regulations,
relating to environmental matters that impose limitations on the discharge of
pollutants into the air, water and soil and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. In this regard,
Color Imaging is required to have a permit in order to conduct various aspects
of its business. The Air Protection Branch of the State of Georgia's Department
of Natural Resources Environmental Protection Division issued a permit to Color
Imaging in 2000 to construct and operate a copier and printer toner
manufacturing facility at our headquarters. The permit is conditioned upon
compliance by us with all the provisions of the Georgia Air Quality Act, and
specifically the Rules, Chapter 391-3-1, in effect. In addition to operating and
maintaining the equipment, in a manner consistent with good air pollution
control practice to minimize emissions, we must maintain records, conduct tests,
and comply with certain allowable emissions and operational limitations. The
permit is subject to revocation, suspension, modification or amendment for
cause, including evidence of our noncompliance. Compliance with these laws and
regulations in the past has not had a material adverse effect 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 effect on us.
EMPLOYEES
As of December 31, 2002, we had seventy-seven (77) employees, including one (1)
part-time employee. At December 31, 2001, we had ninety-two (92) employees,
including one (1) part-time employee, while at December 31, 2000 we had one
hundred six (106) employees, including one (1) part-time employee. As of
December 31, 2002, of Color Imaging's 77 employees, 12 were engaged in research
and development activities and 47 in manufacturing and operations related
positions, with the remainder in sales, marketing or administrative positions.
Of Color Imaging's employees, four (4) hold PhD degrees and nine (9) hold
masters degrees. None of our employees is represented by a labor union or is
covered by a collective bargaining agreement. We have not experienced any work
stoppages and consider our relations with employees to be good.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS:
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CUSTOMERS.
For the year ended December 31, 2002, two customers accounted for approximately
67% 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 either of these customers,
10
including through an acquisition, other business combination or the loss by them
of business from their customers 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 or substantial portions of our business with one or more of our major
customers. If we do not sell products or services to customers in the quantities
anticipated, or if a major customer reduces or 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 RELIANCE ON SALES TO A FEW MAJOR CUSTOMERS AND GRANTING CREDIT TO THOSE
CUSTOMERS PLACES US AT FINANCIAL RISK.
As of December 31, 2002, receivables from two customers comprised 62% of
accounts receivable. A concentration of our receivables from a small number of
customers places us at risk should these receivables become uncollectable. If
any one or more of our major customers is unable to pay us it could adversely
affect our results of operations and financial condition. Color Imaging attempts
to manage this credit risk by performing credit checks, requiring significant
partial payments prior to shipment where appropriate, and actively monitoring
collections.
APPROXIMATELY 47% OF OUR BUSINESS DEPENDS ON A SUPPLIER APPROVED BY ONE OF OUR
CUSTOMERS.
Some of our products incorporate technologies that are available from a
particular supplier that has been approved by one of our customers.
Approximately 47% of our sales for the year ended December 31, 2002 were derived
from products limited to a specific supplier. For the year ended December 31,
2002, we purchased 44% of our supplies from that same supplier. We do not have a
written agreement with this or any other supplier. We rely on purchase orders.
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.
IF OUR CRITICAL SUPPLIERS FAIL TO DELIVER SUFFICIENT QUANTITIES OF MATERIALS OR
PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER IT COULD NEGATIVELY AFFECT OUR
BUSINESS.
We use a wide range of materials in the production of our products, and we use
numerous suppliers to supply materials and certain finished products. We
generally do not have guaranteed supply arrangements with our suppliers. Because
of the variability and uniqueness of customers' orders, we do not maintain an
extensive inventory of materials for manufacturing or resale. Key suppliers
include providers of special resins, toners and our injection molder affiliate
that provides plastic bottles, cartridges and related components designed to
avoid the intellectual property rights of others.
Although we make reasonable efforts to ensure that raw materials, toners and
certain finished products are available from multiple suppliers, this is not
always possible; accordingly, some of these materials are being procured from a
single supplier or a limited group of suppliers. Many of these suppliers are
outside the United States, resulting in longer lead-times for many important
materials, which could cause delays in meeting shipments to our customers. We
have sought, and will continue to seek, to minimize the risk of production
interruptions and shortages of key materials and products by:
o selecting and qualifying alternative suppliers for key materials and
products;
o monitoring the financial stability of key suppliers; and
o maintaining appropriate inventories of key materials and products.
There can be no assurance that results of operations will not be materially and
adversely affected if, in the future, we do not receive in a timely and
cost-effective manner a sufficient quantity of raw materials, toners or finished
products to meet our production or customer delivery requirements.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO UTILIZE AVAILABLE MANUFACTURING
CAPACITY.
From 1999 through 2000, we 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 2003. 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 in increasing the sales of our
manufactured products, or if our existing sales from manufactured products
declines, our business will be materially and adversely affected.
11
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP, OR ACQUIRE FROM
THIRD PARTIES, INTELLECTUAL PROPERTY OR PRODUCTS THAT WE CAN COMMERCIALIZE AND
THAT ACHIEVE MARKET ACCEPTANCE.
Our success depends in part on our ability to develop proprietary toner formulas
and manufacturing processes, obtain copyrights and trademarks, maintain trade
secret protection and operate without infringing the proprietary rights of
others. 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.
Success in the aftermarket imaging industry depends, in part, on developing
consumable products that are compatible with the printers, photocopiers and
facsimile machines made by the OEMs, and that have a selling price less than
that of like consumable supplies offered by the OEM. For example, if the OEMs
introduce chemical toners with better imaging characteristics and higher yields,
microprocessor chips that communicate between the toner cartridge and the
device, or introduce products using patented or other proprietary technologies,
then the aftermarket industry has to respond with ongoing development programs
to offer compatible products that emulate the OEMs' without infringing upon the
OEM's intellectual property.
Technical innovations are inherently complex and require long development cycles
and appropriate professional staffing. Our future business success depends on
our ability, and that of critical suppliers, to develop and introduce new
products that successfully address the changing technologies of the OEMs, meet
the customer's needs and win market acceptance in a timely and cost-effective
manner. If we do not develop and introduce products compatible with the OEM's
technologies in a timely manner in response to changing market conditions or
customer requirements, our business could be seriously harmed.
The challenges we face in implementing our business model include establishing
market acceptance of existing products and successfully developing or acquiring
new product lines that achieve market acceptance. We must successfully
commercialize the products that are currently being developed, such as our color
and magnetic character recognition toner for printers and black text and color
toners for new digital copiers 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, we have
not commercialized many of the toners that are under development. 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 BUSINESS MIGHT BE ADVERSELY AFFECTED BY OUR DEPENDENCE ON FOREIGN BUSINESS.
We sell a significant amount of product to customers outside of the United
States. International sales accounted for 37%, 24% and 10% of net sales in the
years ended December 31, 2002, 2001 and 2000, respectively. We expect that
shipments to international customers will continue to account for a material
portion of net sales. During the year ended December 31, 2002, our sales were
made to customers outside the United States as follows:
o Europe (including Israel and Africa) - 20%
o Asia - 5%
o Other - 12%
Most of our products sold internationally, including those sold to our larger
international customers, 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, Color Imaging would experience higher costs in connection
with a product recall or return and replacement.
Most of our products are priced in U.S. dollars, but because we began selling
products in Europe denominated in Euros during 2001, 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. We recorded a gain of $2,858 and a charge
of $1,877 during the years ended December 31, 2002 and 2001, respectively, as a
result of foreign currency transactions.
While our business has not been materially affected in the past by foreign
business or currency fluctuations, because of our significant dependence on
international revenues, our operating results could be negatively affected by a
continued or additional decline in the economies of any of the countries or
regions in which we do business. Periodic local or international economic
downturns, trade balance issues, changes to duties, tariffs or environmental
regulations, political instability and fluctuations in interest and currency
exchange rates could negatively affect our business and results of operations.
We cannot assure you that these factors will not have a material adverse effect
on our international sales and would, as a result, adversely impact our results
of operation and financial condition.
12
OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED IF WE ARE UNABLE TO RECOUP
OUR INVESTMENT IN RESEARCH AND DEVELOPMENT.
The rapid change in technology in our industry requires that we continue to make
investments in research and development in order to not only develop
technologies that function like the OEMs' and do not infringe on the OEMs'
intellectual property rights, but we must also enhance the performance and
functionality of our products and to keep pace with competitive products and
satisfy customer demands for improved performance, features, functionality and
costs. There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development. Research and development costs
typically are incurred before we confirm the technical feasibility and
commercial viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these products at prices that are favorable to us. Our business could be
seriously harmed if we are unable to sell our products at favorable prices or if
our products are not accepted by the market in which we operate.
OUR INTELLECTUAL PROPERTY PROTECTION IS LIMITED.
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:
o laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies; and
o 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.
WE DEPEND ON THE EFFORTS AND ABILITIES OF CERTAIN SENIOR MANAGEMENT AND OTHER
KEY PERSONNEL TO CONTINUE OUR OPERATIONS AND GENERATE REVENUES.
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, employment agreements may be terminated by either party upon giving
the required notice. 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.
WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUE AND BE UNABLE TO
MAINTAIN OUR CLIENT RELATIONSHIPS IF WE LOSE OUR PRODUCTION CAPACITY.
We manufacture all of the products we sell in our existing facility in Norcross,
Georgia. If our existing production facility becomes incapable of manufacturing
products for any reason, we may be unable to meet production requirements, we
may lose revenue and we may not be able to maintain our relationships with our
customers. Without our existing production facility, we would have no other
means of manufacturing products until we were able to restore the manufacturing
capability at our facility or develop an alternative manufacturing facility.
Although we carry business interruption insurance to cover lost revenue and
profits in an amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact on
relations with our existing customers resulting from our inability to produce
products for them.
OUR ACQUISITION STRATEGY 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
businesses 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.
13
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, and any others which may occur in the future, including
civil disturbance, war, riot, epidemics, public demonstration, explosion,
freight embargoes, 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 predict 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.
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 domestic and international 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. In addition, 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.
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 and consumable imaging products
industry in which we operate. In addition, the market for digital color printers
and copiers and related consumable products is subject to rapid change and the
OEM technologies are becoming increasingly difficult barriers to market entry.
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.
THE IMAGING SUPPLIES INDUSTRY IS COMPETITIVE AND WE ARE RELATIVELY SMALL IN SIZE
AND HAVE FEWER RESOURCES IN COMPARISON WITH MANY OF OUR COMPETITORS.
Our industry includes large original equipment manufacturers of printing and
photocopying equipment and the related imaging supplies, as well as other
manufacturers and resellers of aftermarket imaging supplies, with substantial
resources to support customers worldwide. Our future performance depends, in
part, upon our ability to continue to compete successfully worldwide. All of the
original equipment manufacturers and many of our other competitors are
diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products, some of which compete with the
products that we offer. These competitors may bundle their products in a manner
that may discourage customers from purchasing our products. In addition, we face
competition from smaller emerging imaging supply companies whose strategy is to
provide a portion of the products and services that we offer. Loss of
competitive position could impair our prices, customer orders, revenues, gross
margins, and market share, any of which would negatively affect our operating
results and financial condition. Our failure to compete successfully with these
other companies would seriously harm our business. There is risk that larger,
better-financed competitors will develop and market more advanced products than
those that we currently offer or may be able to offer, or that competitors with
greater financial resources may decrease prices thereby putting us under
financial pressure. The occurrence of any of these events could have a negative
impact on our revenues.
14
OUR PRODUCTS HAVE SHORT LIFE CYCLES AND ARE SUBJECT TO FREQUENT PRICE
REDUCTIONS.
The markets in which we operate are characterized by rapidly evolving and
increasingly difficult technologies, frequent new product introductions and
significant price competition. Consequently, our products have short life
cycles, and we must 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 and could cause our operating expenses
to increase substantially.
OUR FINANCIAL PERFORMANCE DEPENDS ON OUR ABILITY TO SUCCESSFULLY MANAGE
INVENTORY LEVELS, WHICH IS AFFECTED BY FACTORS 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 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.
RISKS RELATING TO OWNING OUR COMMON STOCK:
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN APPROXIMATELY 42% OF THE OUTSTANDING
SHARES OF COMMON STOCK, AND AN AFFILIATE HAS SUBSCRIBED TO OUR OFFERING FOR 4.5
MILLION SHARES OF OUR COMMON STOCK, ALLOWING THESE STOCKHOLDERS TO CONTROL
MATTERS REQUIRING APPROVAL OF THE STOCKHOLDERS.
As a result of such ownership, and potential increased ownership, by our
officers and directors, other 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 10, 2003, we had issued and outstanding 8,425,005 shares of common
stock and 935,337 outstanding warrants and 920,000 outstanding options to
purchase 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 we 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. Stockholders in our registration statement on Form
SB-2 declared effective on January 23, 2003, are able to sell up to
approximately 4 million shares of our common stock, and such sales could make it
more difficult for us to sell securities at the time and price we deem
appropriate. To the extent stockholders, including the stockholders listed in
the Form SB-2, offer 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 as a result of the concurrent offering by stockholders listed
in the Form SB-2. Investors may negotiate prices with stockholders listed in the
Form SB-2 which are lower than the price we are offering our shares of common
stock. Furthermore, 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.
WE MAY FACE POTENTIAL REGULATORY ACTION OR LIABILITY IN CONNECTION WITH OUR 2001
PRIVATE PLACEMENT.
Our issuance of common stock and warrants in a private placement which was
completed in 2001 could subject us to potential adverse consequences, including
securities law liability and the voiding of contracts entered into in connection
with the private placement. If our activities or the activities of other parties
in the 2001 private placement are deemed to be inconsistent with securities laws
under Section 29 of the Securities Exchange Act of 1934 or our activities or the
activities or the activities of other parties are deemed to be inconsistent with
the broker dealer registration provisions of Section 15(a) of the Exchange Act:
o we may be able to void our obligation to pay transaction-related fees in
connection with the private placement and we may receive reimbursement for
fees already paid;
15
o persons with whom we have entered into securities transactions that are
subject to these transaction-related fees may have the right to void these
transactions; and
o we may be subject to regulatory action.
Due to the inherent uncertainties involved with the interpretation of securities
laws, we are unable to predict the following: the validity of any potential
liability in connection with our private placement, the outcome of any
regulatory action or potential liability or the outcome of voiding transactions
in connection with the private placement. The defense of any regulatory action
or litigation and any adverse outcome could be costly and could have a material
adverse effect on our financial position and results of operations and could
divert management attention.
DIGITAL COLOR PRINT'S INTENDED TENDER OFFER TO EXCHANGE ITS SHARES FOR UP TO
900,000 SHARES OF OUR COMMON STOCK MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK.
Digital Color Print's intended tender offer to exchange shares for up to 900,000
shares of our common stock could result in Digital Color Print having up to
900,000 shares of our common stock that it could sell in the market. The sale of
all or substantially all of such shares of our common stock by Digital Color
Print may adversely affect the market price of our common stock.
OUR COMMON STOCK IS LISTED ON THE OVER-THE-COUNTER (OTC) 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 OTC Bulletin Board, the liquidity of
our common stock is impaired, not only in the number of shares that are bought
and sold, but also through delays in the timing of transactions, and limited
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:
o progress of our products through development and marketing;
o announcements of technological innovations or new products by us or our
competitors;
o government regulatory action affecting our products or competitors'
products in both the United States and foreign countries;
o developments or disputes concerning patent or proprietary rights;
o actual or anticipated fluctuations in our operating results;
o the loss of key management or technical personnel;
o the loss of major customers or suppliers;
o the outcome of any future litigation;
o changes in our financial estimates by securities analysts;
o fluctuations in currency exchange rates;
o general market conditions for emerging growth and technology companies;
o broad market fluctuations;
o recovery from natural disasters; and
o economic conditions in the United States or abroad.
16
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 stockholder 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.
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, to engage in sales of
our securities, our intention to repay certain borrowings from future sales of
our securities or cash flow, the ability to expand capacity by placing in
service additional manufacturing equipment during 2003, 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, our introduction of new products and our increasing
our sales from digital copier, color and magnetic character recognition toner
products during 2003, the prospective effects of having discontinued the Logical
Imaging Solutions operations, sales, operations, demand, technology, products,
business ventures, major customers, major suppliers, retention of key officers,
management or employees, 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.
ITEM 2. PROPERTIES
We currently lease a facility of approximately 180,000 square feet in Norcross,
Georgia from an affiliated party. This facility serves as our executive
headquarters and houses our toner manufacturing facilities, as well as our
research and development and sales and marketing departments. On February 5,
2003, we amended the lease to extend the term from March 31, 2009 to March 31,
2013 for this facility and it includes three options at our election to extend
the term for five years each. On September 30, 2002, we divested Logical Imaging
Solutions and no longer have the facility in Santa Ana, California. Management
considers its facility to be sufficient for its operations for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
Color Imaging is not a party to nor is any of its property subject to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the Over the Counter Bulletin Board (the OTC
Bulletin Board) under the symbol CIMG. Prior to July 7, 2000, our common stock
was traded on the OTC Bulletin Board under the symbol ADTX. The following table
sets forth the high and low prices of our common stock for the quarters
indicated as quoted on the OTC Bulletin Board.
2001 2002
------------------------- --------------------------
HIGH LOW HIGH LOW
---------- ---------- ----------- -----------
First Quarter.......... $ 3.0000 $ 2.5000 $ 3.3500 $ 2.1000
Second Quarter......... 2.6500 1.9000 2.5600 1.2500
Third Quarter.......... 2.7500 1.9000 2.3500 1.0100
Fourth Quarter......... 4.3000 2.0000 1.6000 0.8000
The above quotations represent prices, adjusted for stock splits, between
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
HOLDERS
As of February 28, 2003, there were 325 holders of record of our common stock.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings to finance our
operations and fund the growth of our business. Any payment of future dividends
will be at the discretion of our board of directors and will depend upon, among
other things, our earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of dividends
and other factors that our board of directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
As of the year ended December 31, 2002, the following securities were authorized
for issuance under our equity compensation plans:
------------------------------------------- ---------------------------- -------------------------- -----------------------------
Plan Category Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options outstanding options future issuance under
equity compensation plans
(excluding securities
(a) (b) reflected in column (a))
------------------------------------------- ---------------------------- -------------------------- -----------------------------
Equity compensation plans approved by
security holders None N/A N/A
------------------------------------------- ---------------------------- -------------------------- -----------------------------
Equity compensation plans not approved by
security holders 945,000 $ 2.33 N/A
------------------------------------------- ---------------------------- -------------------------- -----------------------------
Total 945,000 $ 2.33 None
------------------------------------------- ---------------------------- -------------------------- -----------------------------
After the merger, on June 28, 2000, we granted options to acquire 500,000 shares
of our common stock to senior members of our management at an exercise price of
$2.00 per share. The options vest over a two to four year period and expire 5
years from their respective date of vesting.
During the year ended December 31, 2001, the board of directors granted officers
and employees options to acquire 535,000 shares of our common stock and outside
18
directors options to acquire 175,000 shares of our common stock at an exercise
price of $2.75 per share. Of the 535,000 options granted to officers and
employees, 25% vested immediately and the remainder will vest over 3 years. The
officer and employee options expire 5 years from their respective date of
vesting. Each outside director was granted options to acquire 25,000 shares of
our common stock, for a total of 175,000 options, effective upon his or her
election or appointment to the board of directors. The outside director options
vest over 5 years, beginning with the first anniversary date of his or her
appointment to the board, and expire 3 years from their respective date of
vesting. As a result of employment terminations or resignations, as of December
31, 2002, options to purchase 190,000 shares of common stock by management or
our employees have lapsed, and options to purchase 100,000 shares of our common
stock granted to outside directors have lapsed.
The board of directors granted options to acquire 100,000 shares of our common
stock to an officer at an exercise price of $2.00 per share during the year
ended December 31, 2002. 25% vested immediately and the remainder will vest over
3 years. The options expire 5 years from their respective date of vesting. The
officer is no longer with Color Imaging, and, as of December 31, 2002, options
to acquire 75,000 shares of our common stock have lapsed and the remainder
lapsed on February 6, 2003.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 7 and other financial information included elsewhere in this
Report or incorporated herein by reference. The selected data presented below
are derived from the Color Imaging's Consolidated Financial Statements. Prior to
the merger on June 28, 2000, Color Imaging was a non-operating public shell. On
September 30, 2002, Color Imaging divested itself of Logical Imaging Solutions,
Inc. in a share exchange agreement with Digital Color Print, Inc. The historical
results are not necessarily indicative of future results of operations.
Fiscal Year
(Dollars in thousands, except per share data) 2002 2001 2000 1999 1998
---------- ----------- ----------- ----------- -----------
Income Statement Data:
Total revenue $ 28,000 $ 29,970 $ 11,385 $ -- $ --
Operating income (loss) 988 732 (292) -- --
Net income (loss) from continuing operations 430 254 (386) -- --
Net loss from discontinued operations (261) (204) (272) (384) (643)
Net income (loss) 169 50 (658) (384) (643)
Diluted net income (loss) per share from
continuing operations .04 .03 (.05) -- --
Balance Sheet Data:
Cash and short-term investments $ 129 $ 394 $ 338 $ 950 $ 950
Net assets of discontinued operations 0 2,264 1,547 570 (243)
Total assets 16,114 19,817 19,295 1,520 707
Working capital 1,797 4,352 1,891 1,520 707
Long-term obligations 4,683 4,798 5,446 -- --
Retained earnings (accumulated deficit) (2,049) (2,218) (2,268)) (1,610) (1,226)
Total stockholders' equity 5,241 7,608 5,036 1,520 707
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
On June 28, 2000, Color Imaging, formerly known as Advatex Associates, Inc.
merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and Logical
Imaging Solutions and Color Image became wholly-owned subsidiaries of Advatex.
The financial information contained in this report is in conformity with the
purchase method of accounting. The assets, liabilities and operating results of
Color Image are only included in the consolidated financial statements of Color
Imaging from the date of acquisition, June 28, 2000, or for only the last six
months of the year ended December 31, 2000 and for the full years ended December
31, 2001 and 2002, and discontinued operations are those of Logical Imaging
Solutions for all periods. On December 31, 2000, Color Image was merged with and
into Color Imaging. On September 30, 2002, we divested Logical Imaging Solutions
in exchange for 1.7 million shares of our common stock and warrants to purchase
up to 15% of the common stock of Digital Color Print or Logical Imaging
Solutions. As the result of our disposing of Logical Imaging Solutions, Inc. we
no longer offer printing systems to commercial printers nor the support services
and consumables related thereto. As a further result of Color Imaging's
divestiture of Logical Imaging Solutions, our investments in the furthering of
Logical Imaging Solutions' technologies and carrying its operations have ceased.
Significantly, since the merger on June 28, 2000, Color Imaging invested
approximately $2.35 million in the operations of Logical Imaging Solutions and
the development of its technologies with $675,000 of that amount having been
invested during the nine month period ended September 30, 2002. The disposal of
Logical Imaging Solutions eliminates the capital needed to support those
operations and should result in improved profitability from operations.
Our strategy for growing revenue and operating profit is to expand, including
through strategic acquisition(s), our printer and copier products business. The
key elements of our strategy are (1) increasing vertical integration by
supplying complete toner and cartridge devices, (2) capitalizing on our research
and development expertise of producing specialty, color and digital copier and
or multifunctional device toners, (3) exploiting the efficiencies associated
with the investment made in manufacturing facilities, (4) expanding our sources
for products from strategic suppliers that we can add value to or resell that
complement our product lines and (5) expanding into new geographic markets, and
broadening our sales channels.
The following discussion and analysis should be read in conjunction with our
financial data and our Financial Statements and notes appearing elsewhere in
this report.
Net sales for the year ended December 31, 2002 was $28 million, compared to $30
million in 2001 and $11.4 million in 2000. Net sales in 2002 decreased primarily
due to reduced demand domestically and substantially reduced sales to our
largest customer in the fourth quarter of 2002. All periods reflect the
operating results of Color Image from after the date of the merger, June 28,
2000. In the twelve months ended December 31, 2002, 2001 and 2000, our net sales
were primarily generated from the sale of finished consumable products for
electronic printers and photocopying machines and comprised approximately 71.8%,
75.1% and 83.7% of net sales, respectively. For the twelve months ended December
31, 2002, 2001 and 2000, our two largest imaging products customers accounted
for 47% and 20%, 41% and 16% and 0% and 0% of net sales, respectively. During
the twelve months ended 2002, there were no sales to our third largest customer
of 2001 who accounted for 12% of 2001 and was are largest customer accounting
for 57% of 2000 net sales, since these sales were made directly to our largest
customer during 2002. Sales to these customers consist primarily of analog
copier products, and as a result are expected to decline over time unless these
declining sales to these customers are offset by the sale of digital copier
products. As of September 30, 2002, we no longer sell certain very low margin
copier products purchased for resale to our largest customer. As a result, our
sales will be less concentrated with our largest customer and our gross profit
margins are expected to improve. Our orders for this discontinued very low
margin product during 2002 were approximately $4 million, or 14% of our total
sales for the year ended December 31, 2002 and represents approximately 33% of
our sales for 2002 to our largest customer. During the fourth quarter of 2002,
as the result of our largest customer having lost business from one of its major
customers that has been using our product, orders from our largest customer
further declined. Orders in the fourth quarter 2002 were approximately 43% lower
than the previous quarterly averages of 2002, and we expect sales to our largest
customer during 2003 to be about one-half of the amount sold to them during
2002, or down approximately $7 million. We do not have a written or oral
contract with this customer. Our inventory for the discontinued product has been
sold, and inventory in connection with the other products no longer sold by our
largest customer to one its customers is still being sold to our largest
customer for sale to others. We do not have a written or oral contract with our
customers, and all sales are made through purchase orders. Though our sales are
on purchase orders, these customers typically issue purchase orders three months
in advance of the product delivery date and provide us with an additional two
month rolling forecast. Consistent with the purchase orders and forecasts
provided to us by our major customers, we provide our major suppliers with
purchase orders three months in advance and an additional rolling forecast for
two months. In April 2001, we changed our purchasing arrangement with our
largest supplier to FOB origination from FOB destination, and we adjusted our
pricing to reflect the change to costs.
Net sales made outside of the United States increased to approximately $10.3
million, or 37% of total sales for the twelve months ended December 31, 2002,
compared to $7.2 million, or 24% for the twelve months ended December 31, 2001.
This 42% increase in international sales resulted primarily from the increase in
20
sales to our two largest customers. However, as a result of our no longer
selling certain copier products to our largest customer, both our domestic and
our international sales are expected to decrease for all of 2003, while our
gross margin is expected to be higher throughout 2003 when compared to 2002.
The following table reflects the consolidated new orders, net of cancellations,
revenues and backlog as of the beginning and end of the three years ended
December 31, 2002, as well as for Color Imaging's two general product lines. All
periods reflect the results of Color Image from after the date of the merger,
June 28, 2000.
Backlog Backlog
at start at end
of New Net of
Year Orders Revenue Year
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
2002:
Copier Products $ 1,921 $ 20,576 $ 19,721 $ 2,718
Printer Products 483 8,465 8,279 473
-------- -------- -------- --------
Total 2,404 29,041 28,000 3,191
======== ======== ======== ========
2001:
Copier Products 2,401 20,178 20,658 1,921
Printer Products 856 8,939 9,312 483
-------- -------- -------- --------
Total 3,257 29,117 29,970 2,404
======== ======== ======== ========
2000:
Copier Products 1,795 7,936 7,330 2,401
Printer Products 69 4,842 4,055 856
-------- -------- -------- --------
Total $ 1,864 $ 12,778 $ 11,385 $ 3,257
======== ======== ======== ========
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the 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.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions 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. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
A critical accounting policy is one that is both important to the portrayal of
Color Imaging's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.
VALUATION ALLOWANCE FOR ACCOUNTS RECEIVABLE. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. These allowances are based on historical experience,
credit evaluations and specific customer collection issues we have identified.
Since our accounts receivable are often concentrated in a relatively few number
of customers, a significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results.
INVENTORY VALUATION. Our inventories are recorded at the lower of standard cost
or the current estimated market value. As with any manufacturer or wholesaler,
economic conditions, cyclical customer demand, product introductions or pricing
changes of our competitors and changes in purchasing or distribution can affect
the carrying value of inventory. Demand for our products has fluctuated
significantly and may do so in the future, which could result in an increase in
21
the cost of inventory or an increase in excess inventory quantities on hand. As
circumstances warrant, we record lower of cost or market inventory adjustments.
In some instances these adjustments can have a material effect on the financial
results of an annual or interim period. In order to determine such adjustments,
we evaluate the age, inventory turns, estimated fair value and, in the case of
toner products, whether or not they can be reformulated and manufactured into
other products, and record any adjustment if estimated fair value is below cost.
Through periodic review of each of our inventory categories and by offering
markdown or closeout pricing, we regularly take steps to sell off slower moving
inventory to eliminate or lessen the effect of any lower of cost or market
adjustment. If assumptions about future demand or actual market conditions are
less favorable than those projected by management, write-downs of inventory
could be required, and there can be no assurance that future developments will
not necessitate further write-downs.
VALUATION OF LONG-LIVED ASSETS. We periodically evaluate whether events and
circumstances have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of our long-lived assets, such as our
investment in our toner manufacturing equipment. We have approximately $7.8
million invested in such equipment and plant improvements, with a carrying value
of $6.7 million, that have estimated lives of up to twenty years. Should
competing technologies or offshore competitors cause our manufacturing
technology to be non-competitive, or should other events or circumstances
indicate that the carrying amount of these assets would not be recoverable, the
estimated life of these assets may need to be shortened and their carrying value
could be materially affected. If the sum of the undiscounted expected cash flows
from an asset to be held and used in operations is less than the carrying value
of the asset, an impairment loss is recognized.
WARRANTY. We provide a limited warranty, generally ninety (90) days, to all
purchasers of our products. Accordingly, we do not make a provision for the
estimated cost of providing warranty coverage, and instead we expense these
costs as they are incurred. On occasion, we have been required and may be
required in the future to provide additional warranty coverage to ensure that
our products are ultimately accepted or to maintain customer goodwill. While our
warranty costs have historically not been significant, we cannot guarantee that
we will continue to experience a similar level of predictability with regard to
warranty costs as we have in the past. In addition, the introduction of more
expensive finished products, technological changes or previously unknown defects
in raw materials or components may result in more extensive and frequent
warranty claims than anticipated, which could have a material adverse impact on
our operating results for the periods in which such additional costs
materialize.
RESULTS OF CONTINUING OPERATIONS
All periods reflect the operating results of Color Image from after the date of
the merger, June 28, 2000.
Color Imaging's net sales were $28 million for the year ended December 31, 2002,
a decrease of approximately 7% from December 31, 2001. The net sales by product
category were as follows:
% Increase % Increase
(Dollars in thousands) 2002 (Decresse) 2001 (Decrease) 2000
----------- ---------- ----------- ---------- ----------
Product Category:
Cartridges and bottles
Copier finished products $16,581 (11%) $18,579 147% $ 7,516
Printer finished products 3,533 (10%) 3,934 95% 2,018
----------- ---------- ----------- ---------- ----------
20,114 (11%) 22,513 136% 9,534
Bulk toner and parts 7,886 6% 7,457 303% 1,851
----------- ---------- ----------- ---------- ----------
Total net revenue $28,000 (7%) $29,970 163% $11,385
=========== ========== =========== ========== ==========
The following table sets forth, for the periods indicated, selected information
derived from Color Imaging's consolidated statements of operations and expressed
as a percentage of net sales.
Twelve Months Ended December 31,
---------------------------------------------
2002 2001 2000
------------- ------------ ------------
Net sales 100 100 100
Cost of goods sold 84 85 87
Gross Profit 16 15 13
Administrative expense 5 5 7
Deferred charge write-off 0 1 0
Research and development 3 3 5
Sales and marketing 5 4 4
Operating income 3 2 -3
Interest and financing costs 1 1 2
Depreciation and amortization 2 2 3
Income before taxes 2 1 -6
Provision for taxes (credit) 1 0 -2
Net income (loss)from continuing
operations 1 1 -3
22
YEARS ENDED DECEMBER 31, 2002 AND 2001
Net Sales. Our net sales decreased by $1.97 million, or 7%, to $28 million for
the twelve months ended December 31, 2002, from $29.97 million for the twelve
months ended December 31, 2001. Net sales made in the United States were $17.7
million, a decrease of $4.9 million, or 22%, from $22.6 million made in the
comparable period in 2001. The decrease in net sales made in the United States
resulted primarily from reduced sales to our largest customer and decreased
demand generally for all of our products, while the increase in sales made
outside of the United States was primarily the result of increased sales to our
two largest customers. Of the $28 million in net sales, $20.1 million, or 72%,
were attributable to cartridges and bottled toner products, compared to $22.5
million or 75% for the comparable period in 2001. The decrease in cartridge and
bottled toner sales of $2.4 million or 11% was primarily the result of decreased
sales to our largest customer and less demand domestically for these products.
The revenue increase from bulk toner and parts was $0.4 million or 5% compared
to 2001, largely as a result of increased sales to our largest customer. In the
twelve months ended December 31, 2002, two distributors of imaging supplies
accounted for approximately 47% and 20%, respectively, of net sales, with the
latter being an OEM for which we private label. For twelve months ended December
31, 2001, these same two customers accounted for 42% and 16%, respectively.
Cost of Goods Sold. Cost of goods sold decreased by $2.18 million, or 8.5%, to
$23.42 million from $25.60 million for the twelve months ended December 31, 2002
from the comparable period in 2001, primarily as the result of the decrease in
net sales but also as a result of lower manufacturing costs. Cost of goods sold
as a percentage of net sales decreased by 1.8 percentage points from 85.4% for
the twelve months ended December 31, 2001 to 83.6% for the twelve months ended
December 31, 2002. The decrease in the cost of goods sold as a percentage of net
sales was primarily the result of reduced sales derived from certain very low
margin products previously sold to our largest customer that have been
discontinued and the effects of previous price increases on a few analog copier
products. Having recently placed more efficient manufacturing equipment in
service, we expect our cost of goods sold to further decrease as a percentage of
net sales, but there can be no assurance in this regard.
Gross Profit. As a result of the above factors, gross profit increased to $4.6
million in the twelve months ended December 31, 2002 from $4.4 million in the
twelve months ended December 31, 2001, or only $200,000, while net sales for the
same period decreased by approximately $2 million.
Operating Expenses. Operating expenses decreased $80,000, or 2.3%, to $3,590,000
in the twelve months ended December 31, 2002 from $3,640,000 in the twelve
months ended December 31, 2001, including the $215,000 deferred charge write-off
in 2001. General and administrative, selling and R&D expenses increased, as a
percentage of net sales, to 12.8% in the twelve months ended December 31, 2002
from 12.1% in the twelve months ended December 31, 2001 as the result of the
decrease in net sales for the year and the increase in research and development
and sales and marketing expenses. General and administrative expenses decreased
approximately 10.5%, or $153,000 to $1,312,000 for the twelve months ended
December 31, 2002 from the comparable period in 2001, largely resulting from
reduced payroll, other taxes, travel and professional investor relations
expenses. Selling expenses increased by $162,000, or 13.8%, in the twelve months
ended December 31, 2002 compared to the twelve months ended December 31, 2001.
Selling expenses increased primarily as a result of increased sales commission,
advertising and payroll expenses. Research and development expenses increased by
$156,000, or 19.7%, to $947,000 in the twelve months ended December 31, 2002,
primarily as the result of efforts being redirected to toner research and
development from the acquisition and construction of capitalized test fixtures
utilized by Logical Imaging Solutions. We expect to continue to increase
research and development expenditures in an effort to develop and bring to
market more new products before our competition, while also reformulating
certain product formulas to manufacture a greater percentage of our products on
our more efficient production equipment.
Operating Income. As a result of the above factors, operating income increased
by $256,000, or 35%, to $988,000 in the twelve months ended December 31, 2002
from $732,000 in the twelve months ended December 31, 2001.
Interest and Finance Expense. Interest expense decreased by $65,000 in the
twelve months ended December 31, 2002 from the twelve months ended December 31,
2001. The decrease was primarily the result of reduced interest bearing debt
levels.
Other Income. Other income increased by $7,000 from income of $40,000 to income
of $47,000 in the twelve months ended December 31, 2002 from the twelve months
ended December 31, 2001.
Income Taxes. As the result of our profit from continuing operations in the
twelve months ended December 31, 2002, we recorded an income tax provision of
$274,000 for the period, while the income tax provisions was $121,000 for the
twelve months ended December 31, 2001.
YEARS ENDED DECEMBER 31, 2001 AND 2000
All periods reflect the operating results of Color Image from after the date of
the merger, June 28, 2000, and as a result for only six months in the period
ended December 31, 2000.
23
Net Sales. Our net sales were $30.0 million for the year ended December 31,
2001, or an increase of 163% compared to $11.4 million for the six months ended
December 31, 2000. Net sales made in the United States were $22.6 million, an
increased of $12.4 million, or 122%, from $10.2 million for the six months ended
December 31, 2000. The decrease in net sales made in the United States resulted
primarily from reduced sales to our largest customer and decreased demand
generally for all of our products, while the increase in sales made outside of
the United States was primarily the result of increased sales to our two largest
customers. Of the $30.0 million in net sales, $22.5 million, or 75%, were
attributable to cartridges and bottled toner products, compared to $9.5 million
or 84% for the six months ended December 31, 2000. The increase in cartridge and
bottled toner sales of $13 million or 136% was primarily the result of increased
sales to our two largest customers and including Color Image's net sales for
only the last six months of 2000. The revenue increase from bulk toner and parts
was $5.6 million or 303% compared to the six months ended December 31, 2000,
largely as a result of increased sales to our largest customer and including
Color Image's net sales for only the last six months of 2000. In the twelve
months ended December 31, 2001, two distributors of imaging supplies accounted
for approximately 42% and 16%, respectively, of net sales, with the latter being
an OEM for which we private label. For the six months ended December 31, 2000,
the products sold to our two largest customers of 2001 were sold to a third
customer and accounted for 64% of our total sales in 2000.
Cost of Goods Sold. Cost of goods sold increased by $15.7 million or 159% to
$25.6 million in the year ended December 31, 2001 from $9.9 million in the year
ended December 31, 2000. Had Color Image's entire year 2000 been included, cost
of goods sold would have increased by $8.1 million or 45%. This increase was
primarily due to increased net sales. Cost of goods sold as a percentage of net
sales decreased to 85% in the year ended December 31, 2001 from 87% in 2000.
Gross Profit. As a result of the above factors, gross profit increased by $2.9
million in the year ended December 31, 2001 from $1.5 million in the six months
ended December 31, 2000. Gross profit as a percentage of net sales was 15% and
13% for December 31, 2001 and 2000, respectively.
Operating Expenses. Operating expenses, excluding the deferred charge write-off,
increased $1.6 million or 91% to $3.4 million in the year ended December 31,
2001 from $1.8 million in the year ended December 31, 2000, primarily as the
result of only including Color Image's operating expenses for the last half of
2000. Notwithstanding the deferred charge write-off, general and administrative,
selling and R&D expenses decreased, as a percentage of net sales, to 12% in the
year ended December 31, 2001 from 16% in the year ended December 31, 2000.
General and administrative expenses increased by $691,000, or 89%, primarily as
the result of only reflecting Color Image's expenses for only the last half of
the year 2000. The general and administrative expenses that did increase in 2001
compared to 2000 were primarily those for professional fees and payroll as the
result of the expanded operations of Color Imaging. Selling expenses increased
by $698,000, or 148%, in the year ended December 31, 2001 compared to the year
ended December 31, 2000, primarily as the result of only reflecting Color
Image's expenses for only the last half of the year 2000. The selling expenses
that did increase in 2001 compared to 2000 were primarily those in connection
with increased marketing costs associated with the increased revenues. Selling
expenses as a percentage of net sales was 4% in both 2001 and 2000. Research and
development expenses increased by $240,000, or 44%, to $791,000 in the year
ended December 31, 2001, primarily as the result of only reflecting Color
Image's research and development costs for the last half of the year 2000.
Research and development expenses as a percentage of net sales decreased to 3%
in the year 2001, from 5% in the year 2000, reflecting the higher sales level.
Deferred Charge Write-Off. An expense of $215,000 was recorded in the year ended
December 31, 2001, for expenditures related to activities in connection with an
acquisition of a manufacturing business that was not consummated. $53,000 of
this expense was incurred during the year ended December 31, 2000 and $162,000
during the year ended December 31, 2001.
Operating Income. As a result of the above factors the operating income
increased by $1,024,000, to income of $732,000 in the year ended December 31,
2001 from a loss of $292,000 in the year ended December 31, 2000. $256,000 of
the year ended December 31, 2000 operating loss resulted from expenses in
connection with our factory relocation.
Interest and Finance Expense. Interest expense increased by $175,000 in the year
ended December 31, 2001 from the year ended December 31, 2000, primarily as a
result of only including Color Image's interest expense for the last half of
2000.
Other Income. Other income increased by $166,000 from expenses of $126,000 to
income of $40,000 in the year ended December 31, 2001 from the year ended
December 31, 2000. This increase was primarily due to not having the expenses in
2001 for the disposal of equipment in connection with our factory relocation
during 2000.
Income Taxes. As the result of our increased profit in the year ended December
31, 2001, income tax provisions were $122,000 compared to a tax credit of
$254,000 for the year ended December 31, 2000.
24
RESULTS OF DISCONTINUED OPERATIONS
On September 30, 2002, we completed a share exchange agreement with Digital
Color Print, Inc., whereby we received 1.7 million shares of our common stock in
exchange for all of the shares of the common stock of our subsidiary, Logical
Imaging Solutions, Inc. The financial statements included herein, reflect the
divestiture of Logical Imaging Solutions, Inc. as discontinued operations.
The following table sets forth, for the periods indicated, selected information
relating to the discontinued operations of Logical Imaging Solutions that has
been derived from our consolidated statements of operations.
Nine Months Ended Twelve Months
September 30, Ended
December 31,
-------------------- -------------------------------------------
2002 2001 2000
-------------------- -------------------- -------------------
Net revenue $ 464,628 $ 551,400 $ 723,063
Operating (loss) (406,570) (289,328) (350,999)
Net (loss) $ (261,326) $ (204,154) $ (271,799)
==================== ==================== ===================
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, Color Imaging had cash on hand of $129,000 and the
availability under our revolving credit line with our bank was $935,000. Our
working capital and current ratio was approximately $1.8 million and $4.3
million and 1.29 to 1 and 1.59 to 1, respectively, at December 31, 2002 and
2001.
Color Imaging generated positive cash flows from continuing operating activities
of $950,000 in the twelve months ended December 31, 2002 compared to $737,000
used by continuing operations in the twelve months ended December 31, 2001. The
increase in operating cash flows from continuing operations in the twelve months
ended December 31, 2002 was primarily due to the reduction in inventories and
higher net income. Operating cash flows used by discontinued operations were
$676,000 and $921,000 for the years ended December 31, 2002 and 2001,
respectively, resulting in net operating cash flows provided by operations of
$273,000 and used by operations of $1,658,000 for the years ended December 31,
2002 and 2001, respectively.
Cash flows used in investing activities were $568,000 in the twelve months ended
December 31, 2002, compared to $255,000 in the twelve months ended December 31,
2002 and 2001, respectively. The increase in cash used in investing activities
in the twelve months ended December 31, 2002, was entirely attributable to
increased capital expenditures in connection with our most recent factory
expansion completed at the end of the third quarter of 2002.
Cash flows provided by financing activities for the twelve months ended December
31, 2002 was $29,000, resulting primarily from the $1,000,000 in net loans we
received from three directors, compared to $1,968,000 provided by financing
activities for the comparable period of 2001. The cash flows provided by
financing activities for the twelve months ended December 31, 2001 were derived
primarily from proceeds from the sale of our common stock.
We have a $2.5 million revolving line of credit with our bank that had an
outstanding balance as of December 31, 2002 of $1,022,000. At the end of each
month, for the following month, we have an interest rate option of either the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50% or our bank's prime interest rate minus 0.25%. As of
December 31, 2002, the interest rate was the one-month Libor rate of 1.38% plus
2.50% (3.88%). This revolving line of credit has a June 30, 2003 expiration
date. Under the line of credit, we are permitted to borrow up to 85% of eligible
accounts receivable and 50 percent of eligible inventories (up to a maximum of
$1.1 million of such inventories and not to exceed 60 percent of the total
outstanding). Based on the foregoing formula, we had $935,000 of the additional
monies available to us to borrow from the bank as of December 31, 2002. We have
granted our bank a security interest in all of our assets as security for the
repayment of the line of credit. The bank agreement contains various covenants
which Color Imaging is required to maintain, and as of December 31, 2002, we
were in compliance with these covenant requirements.
Funds generated from operating activities and availability under credit
facilities is expected to be sufficient to fund our operations and other
obligations in 2003, and the $6,075,000 of proceeds received in March 2003 from
our offering on Form SB-2, subject to our acceptance in accordance with the
subscription procedures, is significantly greater than the amounts required for
our planned investing and financing expenditures for 2003. We believe that our
planned investing and financing activities for 2003 will result in increased
revenues and operating margins and reduce interest expense.
COMMITMENTS
Key suppliers include overseas toner, raw materials, cartridge, parts and
components manufacturers capable of meeting our material specifications. As of
December 31, 2002, Color Imaging had unconditional commitments to purchase $2.7
million of toner, raw materials, cartridges, parts and other merchandise with
25
future delivery dates. Due to minimum order quantities and long lead times for
many of these products, we have made purchase commitments that may be in excess
of future production requirements, and it could take several months to use all
of these product commitments in the manufacture of our products. These purchase
commitments are not expected to result in any significant losses, though those
in connection with older analog copier products have a higher risk of
obsolescence than those used in the manufacture of our other products.
Color Imaging leases its headquarters and manufacturing building and certain
small equipment. As of December 31, 2002, minimum rental commitments under
noncancellable leases total $6,476,000, of which $531,000, $545,000 and $558,000
are payable in fiscal years 2003, 2004 and 2005, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to
be accounted for using the purchase method of accounting and is effective for
all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill to be tested for impairment under certain circumstances, and
written-off when impaired, rather than being amortized as previous standards
required. Furthermore, SFAS 142 requires purchased intangible assets to be
amortized over their estimated useful lives unless these lives are determined to
be indefinite. SFAS 142 is effective for fiscal years beginning after December
15, 2001.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASB's new rules on asset impairment
supercede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and portions of Accounting Principles
Board Opinion 30, "Reporting the Results of Operations". This Standard provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale.
The adoption of the above standards had no effect on our financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 will generally require gains and losses on extinguishment of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items. Color Imaging is required to adopt SFAS No. 145 in fiscal
2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires that costs associated
with exit or disposal activities be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 will
apply to exit or disposal activities initiated by Color Imaging after fiscal
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for transition to SFAS No. 123's
fair value method of accounting for stock-based compensation. As amended by SFAS
No. 148, SFAS No. 123 also requires additional disclosure regarding stock-based
compensation in annual and condensed interim financial statements. The new
disclosure requirements are effective immediately and are reflected in Note 8 of
Notes to Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any investments or assets outside of the United States. However,
we are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates.
We estimate that about 80% of our transactions are denominated in U.S. dollars,
excepting those sales in Euros to our second largest customer's operations in
Europe. Accordingly, beginning in 2001, we are subject to foreign currency risk
with respect to future costs or cash flows from our sales in Euros. We have
adjusted our prices annually with our customer to reflect the change in the
exchange rate and do not expect to be subject to material foreign currency risk,
accordingly, with respect to those sales. As a result, to date, we have not
entered into any foreign currency forward exchange contracts or other derivative
financial instruments to hedge the effects of adverse fluctuations in foreign
currency exchange. We incurred a net foreign currency transaction gain of $2,858
in 2002 and loss of $1,877 in 2001. Our pricing for our products sold in Euros
is currently at the rate of 0.96 Euros relative to the U.S. dollar, and at
December 31, 2002, according to information available from the Pacific Exchange
Rate Service, the exchange rate for the Euro relative to the U.S. dollar was
0.95363. A 10% change in the value of the Euro from .96 Euros relative to the
United States dollar would cause approximately an $8,000 foreign currency
translation adjustment in an average month, a type of other comprehensive income
(loss), which would be a direct adjustment to stockholders' equity.
26
Our revolving line of credit bears interest based on interest rates tied to the
prime rate or LIBOR rate, either of which may fluctuate over time based on
economic conditions. As a result, we are subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market rates fluctuate and we are in a borrowing mode.
Color Imaging's investment policy requires investments with high credit quality
issuers and limits the amount of credit exposure to any one issuer. Investments
made by Color Imaging will principally consist of U.S. government and government
agency obligations and investment-grade, interest-bearing corporate debt
securities with varying maturity dates of five years or less. Because of the
credit criteria of the Color Imaging's investment policies, the primary market
risk associated with these investments is interest rate risk. Color Imaging does
not use derivative financial instruments to manage interest rate risk or to
speculate on future changes in interest rates. Since Color Imaging did not have
any monies invested in securities at December 31, 2002, we are not subject any
market or interest rate risk in connection with securities available-for-sale.
Management believes that a reasonable change in raw material prices could have a
material impact on future earnings or cash flows, because we generally are not
able to offset increases to our costs with higher prices for our products.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Annual Report on Form 10-K:
Page
----
Financial Statements:
Independent Auditors' Report.......................................29
Consolidated Balance Sheets December 31, 2002 and 2001 ...........30
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 ..................................31
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001, and 2000......................32
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000..................................33
Notes to Consolidated Financial Statements December 31, 2002,
2001 and 2000......................................................34
28
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COLOR IMAGING, INC.
NORCROSS, GEORGIA
We have audited the accompanying consolidated balance sheets of Color Imaging,
Inc. (a Delaware corporation) and subsidiary as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed on the Index of
Item 15(a). 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Color Imaging, Inc.
and subsidiary as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
Unites States of America.
LAZAR LEVINE & FELIX LLP
New York, New York
February 7, 2003
except for Note 17
the date of which
March 7, 2003
29
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
--------------- ---------------
- ASSETS -
CURRENT ASSETS:
Cash $ 128,501 $ 393,981
Accounts receivable -- net of allowance for doubtful accounts
of $64,178 and $72,911 for 2002 and 2001, respectively 2,390,019 2,894,003
Inventories 5,080,237 5,604,975
Deferred taxes -- 190,509
Related party portion of IDR bond -- current 83,160 79,596
Other current assets 304,672 335,621
Net assets of discontinued subsidiary -- 2,264,117
--------------- ---------------
TOTAL CURRENT ASSETS 7,986,589 11,762,802
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT -- NET 7,038,111 7,013,070
--------------- ---------------
OTHER ASSETS:
Related party portion of IDR bond 735,340 818,500
Deferred offering costs 121,924 --
Other assets 231,571 222,131
--------------- ---------------
1,088,835 1,040,631
--------------- ---------------
$ 16,113,535 $ 19,816,503
=============== ===============
- LIABILITIES & STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Revolving credit lines $ 1,022,470 $ 1,462,416
Accounts payable 3,543,680 4,841,414
Current portion of notes payable 363,789 340,232
Current portion of notes payable - related parties 401,937 --
Current portion of bonds payable 350,000 335,000
Other current liabilities 507,782 432,043
--------------- ---------------
TOTAL CURRENT LIABILITIES 6,189,658 7,411,105
--------------- ---------------
LONG TERM LIABILITIES:
Notes payable 989,667 1,352,893
Notes payable - related parties 598,063 --
Bonds payable 3,095,000 3,445,000
--------------- ---------------
LONG TERM LIABILITIES 4,682,730 4,797,893
--------------- ---------------
TOTAL LIABILITIES 10,872,388 12,208,998
--------------- ---------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000,000 shares;
8,437,965 and 10,099,175 shares issued and outstanding on 84,380 100,992
December 31, 2002 and 2001, respectively
Additional paid-in capital 7,205,909 9,873,939
Stock subscription receivable -- (149,000)
Accumulated deficit (2,049,142) (2,218,426)
--------------- ---------------
5,241,147 7,607,505
--------------- ---------------
$ 16,113,535 $ 19,816,503
=============== ===============
See notes to consolidated financial statements.
30
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Year Ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
SALES $ 28,000,309 $ 29,969,768 $ 11,385,069
COST OF SALES 23,421,429 25,598,095 9,882,089
------------ ------------ ------------
GROSS PROFIT 4,578,880 4,371,673 1,502,980
------------ ------------ ------------
OPERATING EXPENSES:
Administrative 1,312,317 1,464,683 773,744
Deferred charge write-off -- 215,371 --
Research and development 946,848 791,498 551,027
Sales and marketing 1,331,454 1,168,585 470,625
------------ ------------ ------------
3,590,619 3,640,137 1,795,396
------------ ------------ ------------
INCOME (LOSS) FROM OPERATONS 988,261 731,536 (292,416)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income (expense) 47,201 39,782 (126,457)
Interest and financing costs (330,606) (395,598) (221,304)
------------ ------------ ------------
(283,405) (355,816) (347,761)
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 704,856 375,720 (640,177)
PROVISION (BENEFIT) FOR INCOME TAXES 274,246 121,790 (253,592)
------------ ------------ ------------
NET INCOME FROM CONTINUING OPERATIONS 430,610 253,930 (386,585)
(LOSS) FROM OPERATIONS OF SUBSIDIARY
DISPOSED OF - NET OF INCOME TAX (261,326) (204,154) (271,799)
------------ ------------ ------------
NET INCOME (LOSS) $ 169,284 $ 49,776 $ (658,384)
============ ============ ============
INCOME (LOSS) PER COMMNON SHARE:
Basic
Continuing operations $ .04 $ .03 $ (.05)
Discontinued operations (.02) (.02) (.04)
------------ ------------ ------------
Basic earnings (loss) per share $ .02 $ .01 $ (.09)
============ ============ ============
Diluted
Continuing operations $ .04 $ .03 $ (.05)
Discontinued operations (.02) (.02) (.04)
------------ ------------ ------------
Diluted earnings (loss) per share $ .02 $ .01 $ (.09)
============ ============ ============
Weighted average shares outstanding:
Basic 9,686,429 7,985,071 7,055,763
Diluted 9,686,429 8,560,369 7,055,763
See notes to consolidated financial statements.
31
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ADDITIONAL STOCK TOTAL
COMMON PAID-IN SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL RECEIVABLE DEFICIT EQUITY
------------- ------------ ----------- ------------- ------------- -----------
Balance at December 31, 1999 3,999,987 $ 40,000 $3,058,241 $ -- $(1,609,818) $1,488,423
Acquisition of Color 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 7,490,948 74,909 7,229,293 -- (2,268,202) 5,036,000
Exercise of stock warrants 55,452 555 110,349 -- -- 110,904
Exercise of stock warrants -
cashless 1,104,815 11,048 (11,048) -- -- --
Common stock, issued for services 10,000 100 24,900 -- -- 25,000
Common stock, issued in private
placement 1,437,960 14,380 2,520,445 (149,000) -- 2,385,825
Net income for the year -- -- -- -- 49,776 49,776
------------- ------------ ----------- ------------- ------------- -----------
Balance at December 31, 2001 10,099,175 100,992 9,873,939 (149,000) (2,218,426) 7,607,505
Stock subscription received -- -- (5,649) 149,000 -- 143,351
Exercise of stock warrants -
cashless 38,790 388 (388) -- -- --
Common stock, exchanged for
subsidiary disposed of (1,700,000) (17,000) ( 2,661,993) -- -- (2,678,993)
Net income for the year -- -- -- -- 169,284 169,284
------------- ------------ ----------- ------------- ------------- -----------
Balance at December 31, 2002 8,437,965 $ 84,380 $7,205,909 $ -- $(2,049,142) $5,241,147
============= ============ =========== ============= ============= ===========
See notes to consolidated financial statements.
32
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)from continuing operations $ 430,610 $ 253,930 $ (386,585)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 542,661 569,731 371,107
Deferred income taxes 190,509 121,001 (254,976)
Allowance for doubtful accounts (8,733) 72,911 --
Compensatory stock -- 25,000 --
(Increase) decrease in:
Accounts receivable 512,717 476,987 (112,593)
Inventory 524,738 (862,087) 792,316
Prepaid expenses and other assets (100,415) 51,228 383,264
Due from related party - IDR bond 79,596 76,032 --
Increase (decrease) in:
Accounts payable and accrued liabilities (1,221,997) (1,521,895) 437,828
------------ ------------ ------------
Net cash provided (used) by continuing operations 949,686 ( 737,162) 1,230,361
Net cash (used) by discontinued operations (676,202) (921,043) (1,213,259)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 273,484 (1,658,205) 17,102
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (567,702) (254,630) (1,200,880)
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES: (567,702) (254,630) (1,200,880)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit (439,946) 63,416 (541,000)
Proceeds from long-term debt -- -- 500,000
Principal payments of long-term debt (339,667) (271,792) (278,681)
Principal payments of IDR bond (335,000) (320,000) --
Proceeds from related party borrowing 1,100,000 -- --
Principal repayments to related party (100,000) -- (90,000)
Proceeds from sale of stock 143,351 2,496,729 981,922
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,738 1,968,353 572,241
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (265,480) 55,518 (611,537)
Cash at beginning of year 393,981 338,463 950,000
------------ ------------ ------------
CASH AT END OF YEAR $ 128,501 $ 393,981 $ 338,463
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 299,226 $ 385,656 $ 206,168
Income taxes -- -- --
NONCASH ITEMS:
Common stock issued $ 388 $ 11,148 $ --
See notes to consolidated financial statements.
33
COLOR IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 Color Imaging 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. 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 assets,
liabilities and operating results of Image are only included in the consolidated
financial statements of Color Imaging from the date of acquisition, June 28,
2000.
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
(Unaudited Proforma Data)
-----------------------------
Net sales $ 21,204,435
Net loss (517,934)
Loss per share $ (0.07)
34
NOTE 1. DESCRIPTION OF COMPANY (CONTINUED):
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.
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 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.
See Note 3 regarding Discontinued Operations - Disposal of Logical.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its subsidiary. All significant inter-company 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. FAIR VALUE FINANCIAL INSTRUMENTS:
The carrying values of the Company's current financial instruments approximate
fair value due to the short term in which these instruments mature. The carrying
values of the Company's lines of credit and long-term debt approximate fair
value because the variable interest rates approximate the prevailing interest
rates for similar debt instruments.
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, 2002 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 dealers of copier
supplies and re-manufacturers of laser printing consumable products. The
Company's international customers are comprised principally of an OEM and a
large international distributor. Management does not believe significant risk
exists in connection with the Company's concentrations of credit at December 31,
2002.
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. Consideration is given to deterioration, obsolescence and other
factors in evaluating the estimated market value of inventory based upon
management's judgment and available information. Costs in inventory include
materials, direct labor, and applied manufacturing overhead.
35
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 - 20
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 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". To the extent
carrying values exceed fair values, an impairment loss is recognized in
operating results.
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. 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. The Company has
adopted the disclosure-only provisions of SFAS 123, Accounting for Stock-Based
Compensation. See Note 8B.
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:
The Company recognizes revenues in accordance with Staff Accounting Bulletin
101, Revenue Recognition in Financial Statements (SAB 101).
The Company designs, manufactures, acquires from third parties and sells toner
and parts used in electronic printing and photocopying. Revenue from such
product sales is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. At this time the earnings process is complete and the risks and
rewards of ownership have transferred to the customer, which is generally when
the goods are shipped and all significant obligations of the Company have been
satisfied.
36
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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
$106,077, $57,473 and $33,226 in advertising costs during 2002, 2001 and 2000,
respectively.
M. RESEARCH AND DEVELOPMENT EXPENSES:
Research and development costs are charged to expense when incurred and
aggregated $946,848, $791,498 and $551,027 for 2002, 2001 and 2000,
respectively, from continuing operations.
N. EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) per common share are calculated under the provisions of SFAS No.
128, Earnings per Share. 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 reported a loss from operations in
2000, the exercise of stock options and warrants was not assumed since the
result would be antidilutive for that year.
O. FOREIGN CURRENCY TRANSACTIONS:
During 2001, the Company began selling its products in certain overseas markets
where the prices were denominated in Euros. All balance sheet accounts resulting
from foreign transactions are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet date and statements of operations items
are translated at the weighted average exchange rates for the year. The
resulting translation adjustments are made directly to a separate component of
stockholders' equity. Gains and losses from foreign currency transactions, such
as those resulting from the settlement of foreign receivables (or payables) are
included in the consolidated statements of operations. As of December 31, 2002,
there were no material balance sheet items resulting from foreign currency
transactions. An aggregated gain of $2,858 and a loss of $1,877 from the
settlement of foreign receivables was recognized for the years ended December
31, 2002 and 2001, respectively, and are included in other expense on the
statements of operations. The Company had no sales denominated in currencies
other than the U.S dollar in 2000.
P. DEFERRED CHARGES:
The Company, in connection with a proposed offering (the Offering) of its
securities, has incurred certain costs which have been deferred and which will
be charged against the proceeds of the Offering or charged to expense in the
event the Offering is not completed.
The Company also defers certain expenditures related to the activities
associated with the acquisition of business assets, which the Company has
determined have a future economic benefit. These expenditures are then
capitalized into the cost of the assets upon acquisition. Management reviews
these assets whenever the circumstances and situations change such that there is
an indication that the carrying amount is not recoverable. When management's
best estimate of the future economic benefit of these assets is less than the
carrying amount, the carrying amount is reduced to the fair value and a
write-off is recognized. Deferred charges written off are not restored.
At December 31, 2000, the Company had recorded deferred charges aggregating
$53,805 in connection with fees and costs related to the planned acquisition of
a manufacturing business, and, during 2001, incurred additional costs of
$161,566. The Company was not able to consummate this acquisition and, as of
December 31, 2001, wrote off such deferred costs.
Q. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to
be accounted for using the purchase method of accounting and is effective for
all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill to be tested for impairment under certain circumstances, and
written-off when impaired, rather than being amortized as previous standards
required. Furthermore, SFAS 142 requires purchased intangible assets to be
amortized over their estimated useful lives unless these lives are determined to
be indefinite. SFAS 142 is effective for fiscal years beginning after December
15, 2001.
37
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Q. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASB's new rules on asset impairment
supercede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and portions of Accounting Principles
Board Opinion 30, "Reporting the Results of Operations". This Standard provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale.
The adoption of the above standards had no effect on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 will generally require gains and losses on extinguishment of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items. The Company is required to adopt SFAS No. 145 in fiscal
2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires that costs associated
with exit or disposal activities be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 will
apply to exit or disposal activities initiated by the Company after fiscal 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for transition to SFAS No. 123's
fair value method of accounting for stock-based compensation. As amended by SFAS
No. 148, SFAS No. 123 also requires additional disclosure regarding stock-based
compensation in annual and condensed interim financial statements. The new
disclosure requirements are effective immediately and are reflected in Note 8.
NOTE 3. DISCONTINUED OPERATIONS:
On September 30, 2002, the Company completed a share exchange agreement with
Digital Color Print, Inc. and four of its former directors, whereby the Company
received 1.7 million shares of its common stock in exchange for all of the
shares of the common stock of its subsidiary, Logical Imaging Solutions, Inc.
Based upon guidance provided by APB 29 in connection with accounting for
nonmonetary transactions, the fair value of the 1.7 million shares of common
stock received was approximately $2,678,993; the fair value (approximating the
net book value) of Logical Imaging Solutions, Inc. plus the transaction costs
incurred.
Following is summary financial information for the Company's discontinued
Logical Imaging Solutions, Inc. subsidiary:
Nine Months Ended Year Ended
September 30 December 31,
------------------ ------------------------------------------
2002 2001 2000
------------------ ------------------ -----------------
Net sales $ 464,628 $ 551,400 $ 723,063
------------------ ------------------ -----------------
Loss before taxes (406,570) (289,328) (350,999)
Income tax benefit (145,244) (85,174) (79,200)
------------------ ------------------ -----------------
Net loss from discontinued
operations $ (261,326) $ (204,154) $ (271,799)
================== ================== =================
Pursuant to the share exchange agreement, the Company also received a warrant to
purchase approximately 15% of the then outstanding common stock of Digital Color
Print, Inc. or Logical Imaging Solutions, Inc. The warrant has not been assigned
any value, since it is not cashless, increases from $1.50 to $2.25 and then to
$3.25 per share each year over three years, expires after three years, is not
registered for resale and has no current market.
38
NOTE 3. DISCONTINUED OPERATIONS (CONTINUED):
In addition, the amendment to the share exchange agreement also provides that
Mr. Brennan's (the Company's former chief executive officer) employment
agreement will be immediately terminated upon the transaction's closing and
severance of $6,058 per two-week period, plus reimbursement of health and life
insurance premium costs formerly payable through June 10, 2003 will be
terminated as of March 10, 2003.
The financial statements and related notes presented herein have been restated
to reflect discontinued operations accounting as a result of this transaction.
Logical designs, manufactures and delivers complete printing systems, including
software, control units and print engines to its customers. Logical's
development efforts focused on creating a digital variable printing process that
provides high-speed, color printing systems for commercial applications.
NOTE 4. INVENTORIES:
Inventories for continuing operations consisted of the following components as
of December 31, 2002 and 2001:
2002 2001
------------- -----------
Raw materials $ 427,752 $ 723,480
Work-in-process 1,021,496 967,982
Finished goods 3,665,953 3,987,343
Obsolescence allowance ( 34,964) ( 73,830)
------------- -----------
Total $ 5,080,237 $5,604,975
------------- -----------
NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment of continuing operations consisted of the following as of
December 31, 2002 and 2001:
2002 2001
----------- -----------
Furniture and fixtures $ 88,836 $ 86,586
Test equipment 527,151 452,517
Manufacturing machinery and equipment 6,544,886 6,146,299
Leasehold improvements 1,360,737 1,268,506
----------- -----------
8,521,610 7,953,908
Less: accumulated depreciation and amortization (1,483,499) (940,838)
----------- -----------
$7,038,111 $7,013,070
=========== ===========
Depreciation and amortization expense amounted to $542,661, $569,731 and
$371,107 in 2002, 2001 and 2000, respectively.
NOTE 6. BORROWING ARRANGEMENTS:
As a condition of its Bank's consent to the business combination (see Note 1),
the Company, on August 30, 2000, 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 $2.5 million revolving line of credit with an outstanding
balance as of December 31, 2002 of $1,022,470, which bears interest at the rate
of 3.88% (the one-month libor of 1.38% plus 2.5%) as of December 31, 2002. The
revolving line of credit has a June 30, 2003 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).
39
NOTE 6. BORROWING ARRANGEMENTS (CONTINUED):
The Bank agreement contains various covenants that the Company is required to
maintain, and as of December 31, 2002, the Company was in compliance with these
covenants.
Long-term debt was comprised of the following as of December 31:
2002 2001
---------- ---------
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 $ 2,501 $12,021
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 329,844 419,245
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).
On February 5, 2003, the note was modified and monthly installments of
principal of $23,716 begin February 24, 2003 and continue through May 2006
with interest at the 30-day libor rate plus 2.5% 998,803 1,234,755
Various equipment notes maturing in 2006 22,308 27,104
---------- ---------
1,353,456 1,693,125
Less current maturities 363,789 340,232
---------- ---------
$ 989,667 $1,352,893
========== ==========
The aggregate scheduled maturities of long-term debt for each of the next four
years are as follows:
2003 $ 363,789
2004 393,328
2005 428,254
2006 168,085
-----------
Total $1,353,456
===========
NOTE 7. 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 1.22% revenue bonds as of December 31, 2002,
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 (see
Note 10). The Company and the Related Party are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and the Related Party, each has agreed to be responsible to the other
for their share of the bond obligations and that any party causing an act of
default shall be responsible for 100% 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. The Related Party amounts owed to the Authority
are secured by a lien on the real property leased by the Company and by personal
guarantees executed by members of the Related Party. At this time, the Company
believes that the Related Party portion of the bond is fully collectible. As of
December 31, 2002, the bond principal outstanding was $3,445,000 and the portion
due from the Related Party was $818,500.
40
NOTE 7. INDUSTRIAL DEVELOPMENT REVENUE BOND (CONTINUED):
The aggregate maturities of bonds payable for each of the next five years and
thereafter are as follows:
Company Related Party Total
---------- ------------- ------------
2003 $ 266,000 $ 84,000 $ 350,000
2004 281,200 88,800 370,000
2005 296,400 93,600 390,000
2006 307,800 97,200 405,000
2007 452,200 142,800 595,000
Thereafter 1,014,600 320,400 1,335,000
---------- ------------- ------------
Total $2,618,200 $ 826,800 $3,445,000
========== ============= ============
NOTE 8. STOCKHOLDERS EQUITY:
A. COMMON STOCK AND STOCK WARRANTS:
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. Simultaneously, in 2000,
the Company effected a reverse stock split of one for 6.0779 shares of common
stock.
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, original stockholders of Logical at December
31, 2001, own 225,507 similar warrants (the Old Warrant). The Old Warrant
entitled the warrant holder to purchase, at any time until September 15, 2002, a
share of common stock of the Company for $2.70 per share. As of December 31,
2002 and 2001, the Company had received $0 and $110,905, respectively, in
proceeds from the exercise of Old Warrants. During August 2002 seven holders of
Old Warrants were issued 38,085 shares of the Company's common stock for having
exercised Old Warrants to purchase 157,116 shares of the Company's common stock,
on a cashless basis, and on September 15, 2002, Old Warrants to purchase 12,939
shares of the Company's common stock expired.
The Company issued Units consisting of common stock and common stock underlying
warrants 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. An additional
warrant to purchase common stock of the Company, for each Unit purchased in the
private placement, was issued to subscribers, at no additional cost, whose
investment(s) aggregated at least $300,000. The warrants expire November 30,
2003. During 2001, the Company issued and sold 1,437,960 Units for a total of
$2,925,920 in cash and notes receivable. The Company also issued, at no
additional cost, 1,312,960 additional warrants during this same period. In March
2002, subsequent to the balance sheet date of December 31, 2001, the Company
rescinded one transaction entered into during 2001 for the sale of 25,000 shares
of common stock and warrants to purchase 25,000 shares of the common stock of
the Company. This transaction has been retroactively reflected in the financial
statements as of December 31, 2001. The Company paid fees of $59,520 in
connection with the private placement. Additionally, the Company issued 129,837
warrants to finders to purchase the Company's common stock at an exercise price
of $2.00. During 2001, holders of the Company's warrants exercised 2,462,500
warrants on a cashless basis and received 1,104,815 shares of the Company's
common stock. During 2002, holders of the Company's warrants exercised 1,750
warrants on a cashless basis and received 705 shares of the Company's common
stock. No underwriting discounts or commissions were paid to any person. As of
March 12, 2002, all notes receivable have been fully paid by the investors.
On October 30, 2001, the Company issued and sold 1,000,000 shares of its common
stock to one accredited investor in exchange for $2 million. The purchase price
was $2.00 per share, of which $10,000 was payable in cash and $1,990,000 was
payable in the form of a recourse promissory note, payable at the earlier of (i)
six months after the registration statement covering the shares is declared
effective or (ii) twelve months from the date of the purchase agreement. The
Company also agreed to issue up to 500,000 warrants to purchase its common stock
to the investor in the event it resells the shares at a purchase price of at
least $2.00 per share. These warrants are exercisable for one year at an
exercise price of $2 per share. In March 2002, when the shares could not be
registered with the Securities and Exchange Commission while the promissory note
was unpaid, the Company and the investor mutually rescinded this transaction and
the Company has retroactively reflected this rescission as of December 31, 2001.
See Note 17. Subsequent Event.
41
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED):
B. STOCK OPTIONS:
After the Merger, on June 28, 2000, 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 vest
over a two to four year period and expire 5 years from their respective date of
vesting.
The Company granted options to acquire 710,000 shares of the common stock of the
Company to employees, officers and directors at an exercise price of $2.75 per
share during the year ended December 31, 2001. 535,000 options were granted to
officers and employees of which 25% vested immediately and the remainder vest
over 3 years. The officer and employee options expire 5 years from their
respective date of vesting. Each outside director of the Company was granted
options to acquire 25,000 shares of the common stock of the Company, for a total
of 175,000 options, effective upon his or her election or appointment to the
board of directors. The outside director options vest over 5 years, beginning
with the first anniversary date of his or her appointment to the board, and
expire 3 years from their respective date of vesting. As of December 31, 2002,
options to purchase 190,000 and 100,000 shares of the Company's common stock by
employees and outside directors, respectively, have lapsed.
The Company granted options to acquire 100,000 shares of the common stock of the
Company to an officer at an exercise price of $2.00 per share during the year
ended December 31, 2002, of which 25% vested immediately and the remainder vest
over 3 years. As of December 31, 2002, the officer was no longer an employee of
the Company and options to purchase 75,000 of the 100,000 shares of the
Company's common stock have lapsed.
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.
No compensation expense has been recognized, as all options have been granted
with an exercise price equal to the fair value of the common stock upon date of
grant. No adjustment has been made for the non-transferability of the options or
for the risk of forfeiture at the time of issuance. Forfeitures are instead
recorded as incurred. The fair value of each option grant has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
Year ended December 31,
-------------------------------------------------
Weighted-average assumptions 2002 2001 2000
---------------------------------------------- -------------- -------------- --------------
Risk-free interest rate 2.35% 4.51% 6.02%
Dividend yield 0.00% 0.00% 0.00%
Expected market price volatility factor 0.88 0.26 0.49
Weighted-average expected life of option 3 years 3 years 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.
42
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED):
B. STOCK OPTIONS (CONTINUED):
Had the effects of stock-based compensation been accounted for in the financial
statements using the Black-Scholes option pricing method, the net income and the
basic and diluted earnings per share would have been approximately as follows:
2002 2001 2000
---------- ---------- -----------
Net income (loss), as reported.... $ 169,284 $ 49,776 $ (658,384)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects 65,457 46,755 182,203
---------- ---------- -----------
Pro forma net income (loss)........ $ 103,827 $ 3,021 $ (840,587)
========== ========== ===========
Basic Earnings per share:
As reported........................ $ .02 $ .01 $ (.09)
Pro forma.......................... .01 .00 (.12)
Diluted Earnings per share:
As reported........................ $ .02 $ .01 $ (.09)
Pro forma.......................... .01 .00 (.12)
A summary of the Company's stock option activity, and related information,
follows:
2002 2001 2000
------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year 1,210,000 $ 2.44 500,000 $ 2.00 -- $ --
Granted 100,000 2.00 710,000 2.75 500,000 2.00
Exercised -- -- -- -- -- --
Terminated (365,000) 2.60 -- -- -- --
--------- --------- ---------
Outstanding at end of year 945,000 2.33 1,210,000 2.44 500,000 2.00
========= ========= =========
Exercisable at end of year 667,500 $ 2.22 503,750 $ 2.21 250,000 $ 2.00
Weighted average fair value of
options granted during the year $ .98 $ 1.98 $ 1.85
The weighted-average remaining contractual life of these options is 5 years.
C. RETAINED EARNINGS:
The Company is limited in its ability to declare and pay dividends by the terms
of certain debt agreements.
NOTE 9. 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,
2002, 2001 and 2000, the Company incurred expenses of $20,783, $24,355 and
$9,940, respectively.
43
NOTE 10. RELATED-PARTY TRANSACTIONS:
A. LEASE
The Company leases certain facilities under a real property lease agreement with
Kings Brothers, LLC, amended on February 5, 2003 extending the expiration date
from March 31, 2009 to March 31, 2013 (the Related Party -- see Note 7). The
rental payments for the periods ending December 31, 2002, 2001 and 2000 were
$518,484, $505,836 and $186,427, respectively.
Minimum annual lease commitments are as follows:
2003 $ 531,444
2004 544,730
2005 558,348
2006 572,307
2007 586,612
Thereafter 3,682,826
------------
Total minimum lease payments $ 6,476,2626
============
B. PURCHASES
The Company purchases copier and laser printer products from an entity in which
three directors have a beneficial ownership interest. Purchases for the 2002,
2001 and 2000 years aggregated approximately $2,148,279, $2,061,683 and $435,500
respectively. See also Note 14.
NOTE 11. INCOME TAXES:
The provision for income taxes is composed of the following
2002 2001 2000
---------- ------------ ------------
Current:
Federal $ 70,538 $ 130,470 $ (231,325)
State 13,199 73,380 ( 51,495)
Deferred:
Federal 160,482 (87,500) 50,971
State 30,027 5,440 (21,743)
---------- ------------ ------------
$274,246 $ 121,790 $ (253,592)
========== ============ ============
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense attributable to income from continuing operations,
before cumulative effect of accounting changes is:
2002 2001 2000
--------- --------- --------
Tax at U.S. statutory rates 34.00% 34.00% (34.00%)
State income taxes net of federal tax benefit 6.38 6.16 (4.26)
Other-net (1.48) (7.74) (1.35)
--------- --------- --------
38.90% 32.42% (39.61%)
========= ========= ========
44
NOTE 11. INCOME TAXES (CONTINUED):
The components of the net deferred income tax asset as of December 31, 2002 and
2001, are as follows:
2002 2001
---------- ----------
Deferred tax assets:
Inventory $ -- $ 165
Accounts receivable 24,388 8,340
Accrued expenses 57,000 62,861
Federal tax credits 110,000 172,405
Net operating loss carry-forward 66,838 92,344
---------- ----------
258,226 366,115
Valuation allowance for deferred tax assets -- (53,760)
---------- ----------
258,226 312,355
Deferred tax liabilities:
Fixed assets (258,226) (121,846)
---------- ----------
Net deferred tax asset $ -- $ 190,509
========== ==========
At December 31, 2002 and 2001, the Company has recorded a net deferred tax asset
of $ 0 and $190,509 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. The Company had experienced
operating losses for the 2000 and 1999 years. A significant portion of the loss
sustained in 2000 was a result of non-recurring moving expenses and management
does not foresee any like charges for the next few years. The Company has
taxable income for 2002 and projects taxable income for 2003, as such, the
Company believes that it is more likely than not that a substantial portion of
the deferred tax asset will be realized, and consequently, has not established a
valuation allowance.
At December 31, 2002, the Company had net operating loss carryforwards (NOLs) of
$336,000 for income tax purposes that expire in years beginning 2020.
NOTE 12. EMPLOYMENT AGREEMENTS:
On June 28, 2000, the Company entered into employment agreements with its Chief
Executive Officer, President, Chief Financial Officer and Vice President
Marketing and Sales. All four of the employment agreements have a 5 year term.
The Company is obligated to pay the Chief Executive Officer and President 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 the Chief Financial Officer 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 the Vice President Marketing and Sales
an annual salary of $89,250 with a guaranteed increase of 5% per annum over the
term of his agreement. In addition to his salary, the Vice President Marketing
and Sales also receives a commission on certain of the Company's sales. 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.
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Chief Financial Officer voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. Upon the divestiture of Logical
Imaging Solutions on September 30, 2002, the Chief Executive Officer's
employment with the Company was terminated with the Company agreeing to pay
compensation and related benefit costs of the Chief Executive Officer through
March 10, 2003. On December 27, 2002, the employment agreement with the Vice
President Sales and Marketing was terminated, and in connection with his Salary
Continuation and Deferred Compensation agreement of 1998 (the "SCDC Agreement")
his salary was reduced to $45,500 effective December 30, 2002, and would be
further reduced to $35,750 effective March 24, 2003. Commissions were made
payable to the Vice President Marketing and Sales on most of the Company's
sales, and his retirement date was extended from February 1, 2003 to December
31, 2003.
45
NOTE 12. EMPLOYMENT AGREEMENTS (CONTINUED):
The employment agreements with the above named officers also commits the Company
to purchasing for their benefit certain life insurance plans. For the periods
during which such plans were in place for the Chief Executive Officer and Chief
Financial Officer for the years ended December 31, 2002, 2001, and 2000, the
Company paid or reimbursed the Chief Executive Officer $0, $0 and $15,584 and
Chief Financial Officer and $6,446, $0 and $0, respectively, for such
supplemental life insurance plans. The Company pays the premiums and is the
collateral assignee of four split dollar life insurance policies owned by the
President. 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 the President's designated beneficiaries. The split dollar life
insurance premiums were $22,773, $13,526 and $8,253 during 2002, 2001 and 2000,
respectively. The monies due from its President in connection with these life
insurance policies at the years ended December 31, 2002, 2001 and 2000 was
$134,877, $112,103 and $98,578, respectively. The Company owns and is the
beneficiary of a life insurance policy on its Vice President Marketing and Sales
to fund the SCDC Agreement. Upon the officer'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 the SCDC Agreement in 2002, 2001 and 2000
were $20,882, $21,977 and $11,238, respectively. The SCDC Agreement was modified
on December 27, 2002, changing the retirement date of the Vice President
Marketing and Sales from February 1, 2003 to December 31, 2003.
See also Note 3 regarding Discontinued Operations
NOTE 13. SIGNIFICANT CUSTOMERS:
For the year ended December 31, 2002, two distributors/customers of imaging
supplies accounted for 47% and 20% of net sales from continuing operations. For
the year ended December 31, 2001, three distributors/customers of imaging
supplies accounted for 42%, 16% and 12% of net sales from continuing operations.
For the year ended December 31, 2000, a reseller of imaging supplies accounted
for 64% of net sales from continuing operations. The Company does not have a
written or oral contract with any of these customers. All sales are made through
purchase orders.
NOTE 14. SIGNIFICANT SUPPLIERS:
For the years ended December 31, 2002, 2001 and 2000, the Company purchased 44%,
51% and 38%, respectively, of its raw materials and supplies from one supplier
in connection with the sale of copier products. For the years ended December 31,
2002, 2001, and 2000, the Company purchased 10%, 7% and 4%, respectively, of its
components and parts from a supplier in connection with the sale of both copier
and printer products. See also Note 10 B.
NOTE 15. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving 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:
2002 2001 2000
------------------------------ ------------------------------- ---------------------------
United States $ 17,728,982 63% $ 22,600,553 75% $ 10,164,567 89%
Europe 5,638,161 20% 5,255,415 18% 743,749 7%
Asia 1,253,862 5% 647,146 2% 375,020 3%
Other 3,379,304 12% 1,466,654 5% 101,733 1%
----------------- ------- ----------------- ------- ----------------- -------
Total $ 28,000,309 100% $ 29,969,768 100% $ 11,385,069 100%
================= ======= ================= ======= ================= =======
46
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2002 and 2001 (in thousands, except per share
data).
Quarter
----------------------------------------
Fiscal 2002 First Second Third Fourth
----------- ------- ------- ------- -------
Sales, net $ 7,661 $ 7,970 $ 6,654 $ 5,715
Income from continuing operations 369 187 300 132
Net income, continuing operations 186 73 117 55
Net income, discontinued operations (70) (93) (98) --
------- ------- ------- -------
Net income (loss) 116 (20) 19 55
Net income (loss) per share:
Continuing operations .02 .01 .01 .01
Discontinued operations (.01) (.01) (.01) --
------- ------- ------- -------
Basic .01 -- -- .01
Continuing operations .02 .01 .01 .01
Discontinued operations (.01) (.01) (.01) --
------- ------- ------- -------
Diluted .01 -- -- .01
Fiscal 2001
-----------
Sales, net $ 5,354 $ 7,990 $ 9,712 $ 6,914
Income from continuing operations 161 216 352 3
Net income, continuing operations 33 76 182 (37)
Net income, discontinued operations (39) (31) (36) (98)
------- ------- ------- -------
Net income (loss) ( 6) 44 146 (135)
Net income (loss) per share:
Continuing operations -- .01 .02 --
Discontinued operations (.01) -- -- (.01)
------- ------- -------
-------
Basic (.01) .01 .02 --
Continuing operations -- .01 .02 --
Discontinued operations -- -- -- (.01)
------- ------- ------- -------
Diluted -- .01 .02 (.01)
NOTE 17. SUBSEQUENT EVENT:
On January 23, 2003 the Company's offering of up to 7 million shares of its
common stock at a price of $1.35 per share on Form SB-2 filed with the SEC was
declared effective, and on March 6, 2003, the Company received $6,075,000 in
proceeds from an affiliate for the purchase of 4.5 million shares of its common
stock. On March 7, 2003, the Company announced that subject to the acceptance of
the subscription by the Company, in accordance with the subscription procedures,
the Company's offering on Form SB-2 would be terminated on March 13, 2003.
On February 3, 2003, the Company's Board of Directors authorized the rescission
or repurchase of units offered and sold in the Company's private placement
completed in 2001 to one or more investors, upon such terms and conditions and
for payment of such amounts as management deemed, at their sole discretion, to
be in the best interest of the Company. The units offered and sold in the
private placement consisted of one share of common stock at a price of $2.00 and
a warrant to purchase one share of common stock at an exercise price of $2.00,
expiring November 30, 2003. In connection with investments aggregating at least
$300,000, the Company also issued additional warrants at no cost to purchase
shares of the Company's common stock at an exercise price of $2.00 and expiring
on November 30, 2003.
47
NOTE 17. SUBSEQUENT EVENT (CONTINUED):
During February 2003, the Company agreed to repurchase 162,960 shares of the
Company's common stock and warrants to purchase 325,920 additional shares of its
common stock for $349,920 from two stockholders. On March 3, 2003, pursuant to
the terms of the repurchase, 12,960 shares of the Company's common stock and
warrants to purchase 25,920 shares of common stock was exchanged for $49,920 and
the assignment and release of potential claims, and the repurchase of 150,000
shares of common stock and warrants to purchase 300,000 shares of the common
stock and the assignment and release of potential claims will be exchanged for
$300,000 in nine equal monthly installments beginning March 31, 2003 and ending
November 30, 2003. At any time prior to the repurchase of all of the 150,000
shares of common stock and warrants to purchase shares of common stock, the
stockholder of such securities to be repurchased may exercise a one-time option
to terminate the repurchase of the remaining unpurchased securities. In that
event, the Company will no longer be obligated to repurchase any of such shares
of common stock or warrants to purchase shares of the Company's common stock
from such stockholder. No further purchases are anticipated under this
authorization.
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Each of the individuals listed in the table below is currently a director and or
executive officer of Color Imaging. The name and ages of each director and
executive officer, his principal occupation, and the period during which he has
served as a director is set forth in the table. Each of the executive officers
of Color Imaging was elected by the Board of Directors to serve until the Board
of Directors' meeting immediately following the next annual meeting of
shareholders or until his earlier resignation or removal by the Board of
Directors:
NAME AGE SERVICE AS A DIRECTOR POSITION
--------------------------- ------- ----------------------------- -------------------------------------------
Jui-Hung Wang 56 Since June 2001 Director and Chairman of the Board
Sueling Wang, PhD 49 Since June 2000 President, Vice Chairman and Principal
Executive Officer
Morris E. Van Asperen 59 Since June 2000 Executive Vice President, Chief Financial
Officer, Secretary and Director
Charles R. Allison 69 Since June 2000 Vice President, Marketing and Sales,
Director
Jui-Chi Jerry Wang 46 Since June 2000 Director
Jui-Kung Wang 59 Since September 2001 Director
Color Imaging's board of directors retains the responsibilities of the
Compensation Committee, and upon the divestiture of Logical Imaging Solutions on
September 30, 2002, and resultant resignation of the directors affiliated
therewith, the responsibilities of the Audit Committee have since been performed
by the entire board.
The employment histories of Color Imaging's directors and executive officers is
set forth below:
Jui-Hung (Jack) Wang, Chairman since June 2002, has served as a director of
Color Imaging since June 2001. He was a founder and director of Color Image,
Inc. until its merger with Color Imaging. He is a founder and serves as Chairman
of General Plastic Industrial Co., Ltd, a leading Taiwan based manufacturer of
after market injection molded cartridges and accessories for copiers and laser
printers. Since January 2001, Mr. Wang has served as a director of Taiwan Yu-Tzu
Company, a food company. In 1998, Mr. Wang was a founding member of Kings
Brothers LLC, which leases space to Color Imaging used for our headquarters and
manufacturing facilities in Norcross, Georgia. From 1986 to 1994, Mr. Wang was
mayor of Wu-Chi Town, Taiwan.
Sueling Wang, PhD., became President and Vice-Chairman of Color Imaging in June
2000. From 1989 to 2000, he served as President and director of Color Image,
Inc. which was merged with Color Imaging. Dr. Wang was also a founder of Color
Image Inc. In 1998, Dr. Wang was a founding member of Kings Brothers LLC, which
leases space to Color Imaging used for our headquarters and manufacturing
facilities in Norcross, Georgia. Dr. Wang received a M.S. degree from the
University of Windsor, in Ontario, Canada and a PhD degree from the University
of Detroit. Dr. Wang's expertise in resin synthesis brought him into the toner
industry and led to the formation of Color Image, Inc. in 1989.
Morris E. Van Asperen has served as Executive Vice President, Chief Financial
Officer and director of Color Imaging since June 2000 and Secretary since June
2001. From 1998 he served as director of Logical Imaging Solutions and was from
August 2000 its Executive Vice President, Chief Financial Officer and Secretary
until it was disposed of by Color Imaging in September 2002. In 1986 he was
employed by the National Bank of California as Senior Vice President, Corporate
Banking, and when he left the bank in July 2000 he was its Executive Vice
President and Credit Administrator. Mr. Van Asperen also has extensive
experience as a financial and management consultant to businesses of up to $50
million in revenues and 1,000 employees in construction, household goods,
industrial glass, electronics manufacturing and software development. From 1977
to 1984, he served as Vice President & Chief Financial Officer of ATE
Associates, Inc., a supplier of test fixtures and software for numerous military
aircraft programs. Mr. Van Asperen received a B.S. degree in Mathematics from
the University of Oklahoma and an M.B.A. degree from Pepperdine University.
Charles R. Allison, a director since June 2000, was made Vice President,
Marketing and Sales in December 2002. Prior to that he served as Vice President,
Technology of Color Imaging since July 2002. From 1992 to 2000, he served as
Vice President of Marketing and Sales of Color Image, Inc., which was merged
with and into Color Imaging. From 1982 to 1991, he served as Vice President of
Sales and Marketing, and general manager, at Synfax Manufacturing, Inc., an
early developer of consumable products for EBI-based printing technologies. Mr.
Allison has held other senior positions in the printing/imaging industry,
including positions with Minolta Corporation, Litton Business Systems and Royal
McBee.
49
Jui-Chi (Jerry) Wang has served as a director of Color Imaging since June 2000.
From 1994 until 2000, he served as a director of Color Image, Inc., which was
merged with Color Imaging. Since 1984, Mr. Wang has served as President of
General Plastic Industrial Co. Ltd (GPI), a Taiwan-based plastics manufacturer
specializing in injection moldings and more particularly toner cartridges and
accessories for copiers and laser printers. In 1998, Mr. Wang was a founding
member of Kings Brothers LLC, which leases space to Color Imaging used for our
headquarters and manufacturing facilities in Norcross, Georgia. Mr. Wang
received a Master's Degree in Computer Engineering from the University of
Southern California.
Jui-Kung (Elmer) Wang has served as a director of Color Imaging since September
2001. He was a founder of Color Image, Inc. in 1989 and its Chairman until its
merger with Color Imaging. He is a co-founder and has served as a director of
General Plastic Industrial Co., Ltd, a leading Taiwan based manufacturer of
after market injection molded cartridges and accessories for copiers and laser
printers since 1978. In 1998 Mr. Wang was a founding member of Kings Brothers
LLC, which leases space to Color Imaging we use for our headquarters and
manufacturing facilities in Norcross, Georgia. Mr. Wang has been a professor of
management with Tung-Hai University, Taiwan for over 20 years. He has received a
bachelor's degree in economics, and MBA and PhD degrees in management.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The members of the board of directors, certain executive officers of Color
Imaging and persons who hold more than 10% of Color Imaging's outstanding common
stock are subject to the reporting requirements of Section 16(a) of the Exchange
Act which require them to file reports with respect to their ownership of common
stock and their transactions in common stock. Based upon the copies of Section
16(a) reports that the Color Imaging received from such persons for their 2002
fiscal year transactions in the common stock and their common stock holdings,
Color Imaging believes that all reporting requirements under Section 16(a) for
such fiscal year were met in a timely manner by its executive officers, board
members and greater than ten-percent stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned by
our chief executive officer and the three other most highly compensated
executive officers who were serving as such as of December 31, 2002, 2001 and
2000 (collectively, the Named Executive Officers), whose aggregate compensation
for fiscal years 2002, 2001 and 2000 exceeded $100,000 for services rendered in
all capacities to Color Imaging and its subsidiaries for that fiscal year.
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------
ANNUAL LONG-TERM COMPENSATION
COMPENSATION -----------------------------------------------------
-------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS(#) COMPENSATION ($)(1)
-------------------------------- -------- -------------------- ------------------------- -------------------------
Dr. Sueling Wang 2002 $158,439 -- $ 38,736 (2)
President and 2001 $158,423 100,000 (6) $ 22,313 (2)
Chief Executive Officer (10) 2000 $149,159 200,000 (7) $ 18,887 (2)
Michael W. Brennan (11) 2002 $157,500 -- 6,889
2001 $151,442 150,000 (6) $ 6,403
2000 $146,485 -- $ 25,591 (3)
Morris E. Van Asperen 2002 $151,200 -- 14,353 (4)
Executive Vice President 2001 $146,714 100,000 (6) $ 5,461
Chief Financial Officer & 2000 $ 54,294 200,000 (8) $ --
Secretary
Charles R. Allison 2002 $103,028 -- $ 27,321 (5)
Vice President 2001 $106,379 50,000 (6) $ 28,145 (5)
Marketing & Sales 2000 $101,996 50,000 (9) $ 25,902 (5)
(1) For named executive officers the amount reported represents the cost of
group insurance benefits, Color Imaging's matching contribution to the
401(k) plan for the officer and other life insurance policies maintained
for him, as further described in the notes for each officer, respectively.
(2) The split dollar life insurance premiums were $22,773, $13,526 and $8,253
during 2002, 2001 and 2000, respectively. Pursuant to the policies Color
Imaging will, upon his death or earlier liquidation of each such policy, be
entitled to the refund of all premium payments made by Color Imaging on the
policies, and the balance of the proceeds will be paid to Mr. Wang's
designated beneficiaries.
(3) The split dollar life insurance policy is no longer in force. Premiums paid
during 2000 were $15,584.
(4) The life insurance premiums reimbursed by Color Imaging in 2002, 2001 and
2000 was $6,446, $0 and $0, respectively.
(5) The life insurance premiums paid by Color Imaging in 2002, 2001 and 2000
were $20,882, $21,977 and $22,476, respectively. Color Imaging owns and is
the beneficiary of this policy 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.
50
(6) Options granted by action of the board of directors on March 21, 2001. 25%
vest upon grant and the balance vest 25% per year upon each anniversary of
the date of grant. The options expire five years after their respective
vesting date(s). As the result of Mr. Brennan's termination effective
September 30, 2002, with the divestiture of Logical Imaging Solutions by
Color Imagng, Mr. Brennan's options lapsed without exercise on December 31,
2002.
(7) The options were granted as part of the officer's employment agreement on
June 28, 2000. 100,000 vested immediately and the remainder vested ratably
over the next two years upon the anniversary date of the grant.
(8) The options were granted as part of the officer's employment agreement on
June 28, 2000. 100,000 vested immediately and the remainder vested ratably
over the next four years upon the anniversary date of the grant. Mr. Van
Asperen joined Color Imaging as Executive Vice President in August 2001.
(9) The options were granted as part of the officer's employment agreement on
June 28, 2000. 25,000 vested immediately and the remainder vested ratably
over the next two years upon the anniversary date of the grant.
(10) As a result of Mr. Brennan's resignation, Dr. Wang is the principal
executive officer of Color Imaging, and continues to serve as President and
Vice Chairman of the Color Imaging, Inc. See "Color Imaging, Inc. -
"Discontinued Operations" beginning on page 5.
(11) On June 10, 2002, Mr. Brennan was replaced as Chairman and Chief Executive
Officer of Color Imaging, Inc., and as of September 30, 2002, he is no
longer an employee. See "Color Imaging, Inc. - "Discontinued Operations"
beginning on page 5.
OPTION GRANTS TABLE
No options were granted to the Named Executive Officers during the year ended
December 31, 2002.
OPTION EXERCISES AND YEAR-END VALUE TABLE
None of the Named Executive Officers exercised stock options during 2002. The
following table sets forth certain information regarding unexercised options
held at year-end by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 2002 AND OPTION VALUES AT DECEMBER 31, 2002
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS
------------------------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
------------------------- ---------------- --------------- ------------------ -------------------
Sueling Wang 0 0 250,000 50,000
Michael W. Brennan (1) 0 0 0 0
Morris E. Van Asperen 0 0 200,000 100,000
Charles R. Allison 0 0 75,000 25,000
--------------------
(1) Mr. Brennan's options lapsed, without having been exercised, on
December 31, 2002, as the result of the termination of his employment
with Color Imaging on September 30, 2002.
Based on the closing price of our common stock of $1.20 on December 31, 2002, no
unexercised options were in the money for the Named Executive Officers.
EMPLOYMENT AGREEMENTS
On June 28, 2000, Color Imaging entered into employment agreements with its
Chief Executive Officer, President, Chief Financial Officer and Vice President
of Marketing and Sales. All four of the employment agreements have a 5 year
term. Color Imaging is obligated to pay the Chief Executive Officer and
President annual salaries of $150,000 with a guaranteed increase of 5% per annum
over the term of the agreements. Color Imaging is obligated to pay the Chief
Financial Officer an annual salary of $144,000 with a guaranteed increase of 5%
over the term of his agreement. In addition to commissions earned under Color
Imaging's sales incentive program, Color Imaging is obligated to pay the Vice
President Marketing and Sales an annual salary of $89,250 with a guaranteed
increase of 5% per annum over the term of his agreement. In addition to his
salary, the Vice President Marketing and Sales also receives a commission on
certain of Color Imaging's sales. Each employee may terminate the agreement upon
6 months notice to Color Imaging. Color Imaging may terminate each employee upon
6 months notice by Color Imaging; provided, however, that Color Imaging 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.
51
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Chief Financial Officer voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. Upon the divestiture of Logical
Imaging Solutions on September 30, 2002, the Chief Executive Officer's
employment with Color Imaging was terminated with Color Imaging agreeing to pay
compensation and related benefit costs of the Chief Executive Officer through
March 10, 2003. On December 27, 2002, the employment agreement with the Vice
President Sales and Marketing was terminated, and in connection with his Salary
Continuation and Deferred Compensation agreement of 1998 (the "SCDC Agreement")
his salary was reduced to $45,500 effective December 30, 2002, and would be
further reduced to $35,750 effective March 24, 2003. Commissions were made
payable to the Vice President Marketing and Sales on most of Color Imaging's
sales, and his retirement date was extended from February 1, 2003 to December
31, 2003.
The employment agreements with the above named officers also commits Color
Imaging to purchasing for their benefit certain life insurance plans. For the
periods during which such plans were in place for the Chief Executive Officer
and Chief Financial Officer for the years ended December 31, 2002, 2001, and
2000, Color Imaging paid or reimbursed the Chief Executive Officer $0, $0 and
$15,584 and Chief Financial Officer and $6,446, $0 and $0, respectively, for
such supplemental life insurance plans. Color Imaging pays the premiums and is
the collateral assignee of four split dollar life insurance policies owned by
the President. Pursuant to the policies Color Imaging will, upon his death or
earlier liquidation of each such policy, be entitled to the refund of all
premium payments made by Color Imaging on the policies, and the balance of the
proceeds will be paid to the President's designated beneficiaries. The split
dollar life insurance premiums were $22,773, $13,526 and $8,253 during 2002,
2001 and 2000, respectively. The monies due from its President in connection
with these life insurance policies at the years ended December 31, 2002, 2001
and 2000 was $134,877, $112,103 and $98,578, respectively. Color Imaging owns
and is the beneficiary of a life insurance policy on its Vice President
Marketing and Sales to fund the SCDC Agreement. Upon the officer'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 Color Imaging to fund the SCDC Agreement in 2002,
2001 and 2000 were $20,882, $21,977 and $11,238, respectively. The SCDC
Agreement was modified on December 27, 2002, changing the retirement date of the
Vice President Marketing and Sales from February 1, 2003 to December 31, 2003.
COMPENSATION OF DIRECTORS
Directors who are employees of Color Imaging receive no separate compensation
for their service as directors. Our non-employee directors are each granted by
the board of directors nonqualified options to acquire 25,000 shares of our
common stock at the then market price per common share, effective upon his or
her election or appointment to the board of directors. The non-employee director
options vest over 5 years, beginning with the first anniversary date of his or
her appointment to the board, and expire 3 years from their respective date of
vesting. Also, non-employee directors receive $1,000 for each meeting of the
board of directors physically attended and $500 for meetings conducted by
teleconference or unanimous written consent. Directors who are members of the
Audit Committee receive $500 for each meeting of the Audit Committee.
Non-employee directors are also reimbursed for travel expenses for attending
Board and committee meetings. Color Imaging has no consulting contracts or other
arrangements between it and non-employee directors in return for their services
on the board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to Color Imaging with respect
to the beneficial ownership of Color Imaging's common stock as of March 10, 2003
by:
o each stockholder known by Color Imaging to own beneficially more than
5% of Color Imaging's common stock;
o each Named Executive Officer;
o each of Color Imaging's directors; and
o all directors and executive officers as a group.
Except as otherwise indicated in the footnotes, Color Imaging believes that the
beneficial owners of the common stock listed below, have sole voting power and
investment power with respect to such shares of common stock indicated. In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of the date of this prospectus are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percent ownership of
any other person.
52
PERCENTAGE OF
NAME OF BENEFICIAL OWNER NO. OF SHARES OWNERSHIP(1)
---------------------------------- ------------------- --------------------
Sueling Wang (2) 1,956,551 22.6%
Morris E. Van Asperen (3) 310,906 3.6%
Charles R. Allison (4) 75,000 *
Jui-Chi Wang (5) 689,450 8.2%
Jui-Hung Wang (6) 704,178 8.4%
Jui-Kung Wang (7) 321,209 3.8%
Joseph P. Donnolo 472,443 5 6%
Che-Chang Yeh 445,205 5 3%
Michael W. Brennan (8) 200,000 2.4%
Executive officers and directors
as a group (7 persons) (9) 4,057,294 48.2% (10)
----------------
* Less than 1%
(1) Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). The table above includes the number of shares underlying
options and warrants which are exercisable within 60 days after the date of
this proxy statement.
(2) Includes: (a) 600,000 shares owned by Sueling Wang's four children, (b)
141,204 shares owned by Yik-Li Sih, Sueling Wang's wife, in which Dr. Wang
may be deemed to have pecuniary interest. Dr. Wang disclaims beneficial
ownership of such 741,204 shares. Also includes 250,000 shares subject to
options that are currently exercisable.
(3) Includes 200,000 shares subject to options that are currently exercisable.
(4) Includes 75,000 shares subject to options that are currently exercisable.
(5) Includes 10,000 shares subject to options that are currently exercisable.
(6) Includes 5,000 shares subject to options that are currently exercisable.
(7) Includes 5,000 shares subject to options that are currently exercisable.
(8) Includes 75,000 shares underlying options that are currently exercisable.
Mr. Brennan is no longer with Color Imaging as the result of the
discontinuation of the Logical Imaging Solutions' operations as of
September 30, 2002.
(9) Includes 570,000 shares subject to options that are exercisable within 60
days after the date of this prospectus.
(10) On March 6, 2003, Color Imaging received subscription proceeds of
$6,075,000 for the public sale of 4,500,000 shares of our common stock at a
price of $1.35 per share from Chi Fu Investment Co Ltd, a wholly-owned
subsidiary of our affiliate General Plastic Industrial Co Ltd. Based upon
the number of common shares of Color Imaging outstanding as of March 10,
2003, and subject to acceptance of the purchase of the 4,500,000 shares of
our common stock by our affiliate per the procedures of our offering, on
March 13, 2003 we will have 12,925,005 shares of common stock issued and
outstanding. At that time our officers and directors as a group will own
approximately 31.4% and our affiliate, Chi Fu Investment Co Ltd, will own
approximately 34.8% of our outstanding common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from which we lease our Norcross, Georgia
plant. For the twelve months ended December 31, 2002, 2001 and 2000 we paid
Kings Brothers LLC $518,484, $505,836 and $186,427, respectively, in lease
payments. The lease was made on April 1, 1999, and upon unanimous approval of
the board of directors and the disinterested members of the board of directors,
it was amended February 5, 2003, to extend its expiration from March 31, 2009 to
March 31, 2013.
On November 19, 2001, we borrowed $200,000 on an unsecured basis from Kings
Brothers LLC. The revolving loan bears interest at the rate of 9% per annum,
matured on November 18, 2002 and is evidenced in writing. We paid the principal
and interest outstanding on December 10, 2001, paying $790.38 in total interest
to Kings Brothers. We borrowed this amount for general corporate purposes,
including working capital. On March 20, 2002 the revolving loan arrangement was
cancelled.
We also had a short-term unsecured loan, due July 26, 2000, evidenced in writing
from Kings Brothers of $240,000 with interest at 8%, paying $5,576 of interest
for the year. As of December 31, 2000, all amounts outstanding under the loan
were repaid. We used the proceeds of this loan for working capital.
On June 1, 1999, the Development Authority of Gwinnett County, Georgia issued
$4,100,000 of industrial development revenue bonds on behalf of us and Kings
Brothers LLC. Pursuant to a certain joint debtor agreement we are jointly and
severally liable with Kings Brothers to pay the amounts borrowed under the bond.
The 3.5% revenue bonds are payable in varying annual principal and monthly
interest payments through July 2019. The bonds are collateralized by all of our
assets and the real property leased by us and owned by Kings Brothers. The
majority of the proceeds $3,125,872 from the bond issue were used by us to
relocate our manufacturing plant, make leasehold improvements at the new
facility and to purchase certain manufacturing equipment. The remaining proceeds
$974,128 were used by Kings Brothers to pay down the mortgage on its real
property, some of which is leased to us. The proceeds used by Kings Brothers
have been recorded as a receivable on our financial statements. We entered into
a Joint Debtor Agreement with Kings Brothers LLC concerning their rights, duties
and obligations in connection with the bonds. Kings Brothers and we,
collectively, are obligated to repay any outstanding debt under the bonds.
Amounts receivable from Kings Brothers are secured by a lien on all of Kings
Brothers' real estate, including the part we lease from them, and by personal
guarantees by the members of Kings Brothers. Principal due and paid by Kings
53
Brothers for the twelve months ended December 31, 2002, 2001 and 2000 was
$79,596, $76,032 and $0, respectively. Interest due and paid by Kings Brothers
for the twelve months ended December 31, 2002, 2001 and 2000 was $14,612,
$30,368 and $22,255, respectively. As of December 31, 2002, the principal
outstanding was $3,445,000 and the portion due to us from Kings Brothers was
$818,500.
Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang, are owners in and
Chairman, Auditor and President, respectively, of General Plastic Industrial
Co., LTD (GPI), a Taiwanese manufacturer of injection molded cartridges and
accessories for copiers and laser printers. GPI also owned and operated GPI-USA,
Inc. (GPI-USA) a wholly-owned United States distributor of GPI's products. For
the twelve months ended December 31, 2002 and 2001 we purchased $2,148,279 and
$2,061,683, respectively, of injected molded products from GPI. In 2000 we
purchased from GPI and GPI-USA $268,966 and $166,526, respectively, of copier
and laser printer products.
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi J. Wang,
collectively have beneficial ownership interests of 32.6% in AccuRec, LLC, a
distributor of digital versatile disks. From time to time during the year ending
December 31, 2000, we had short-term unsecured loans evidenced in writing and
due on demand issued to AccuRec aggregating $1,850,000 and a maximum outstanding
at any one time of $500,000. The interest rate on these loans was 8%, and we
paid a total of $6,244 in interest during 2000. As of December 31, 2000 all
amounts outstanding under such loans were repaid. We used the proceeds from
these loans for working capital purposes.
Director, Sueling Wang, as trustee for two of his children, loaned us a total of
$252,000 from 1998 to 1999 at an interest rate of 12% with principal and
interest due at expiry. Each of the loans was paid in full during July 2000, and
we paid interest in the aggregate amount of $47,205 on these loans. We used the
proceeds of this loan for working capital purposes.
On March 14, 2002, we borrowed $500,000 from director, Sueling Wang, on an
unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and is evidenced in writing. On September 2, 2002, we entered
into a modification agreement with Sueling Wang to change the terms of the note,
extending the term to March 1, 2005, providing for a $100,000 principal payment,
decreasing the interest rate to 6% per annum, providing for interest only
payments through February 28, 2003, and providing for 24 monthly payments of
principal and interest beginning on April 1, 2003, in the amount of $17,735.67.
We borrowed the $500,000 amount to meet a supplier commitment for product.
Through December 31, 2002, interest paid on the note was $36,296. As of December
31, 2002, the principal outstanding was $400,000.
On August 21, 2002, we borrowed $100,000 from director, Jui-Chi Wang, on an
unsecured basis. The loan bears interest at the rate of 6% per annum, matures on
March 1, 2005 and is evidenced in writing. We borrowed this amount in order to
repay $100,000 borrowed from director Sueling Wang on March 14, 2002. The note
is interest only through February 28, 2003, and then is fully amortizing over 24
months with principal and interest payments payable monthly beginning April 1,
2003 in the amount of $4,434. As of December 31, 2002, the interest accrued and
paid on the note was $2,170, and $100,000 was the outstanding principal balance.
On August 21 and September 2, 2002, we borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, matures on March 1, 2005 and is
evidenced in writing. We borrowed this amount in order to make a principal
payment due on our industrial development bond in the approximate amount of
$255,000, for the acquisition of capital equipment in the approximate of
$125,000 and for general corporate purposes. The note is interest only through
February 28, 2003, and then is fully amortizing over 24 months with principal
and interest payments payable monthly beginning April 1, 2003 in the amount of
$22,169.60. As of December 31, 2002, interest accrued and paid on the note was
$10,259, and the principal balance was $500,000.
Directors Jui-Chi Wang and Jui-Hung Wang purchased 350,000 and 50,000 Units
(each Unit consisted of one share of common stock and a warrant to purchase one
share of common stock at an exercise price of $2.00 per share) for $700,000 and
$100,000, including promissory notes, respectively. Jui-Chi Wang's $700,000
recourse promissory note without interest was made on December 1, 2001, due
December 31, 2001 and paid in full on December 18, 2001. Jui-Hung Wang's $99,500
recourse promissory note without interest was made on December 24, 2001, due
April 1, 2002 and paid in full on January 30, 2002. The terms of the notes were
consistent with the terms of notes of third parties who purchased Units in the
private placement from Color Imaging.
We believe that the terms of the loans and borrowings from affiliates were on
terms more favorable than were otherwise available from third parties.
On September 11, 2002, we entered into a share exchange agreement with four of
our directors, Messrs. Brennan, St. Amour, Langsam and Hollander, whereby a new
company, Digital Color Print, Inc., owned by them, acquired the capital stock of
our wholly owned subsidiary, Logical Imaging Solutions, in exchange for
approximately 1.6 million shares of the our common stock. On September 20, 2002,
we entered into an amendment to the share exchange agreement pursuant to which
the number of shares of the our common stock to be exchanged for the capital
stock of Logical Imaging Solutions was increased from 1.6 million to 1.7 million
and a requirement was added that Logical Imaging Solutions have at least
$100,000 on hand at closing. On September 30, 2002, the share exchange
54
transaction was closed, and the 1.7 million shares of our stock were received
and retired by our stock transfer agent. See "Color Imaging, Inc. - Recent
Developments" beginning on page 11.
On March 6, 2003, Color Imaging received from Chi Fu Investment Co Ltd
$6,075,000 of subscription proceeds for the public sale of 4,500,000 of our
common shares at a price of $1.35 per share in our offering on Form SB-2 filed
with the Securities and Exchange Commission. Chi Fu Investment Co Ltd is a
wholly owned subsidiary of our affiliate General Plastic Industrial Co., Ltd,
and our directors Jui-Hung Wang and Jui-Chi Wang each own 34.6% and 19.9%,
respectively, of General Plastic Industrial Co., Ltd.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, Color Imaging carried out
an evaluation, under the supervision and with the participation of Color
Imaging's management, including Color Imaging's President along with Color
Imaging's Chief Financial Officer, of the effectiveness of the design and
operation of Color Imaging's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, Color Imaging's President
along with Color Imaging's Chief Financial Officer concluded that Color
Imaging's disclosure controls and procedures are effective in timely alerting
them to material information relating to Color Imaging required to be included
in Color Imaging's periodic SEC filings. There have been no significant changes
in Color Imaging's internal controls or in other factors that would
significantly affect internal controls subsequent to the date Color Imaging
carried out its evaluation.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The consolidated financial statements required by this item are set
forth on the pages indicated at Item 8.
(2) Financial Statement Schedule for the years ended December 31, 2002, 2001 and
2000:
Schedule II - Valuation and Qualifying Accounts is set forth below.
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
----------------------------------------------------------------------------------------------
For the Year Balance at Charged
Ended Beginning (credited) Balance at
December 31, of Year to Expense Write-offs End of Year
------------- ---------- ---------- ---------- -----------
1. ALLOWANCE FOR
DOUBTFUL ACCOUNTS
2002 $ 72,911 $ -- $ 8,733 $ 64,178
2001 100,000 (27,089) -- 72,911
2000 150,000 (50,000) -- 100,000
2. RESERVE FOR
OBSOLETE INVENTORY
2002 $ 73,830 $ 240,000 $ 278,866 $ 34,964
2001 32,331 41,499 -- 73,830
2000 118,024 -- 85,693 32,331
3. DEFERRED TAX
VALUATION ALLOWANCE
2002 $ 53,760 $ (3,760) $ -- $ 50,000
2001 90,000 (36,240) -- 53,760
2000 -- 90,000 -- 90,000
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits:
Incorporated by reference herein to Item 15( c) below.
(b) Reports on Form 8-K.
A report on Form 8-K dated September 30, 2002 was filed on October 2, 2002,
reporting under Item 5 the consummation of the share exchange agreement between
Color Imaging and Digital Color Print, the divestiture of Color Imaging's wholly
owned subsidiary Logical Imaging Solutions and the resignation of four of our
directors affiliated with Digital Color Print.
(c) Exhibits:
The following exhibits are filed herewith or incorporated herein by reference:
NO. DESCRIPTION
------- -----------
2.1 Merger Agreement and Plan of Reorganization dated May 16, 2000, by and
between Advatex Associates, Inc., Logical Imaging Solutions
Acquisition Corp., Color Imaging Acquisition Corp., Logical Imaging
Solutions, Inc., and Color Image, Inc., incorporated by reference to
the Registrant's Form 8-K filed on July 17, 2000.
2.2 Amendment No. 1 to the Merger Agreement and Plan of Reorganization
dated June 15, 2000, incorporated by reference to the Registrant's
Form 8-K filed on July 17, 2000
2.3 Amendment No. 2 to the Merger Agreement and Plan of Reorganization
dated June 26, 2000, incorporated by reference to the Registrant's
Form 8-K filed on July 17, 2000
2.4(1) Share Exchange Agreement dated as of September 11, 2002 between Color
Imaging, Inc., Logical Imaging Solutions, Inc., Digital Color Print,
Inc., and the shareholders of Digital Color Print, Inc., incorporated
by reference to Exhibit 2.1 to the Registrant's Form 8-K filed
September 26, 2002.
56
(c) Exhibits (continued):
NO. DESCRIPTION
------- -----------
2.5 Amendment No. 1 to Share Exchange Agreement dated as of September 20,
2002 between Color Imaging, Inc., Logical Imaging Solutions, Inc.,
Digital Color Print, Inc., and the shareholders of Digital Color
Print, Inc., incorporated by reference to Exhibit 2.2 to the
Registrant's Form 8-K filed September 26, 2002.
3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3.1
to the Registration statement on Form SB-2 filed July 15, 2002.
3.2 Bylaws, incorporated by reference to the Registrant's Form 10-QSB for
the quarter ended March 31, 2002.
4.1 Stock Purchase Agreement between the Company and Wall Street
Consulting Corp. dated October 30, 2001, incorporated by reference to
Exhibit 4.1 to the Registration statement on Form SB-2 filed May 31,
2002.
4.2 Promissory Note of Wall Street Consulting Corp. dated October 30,
2001, incorporated by reference to Exhibit 4.2 to the Registration
statement on Form SB-2 filed May 31, 2002.
4.3 Form of Warrant issued to Selling Stockholders, incorporated by
reference to Exhibit 4.3 to the Registration statement on Form SB-2
filed November 28, 2001.
4.4 Loan and Security Agreement between Color Imaging and Southtrust Bank
dated May 5, 2000, incorporated by reference to Exhibit 4.4 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.5 Amendment of Loan Documents between Color Imaging and SouthTrust Bank
dated August 30, 2000, incorporated by reference to Exhibit 4.5 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.6 Second Amendment of Loan Documents between Color Imaging and
SouthTrust Bank dated November 30, 2000, incorporated by reference to
Exhibit 4.6 to the Registration statement on Form SB-2 filed May 31,
2002.
4.7 Third Amendment of Loan Documents between Color Imaging and SouthTrust
Bank dated June 30, 2001, incorporated by reference to Exhibit 4.7 to
the Registration statement on Form SB-2 filed May 31, 2002.
4.8 Fourth Amendment of Loan Documents between Color Imaging and
SouthTrust Bank dated November 1, 2001, incorporated by reference to
Exhibit 4.8 to the Registration statement on Form SB-2 filed May 31,
2002.
4.9 Fifth Amendment of Loan Documents between Color Imaging and SouthTrust
Bank dated December 31, 2001, incorporated by reference to Exhibit 4.9
to the Registration statement on Form SB-2 filed May 31, 2002.
4.10 Sixth Amendment of Loan Documents between Color Imaging and Southtrust
Bank dated February 7, 2002, incorporated by reference to Exhibit 4.10
to the Registration statement on Form SB-2 filed April 11, 2002.
4.11 $500,000 Line of Credit Promissory Note issued to Southtrust Bank
dated May 5, 2000, incorporated by reference to Exhibit 4.11 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.12 $500,000 Amended and Restated Line of Credit Promissory Note issued to
Southtrust Bank dated August 30, 2000, incorporated by reference to
Exhibit 4.12 to the Registration statement on Form SB-2 filed May 31,
2002.
4.13 $500,000 Revolving Note Modification Agreement dated November 30,
2000, incorporated by reference to Exhibit 4.11 to the Registration
statement on Form SB-2 filed November 28, 2001.
4.14 $500,000 Second Revolving Note Modification Agreement dated July 5,
2001, incorporated by reference to Exhibit 4.14 to the Registration
statement on Form SB-2 filed May 31, 2002.
4.15 $1,500,000 Revolving Note between Color Imaging and SouthTrust Bank
dated June 24, 1999, incorporated by reference to Exhibit 4.15 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.16 $1,500,000 Revolving Note Modification Agreement between Color Imaging
and SouthTrust Bank dated May 5, 2000, incorporated by reference to
Exhibit 4.14 to the Registration statement on Form SB-2 filed November
28, 2001.
4.17 $1,500,000 Second Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated August 30, 2000, incorporated by
reference to Exhibit 4.17 to the Registration statement on Form SB-2
filed May 31, 2002.
4.18 $1,500,000 Third Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated November 30, 2000, incorporated by
reference to Exhibit 4.18 to the Registration statement on Form SB-2
filed May 31, 2002.
4.19 $1,500,000 Fourth Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated July 5, 2001, incorporated by
reference to Exhibit 4.19 to the Registration statement on Form SB-2
filed May 31, 2002.
4.20 $2,500,000 Fifth Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated December 31, 2001, incorporated by
reference to Exhibit 4.20 to the Registration statement on Form SB-2
filed May 31, 2002.
4.21 $1,752,000 Installment Note between Color Imaging and SouthTrust Bank
dated June 24, 1999, incorporated by reference to Exhibit 4.21 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.22 $1,752,000 Term Loan Documents Modification Agreement between Color
Imaging and SouthTrust Bank dated August 30, 2000, incorporated by
reference to Exhibit 4.22 to the Registration statement on Form SB-2
filed May 31, 2002.
4.23 SouthTrust Bank waiver letter dated March 26, 2001, incorporated by
reference to Exhibit 4.22 to the Registration statement on Form SB-2
filed February 11, 2002.
4.24 SouthTrust Bank waiver letter dated May 8, 2001, incorporated by
reference to Exhibit 4.23 to the Registration statement on Form SB-2
filed February 11, 2002.
4.25 SouthTrust Bank waiver letter dated August 13, 2001, incorporated by
reference to Exhibit 4.24 to the Registration statement on Form SB-2
filed February 11, 2002.
4.26 SouthTrust Bank waiver letter dated October 31, 2001, incorporated by
reference to Exhibit 4.25 to the Registration statement on Form SB-2
filed February 11, 2002.
4.27 Development Authority of Gwinnett County, Georgia Industrial
Development Trust Indenture dated June 1, 1999, incorporated by
reference to Exhibit 4.27 to the Registration statement on Form SB-2
filed May 31, 2002.
4.28 Loan Agreement between the Company, Kings Brothers LLC and the
Development Authority of Gwinnett County, Georgia dated June 1, 1999,
incorporated by reference to Exhibit 4.28 to the Registration
statement on Form SB-2 filed May 31, 2002.
57
(c) Exhibits (continued):
NO. DESCRIPTION
------- -----------
4.29 Joint Debtor Agreement dated June 28, 2000 by and among Color Image,
Inc., Kings Brothers, LLC, Dr. Sueling Wang, Jui-Chi Wang, Jui-Kung
Wang, and Jui-Hung Wang, incorporated by reference to Exhibit 4.28 to
the Registration statement on Form SB-2 filed February 11, 2002.
4.30 First Amendment to Joint Debtor Agreement dated January 1, 2001 by and
among Color Imaging, Kings Brothers, LLC, Dr. Sueling Wang, Jui-Chi
Wang, Jui-Kung Wang, and Jui-Hung Wang, incorporated by reference to
Exhibit 4.29 to the Registration statement on Form SB-2 filed February
11, 2002.
4.31 Master Security Agreement between Color Imaging and General Electric
Capital Corporation dated November 30, 2000, incorporated by reference
to Exhibit 4.22 to the Registration statement on Form SB-2 filed
November 28, 2001.
4.32 Promissory Note issued to General Electric Capital Corporation dated
November 30, 2000, incorporated by reference to Exhibit 4.23 to the
Registration statement on Form SB-2 filed November 28, 2001.
4.33 $200,000 Promissory Note between Color Imaging and Kings Brothers LLC
dated November 19, 2001, incorporated by reference to Exhibit 4.32 to
the Registration statement on Form SB-2 filed February 11, 2002.
4.34 $500,000 Promissory Note between Color Imaging and Sueling Wang dated
March 14, 2002, incorporated by reference to Exhibit 4.34 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.35 $240,000 Promissory Note between Color Imaging and Kings Brothers LLC
dated July 6, 2000, incorporated by reference to Exhibit 4.35 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.36 $50,000 Promissory Note between the Company and Daniel Wang dated
October 23, 1998, incorporated by reference to Exhibit 4.36 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.37 $112,000 Promissory Note between Color Imaging and Daniel Wang dated
October 16, 1998, incorporated by reference to Exhibit 4.37 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.38 $90,000 Promissory Note between Color Imaging and Michael Wang dated
June 4, 1999, incorporated by reference to Exhibit 4.38 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.39 $150,000 Promissory Note between Color Imaging and AccuRec LLC dated
February 3, 2000, incorporated by reference to Exhibit 4.39 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.40 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
March 7, 2000, incorporated by reference to Exhibit 4.40 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.41 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
April 10, 2000, incorporated by reference to Exhibit 4.41 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.42 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
May 2, 2000, incorporated by reference to Exhibit 4.42 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.43 $500,000 Promissory Note between Color Imaging and AccuRec LLC dated
July 5, 2000, incorporated by reference to Exhibit 4.43 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.44 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
September 14, 2000, incorporated by reference to Exhibit 4.44 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.45 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
October 4, 2000, incorporated by reference to Exhibit 4.45 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.46 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
November 3, 2000, incorporated by reference to Exhibit 4.46 to the
Registration statement on Form SB-2 filed April 11, 2002.
4.47 Seventh Amendment of Loan Documents between Color Imaging and
SouthTrust Bank dated June 28, 2002, incorporated by reference to
Exhibit 4.47 to the Registration statement on Form SB-2 filed July 15,
2002.
4.48 $2,500,000 Sixth Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank, incorporated by reference to Exhibit 4.48
to the Registration statement on Form SB-2 filed July 15, 2002.
4.49 Partial Loan Liability Release Agreement between Color Imaging, Inc.
and SouthTrust Bank dated September 24, 2002, incorporated by
reference to Exhibit 4.49 to the Registration statement on Form SB-2
filed October 2, 2002.
4.50 $500,000 Promissory Note between Color Imaging and Jui Hung Wang dated
August 21, 2002, incorporated by reference to Exhibit 4.50 to the
Registration statement on Form SB-2 filed October 2, 2002.
4.51 $100,000 Promissory Note between Color Imaging and Jui Chi Wang dated
August 21, 2002, incorporated by reference to Exhibit 4.51 to the
Registration statement on Form SB-2 filed October 2, 2002.
4.52 First Note Modification Agreement between Sueling Wang and Color
Imaging dated August 27, 2002, incorporated by reference to Exhibit
4.52 to the Registration statement on Form SB-2 filed October 2, 2002.
10.1 Employment Agreement between Color Imaging and Michael W. Brennan
dated June 28, 2000, incorporated by reference to Exhibit 10.1 to the
Registration statement on Form SB-2 filed November 28, 2001.
10.2 Employment Agreement between Color Imaging and Dr. Sueling Wang dated
June 28, 2000, incorporated by reference to Exhibit 10.2 to the
Registration statement on Form SB-2 filed November 28, 2001.
10.3 Employment Agreement between the Company and Morris E. Van Asperen
dated June 28, 2000, incorporated by reference to Exhibit 10.3 to the
Registration statement on Form SB-2 filed November 28, 2001.
10.4 Employment Agreement between Color Imaging and Charles R. Allison
dated June 30, 2000, incorporated by reference to Exhibit 10.4 to the
Registration statement on Form SB-2 filed November 28, 2001.
10.5 Lease Agreement between Color Imaging and Kings Brothers LLC dated
April 1, 1999, incorporated by reference to Exhibit 10.5 to the
Registration statement on Form SB-2 filed November 28, 2001.
10.6 Amendment No. 1 to Lease Agreement between the Company and Kings
Brothers LLC dated April 1, 1999, incorporated by reference to Exhibit
10.6 to the Registration statement on Form SB-2 filed November 28,
2001.
10.7 Form of Subscription Agreement (Incorporated by reference to Exhibit A
to the Registrant's Registration Statement on Form SB-2 filed on
October 2, 2002).
58
(c) Exhibits (continued):
NO. DESCRIPTION
------- -----------
10.8 Letter of Agreement to Employment Agreement between Color Imaging and
Michael W. Brennan dated June 10, 2002 (incorporated by reference to
Exhibit 10.7 to Registrant's Form 10-QSB filed for the quarter ended
June 30, 2002)
10.9 Termination Agreement between Michael W. Brennan and Color Imaging
dated September 30, 2002, incorporated by reference to Exhibit 10.9 to
the Registration statement on Form SB-2 filed October 2, 2002.
10.10 Form of Warrant between Digital Color Print, Inc. and Color Imaging,
Inc., incorporated by reference to Exhibit 10.10 to the Registration
statement on Form SB-2 filed November 13, 2002.
10.11+ Employment and Deferred Compensation Ageement Amendments between
Charles R. Allison and Color Imaging, Inc., December 27, 2002
10.12+ $1,752,000 Installment Note Amendment between SouthTrust Bank and
Color Imaging, Inc. dated February 5, 2003
10.13+ Commercial Lease Agreement Amendment between Kings Brothers LLC and
Color Imaging, Inc. dated February 5, 2003
10.14+ Purchase and Sale and Release Agreement between Michael Edson and
Color Imaging, Inc. dated February 27, 2003
10.15+ Purchase and Sale and Release Agreement between Stephen Chromik and
Color Imaging, Inc. dated February 27, 2003
99.1+ Certification pursuant to 18 U.S.C. Section 1350 of Sueling Wang,
principal executive officer, dated March 10, 2003.
99.2+ Certification pursuant to 18 U.S.C. Section 1350 of Morris E. Van
Asperen, chief financial officer, March 10, 2003.
(1) Pursuant to Rule 601(b)(2), the schedules and exhibits to this Agreement
shall not be filed. A list of the schedules and exhibits is contained on
the last page of the Agreement. The Registrant agrees to furnish
supplementally a copy of any of the omitted schedules and exhibits to the
Securities and Exchange Commission upon request.
+ Filed herewith.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COLOR IMAGING, INC.
("Registrant")
Dated: March 10, 2003 By: /s/ Sueling Wang
------------------------------------
Sueling Wang, Phd
President, Vice Chairman and
principal executive officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant, in the capacities, and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jui-Hung Wang Chairman March 10, 2003
---------------------------
Jui-Hung Wang
/s/ Sueling Wang President, Vice Chairman March 10, 2003
--------------------------- (principal executive officer)
Sueling Wang
/s/ Morris E. Van Asperen Executive Vice President, Chief March 10, 2003
--------------------------- Financial Officer and Secretary
Morris E. Van Asperen (principal financial and accounting officer)
Vice President, Marketing and Sales and _____________
--------------------------- Director
Charles R. Allison
/s/ Jui-Kung Wang Director March 10, 2003
---------------------------
Jui-Kung Wang
/s/ Jui-Chi Wang Director March 10, 2003
---------------------------
Jui-Chi Wang
60
CERTIFICATION
I, Sueling Wang, President and principal executive officer of Color
Imaging, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Color Imaging, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 10, 2003 Signature: /s/ Sueling Wang
----------------------------------
Sueling Wang, President
(principal executive officer)
61
CERTIFICATION
I, Morris E. Van Asperen, Chief Financial Officer of Color Imaging, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Color Imaging, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 10, 2003 Signature: /s/ Morris E. Van Asperen
----------------------------------
Morris E. Van Asperen
Chief Financial Officer
62