UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18450
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COLOR IMAGING, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3453420
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4350 PEACHTREE INDUSTRIAL BOULEVARD, SUITE 100
NORCROSS, GEORGIA 30071 30071
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(Address of principal executive offices) (Zip code)
(770) 840-1090 FAX (770) 242-3494
---------------------------------
(Registrant's telephone number, including area code)
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 to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes
----
No X
----
As of April 21, 2003, there were 12,937,965 shares of Common Stock
outstanding.
COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2003
(Unaudited) and December 31, 2002(Audited)..........................3
Condensed Statements of Operations (Unaudited)
for the Three Months ended March 31, 2003 and 2002..................4
Condensed Statements of Cash Flows (Unaudited)
for the Three Months ended March 31, 2003 and 2002..................5
Notes to Interim Unaudited Condensed Financial
Statements .........................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risks........23
Item 4. Controls and Procedures ...........................................23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings .................................................24
Item 2. Changes in Securities and Use of Proceeds..........................24
Item 3. Defaults Upon Senior Securities....................................26
Item 4. Submission of Matters to a Vote of Security Holders................26
Item 5. Other information .................................................26
Item 6. Exhibits and Reports on Form 8-K...................................26
Signatures...................................................................31
Certifications...............................................................32
2
PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC.
CONDENSED BALANCE SHEETS
ASSETS
31-Mar-03 31-Dec-02
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS
Cash $ 3,210,171 $ 128,501
Accounts receivable, net 2,274,564 2,390,019
Inventory 4,917,009 5,080,237
Related party portion of IDR bond 83,160 83,160
Other current assets 282,251 304,672
------------ ------------
TOTAL CURRENT ASSETS 10,767,155 7,986,589
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,949,209 7,038,111
------------ ------------
OTHER ASSETS
Related party portion of IDR bond 735,340 735,340
Deferred offering costs -- 121,924
Other assets 228,026 231,571
------------ ------------
TOTAL OTHER ASSETS 963,366 1,088,835
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$ 18,679,730 $ 16,113,535
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit lines $ -- $ 1,022,470
Accounts payable 2,700,384 3,543,680
Current portion of notes payable 5,290 363,789
Current portion of bonds payable 350,000 350,000
Notes payable - related parties 332,490 401,937
Other current liabilities 481,692 507,782
------------ ------------
TOTAL CURRENT LIABILITIES 3,869,856 6,189,658
------------ ------------
LONG TERM LIABILITIES
Notes payable 15,759 989,667
Bonds payable 3,095,000 3,095,000
Notes payable - related parties 416,563 598,063
Deferred tax liability 72,000 --
------------ ------------
LONG TERM LIABILITIES 3,599,322 4,682,730
------------ ------------
TOTAL LIABILITIES 7,469,178 10,872,388
------------ ------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; 12,908,333 and 8,437,965 shares issued and
outstanding on March 31, 2003 and
December 31, 2002, respectively 129,083 84,380
Additional paid-in capital 13,019,069 7,205,909
Accumulated deficit (1,937,600) (2,049,142)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,210,552 5,241,147
------------ ------------
$ 18,679,730 $ 16,113,535
============ ============
See accompanying notes
3
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
SALES $ 5,629,405 $ 7,661,323
C0ST OF SALES 4,310,155 6,438,288
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GROSS PROFIT 1,319,250 1,223,035
------------ ------------
OPERATING EXPENSES
Administrative 466,647 365,475
Research & development 271,967 211,484
Sales & marketing 367,274 276,252
------------ ------------
1,105,888 853,211
------------ ------------
INCOME FROM OPERATIONS 213,362 369,824
------------ ------------
OTHER INCOME (EXPENSE)
Other income 48,146 6,877
Financing expenses (75,966) (74,954)
------------ ------------
(27,820) (68,077)
------------ ------------
INCOME BEFORE TAXES 185,542 301,747
PROVISION FOR INCOME TAXES 74,000 115,250
------------ ------------
NET INCOME FROM
CONTINUING OPERATIONS 111,542 186,497
DISCONTINUED OPERATIONS (Note 2)
(Loss) from operations of
subsidiary disposed of -
net of income taxes -- (70,258)
------------ ------------
NET INCOME $ 111,542 $ 116,239
============ ============
INCOME (LOSS)
PER COMMON SHARE - BASIC
Continuing operations $ .01 $ .02
Discontinued operations $ -- $ (.01)
------------ ------------
$ .01 $ .01
============ ============
INCOME (LOSS)
PER COMMON SHARE - DILUTED
Continuing operations $ .01 $ .02
Discontinued operations $ -- $ (.01)
------------ ------------
$ .01 $ .01
============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 9,332,780 10,099,880
Assumed conversion -- 101,613
------------ ------------
9,332,780 10,201,493
============ ============
See accompanying notes
4
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2003 2002
----------- -----------
Cash flows from operating activities:
Net income from continuing operations $ 111,542 $ 186,497
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 146,726 132,378
Deferred income taxes 72,000 33,001
Decrease (increase) in:
Accounts receivable and other receivables 115,455 (362,350)
Inventories 163,228 210,573
Prepaid expenses and other assets 147,891 (4,553)
Increase (decrease) in:
Accounts payable and accrued liabilities (869,387) (20,886)
------------- -------------
Net cash (used in) provided by
continuing operations (112,545) 174,660
Net cash flows of discontinued operations -- (167,219)
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Net cash (used in) provided by
operating activities (112,545) 7,441
------------- -------------
Cash flows (used in) investing activities:
Capital expenditures (57,824) (248,136)
Other assets -- --
------------- -------------
Net cash (used in)
investing activities (57,824) (248,136)
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Cash flows from financing activities:
Net (payments) under line of credit (1,022,470) (30,724)
Net proceeds from sale of common stock 5,917,086 143,351
Repurchase of common shares and warrants (59,223) --
Net proceeds under related party borrowings -- 500,000
Net (payments) under related party borrowings (250,947) --
Principal payments of long-term debt (1,332,407) (82,403)
------------- -------------
Net cash provided by
financing activities 3,252,039 530,224
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Net increase in cash 3,081,670 289,529
Cash at beginning of year 128,501 393,981
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Cash at end of period $ 3,210,171 $ 683,510
============= =============
Supplemental disclosure of cash flow Information:
Cash paid during the period for:
Interest and financing expense $ 80,545 $ 67,238
============= =============
Income taxes $ 0 $ 0
============= =============
See accompanying notes
5
COLOR IMAGING, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
March 31,
2003 (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals
and adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
NOTE 2. 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:
For the Three Months Ended
March 31,
-------------------------------
2003 2002
----------- -----------
(Loss) from discontinued operations:
Before income taxes $ -- $(105,502)
Income tax provision (benefit) -- (35,244)
----------- -----------
Net (loss) from discontinued operations $ -- $( 70,258)
=========== ===========
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.
NOTE 3. COMMON STOCK AND EQUIVALENTS
On February 27, 2003, the Company entered into an agreement with a stockholder
to repurchase 150,000 shares of common stock and warrants to purchase 300,000
shares of the Company's common stock for an aggregate cost of $300,000. Under
the agreement, the stockholder has a one-time right to cancel the sale of the
common stock and warrants not yet paid for by the Company upon written notice to
the Company. Upon receipt of such notice, the Company is not obligated to
purchase the remaining common stock and warrants. The agreement provides that
the Company is to pay $2.00 for each common share and warrant to purchase two
common shares of the Company's common stock. The shares and warrants are to be
repurchased in approximately equal installments over nine months, beginning in
March and ending in November 2003. On March 24, 2003, the Company repurchased
16,672 of the Company's common shares and warrants to purchased 33,344 common
shares, paying $33,344. The shares and warrants repurchased by the Company are
held in escrow, pending the completion of the repurchase in November 2003, or
its earlier cancellation, at which time they will be cancelled. The shares and
warrants repurchased to date are reflected as if cancelled as of the date
hereof.
6
NOTE 3. COMMON STOCK (CONTINUED)
On March 4, 2003, the Company completed the repurchase from a stockholder of
12,939 shares of the Company's common stock together with warrants to purchase
25,878 shares of the Company's common stock at an aggregate cost of $25,878. The
shares and warrants were originally sold in the Company's private placement that
was completed in December 2001, and the shares and warrants repurchased by the
Company were cancelled.
On March 13, 2003, the Company completed the public sale of 4,500,000 shares of
the Company's common stock at a price of $1.35 per share (see note 10), whereby
the Company received $5,917,086 in net proceeds.
During the three months ended March 31, 2003, the Company did not grant any
options to employees. The following is a summary of total outstanding options
and stock warrants at March 31, 2003:
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted-Average
Range of Exercise Weighted-Average Remaining Weighted-Average
Prices Number Exercise Price Contractual Life Number Exercise Price
--------------------- --------- ---------------- ------------------- --------- ----------------
Options $2.00-$2.75 920,000 $2.34 4.80 years 718,750 $2.28
Warrants $2.00 901,993 $2.00 0.85 years 901,993 $2.00
--------- ---------
Options and warrants 1,821,993 $2.17 3.40 years 1,620,743 $2.12
========= =========
On April 18, 2003, the Company granted options to two directors to purchase
25,000 shares of the Company's common stock at an exercise price of $.45 per
share. The options vest at the rate of 5,000 per year beginning on the first
anniversary date of the grant and continuing annually thereafter and expire
three years from their respective date of vesting.
NOTE 4. INVENTORIES
Inventories consisted of the following components as of March 31, 2003 and
December 31, 2002:
March 31, 2003 December 31, 2002
------------------ -----------------
Raw materials $ 764,324 $ 427,752
Work-in-process 1,310,099 1,021,496
Finished goods 2,952,550 3,665,953
Obsolescence allowance (109,964) (34,964)
----------------- -----------------
Total $ 4,917,009 $ 5,080,237
================= =================
NOTE 5. CHANGES TO BORROWING ARRANGEMENTS
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance as of March 31, 2003 of $0. At the end of each month for the
following month, the Company has the 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 the Bank's prime interest rate minus 0.25%. As of March
31, 2003, the interest rate was the one-month Libor rate of 1.2275% plus 2.50%
(3.8375%). This revolving line of credit has a June 30, 2003 expiration date.
Under the line of credit, the Company is permitted to borrow up to 85% of
eligible accounts receivable and 50 percent of eligible inventories (up to a
maximum of $1.1 million and not to exceed 60 percent of the total outstanding).
The Company has granted the Bank a security interest in all of the Company's
assets as security for the repayment of the line of credit. The Bank agreement
contains various covenants which the Company is required to maintain, and as of
March 31, 2003, the Company was in compliance with these covenant requirements.
7
NOTE 6. SIGNIFICANT CUSTOMERS
In the three month period ended March 31, 2003, two customers accounted for 33%
and 19%, respectively, of net sales. The Company does not have a written or oral
contract with these customers. All sales are made through purchase orders.
Accounts receivable from these customers at March 31, 2003, were $847,711 and
$325,349, respectively.
NOTE 7. SIGNIFICANT SUPPLIERS
In the three months ended March 31, 2003, the Company purchased 41% of its raw
materials, components and supplies from one supplier in connection with sales to
its largest customers. At March 31, 2003, the accounts payable to this supplier
was $1,365,836.
NOTE 8. 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 from continuing operations for the three-month
periods ended March 31 are as follows:
2003 2002
----------- -----------
Sales to Unaffiliated Customers:
United States $ 3,314,623 $ 4,987,555
Europe 1,142,286 1,568,622
Mexico 670,635 650,299
Asia 236,943 175,555
All Others 264,918 279,292
----------- -----------
Total $ 5,629,405 $ 7,661,323
=========== ===========
NOTE 10. RELATED PARTY TRANSACTIONS:
The Company purchased from an affiliate for the three months ended March 31,
2003, $452,524 of injection molded cartridges and accessories for copiers and
laser printers. Accounts payable to the affiliate at March 31, 2003, was
$332,449.
On January 23, 2003 the Company'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, the Company received
subscription gross proceeds from an affiliate of $6,075,000 for the public sale
of 4,500,000 shares of its common stock from an affiliate, and on March 13,
2003, the Company accepted the investment in accordance with the offering
procedures.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussions should be read in conjunction with our condensed
financial statements and the related notes thereto.
BACKGROUND
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. 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 had invested
approximately $2.35 million in the operations of Logical Imaging Solutions and
the development of its technologies. The disposal of Logical Imaging Solutions
eliminates the capital needed to support those operations and should result in
improved profitability from operations.
COLOR IMAGING, INC.
Color Imaging, Inc. has developed and manufactured products used in electronic
printing. We formulate and produce black text and specialty toners, including
color and magnetic character recognition toners for numerous laser printers. Our
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 that are
required for the high-speed processing of checks and other financial documents.
We also supply other consumable products used in electronic printing, and
photocopying, including toner cartridges, cartridge components, photoreceptors
and imaging drums.
Color Imaging, Inc. 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), Panasonic(TM), and printing systems
developed by Logical Imaging Solutions, Inc. Color Imaging, Inc. also
manufacturers and or markets toners for use in Ricoh, Sharp(TM), Xerox(TM),
Canon(TM), Lanier(TM) and Toshiba(TM) copiers. We also offer product
enhancements, including imaging supplies that enable standard laser printers to
print magnetic character recognition data. We market branded products directly
to OEMs and our aftermarket products worldwide to distributors and
remanufacturers of laser printer toner cartridges and to dealers and
distributors of copier products.
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.
RECENT DEVELOPMENTS
On April 18, 2003, the Board of Directors of Color Imaging reviewed the recent
trading activity and prices of our common stock on the OTC Bulletin Board. The
Board of Directors then approved a stock repurchase program pursuant to which
the we are authorized to purchase in the open market, private or other
9
transactions, up to the lesser of $1 million or 1 million shares of our
outstanding shares of common stock.
Repurchases under the program are to be made from time to time at the discretion
of management and as market conditions warrant. The repurchase program does not
obligate us to acquire any specific number of shares and may be discontinued at
any time. There is no guarantee as to the exact number of shares, if any, to be
repurchased by us prior to the completion of the repurchase program. Our present
plan is to cancel any shares repurchased, making them available for reissue for
any general corporate purpose, and to complete the repurchases by September 30,
2004. All purchases will be in accordance with the terms, conditions and
restrictions contained in SEC Rule 10b-18.
On January 23, 2003 Color Imaging, Inc.'s registration statement on Form SB-2
offering of up to 7 million shares of 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. On March 13, 2003, Color Imaging accepted
the investment in accordance with the offering procedures and terminated the
offering without accepting any other subscriptions.
OVERVIEW
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 three months ended March 31, 2003 declined by approximately $2
million, or 26%, to $5.6 million, compared to $7.7 million in 2002. Net sales in
2003 decreased primarily due to reduced demand domestically and substantially
reduced sales to our largest customer for the first quarter 2003 compared to the
same period of 2002. In the three months ended March 31, 2003 and 2002, our net
sales were primarily generated from the sale of finished consumable products for
electronic printers and photocopying machines and comprised approximately 71%
and 69% of net sales, respectively. For the three months ended March 31, 2003
and 2002, our two largest imaging products customers accounted for 33% and 19%
and 49% and 21% of net sales, respectively. 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 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 written or oral contracts 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.
Net sales made outside of the United States decreased to approximately $2.3
million, or 41% of total sales for the three months ended March 31, 2003,
compared to $2.7 million, or 35% for the three months ended March 31, 2002. This
15% decrease in international sales resulted primarily from the decrease in
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 months ended March
31, 2003, as well as for Color Imaging's two general product lines.
10
Backlog Backlog
at start at end
of New Net of
Year Orders Revenue Quarter
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
2003:
Copier Products $ 2,718 $ 2,953 $ 3,562 $ 2,109
Printer Products 473 2,051 2,067 457
-------- -------- -------- --------
Total 3,191 5,004 5,629 2,566
======== ======== ======== ========
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 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
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.
11
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 $6.5 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
Color Imaging's net sales were $5.6 million for the three months ended March 31,
2003, a decrease of approximately 27% from March 31, 2002. The net sales by
product category were as follows:
% Increase
(Dollars in thousands) 2003 % (Decrease) 2002 %
---------- ----- ---------- ---------- -----
Product Category:
Cartridges and bottles
Copier finished products $ 3,051 54% (30%) $ 4,339 57%
Printer finished products 966 17% ( 1%) 979 12%
---------- ---------- ----------
4,017 71% (24%) 5,318 69%
Bulk toner and parts 1,612 29% (31%) 2,343 31%
---------- ---------- ----------
Total net revenue $ 5,629 100% (27%) $ 7,661 100%
========== ========== ==========
The following table sets forth certain information derived from the Company's
unaudited interim statements of operations:
THREE MONTHS ENDED
MARCH 31,
2003 2002
----- -----
(PERCENTAGE OF NET SALES)
Net sales 100 100
Cost of sales 77 84
Gross profit 23 16
Administrative expenses 8 5
Research and development 5 3
Sales and marketing 6 3
Operating income 4 4
Interest expense 1 1
Depreciation and amortization 3 2
Income before taxes 3 4
Provision for income taxes 1 2
Income from continuing operations 2 2
Loss from discontinued operations, net of
income taxes - -1
Net income 2 1
12
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
NET SALES. Our net sales decreased by $2 million, or 26%, to $5.6 million for
the three months ended March 31, 2003, from $7.7 million for the three months
ended March 31, 2002. Net sales made in the United States were $3.3 million, a
decrease of $1.7 million, or 33%, from $5.0 million made in the comparable
period in 2002. Net sales made outside of the United States decreased by
approximately $0.4 million, or 15%, for the quarter compared to the same quarter
of 2002. The decrease in net sales for the quarter compared to that of a year
ago resulted from reduced domestic demand for all of our products and the loss
of business from our largest customer, while the decrease in sales made outside
of the United States was primarily the result of decreased sales to our two
largest customers. Of the $5.7 million in net sales, $3.1 million, or 54%, were
attributable to our copier finished products, while net sales of these same
products were $4.3 million, or 57%, for the comparable period in 2002. The
revenue decrease from copier products from 2002 to 2003 was 30%, reflecting
primarily the loss in business from our largest customer, while the decrease for
the comparable period experienced by laser products was 1%. Sales of our laser
finished products for the three months ended March 31, 2003 were $1 million
compared to $1 million for the same period of 2002. We believe that sales of
both our copier and our laser printing products will increase during 2003, as
the result of sales of new products recently introduced.
COST OF GOODS SOLD. Cost of goods sold decreased by $2.1 million, or 33%, to
$4.3 million from $6.4 million for the three months ended March 31, 2003 and for
the comparable period in 2002, primarily as the result of the decrease in net
sales. Cost of goods sold as a percentage of net sales decreased by 7 percentage
points from 84% for the three months ended March 31, 2002 to 77% for the three
months ended March 31, 2003, primarily as the result of reduced sales derived
from certain very low margin products previously sold to our largest customer
that have been discontinued, a larger percentage of sales being derived from
sales of products with higher gross margins 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.
GROSS PROFIT. As a result of the above factors, gross profit increased to $1.3
million in the three months ended March 31, 2003 from $1.2 million in the three
months ended March 31, 2003, or approximately $100,000, while net sales for the
same period decreased by $2 million. Gross profit as a percentage of net sales
increased by 7 percentage points from 16% to 23% for the three months ended
March 31, 2003, as compared to the corresponding period of the prior year.
OPERATING EXPENSES. Operating expenses increased $.25 million, or 30%, to $1.1
million in the three months ended March 31, 2003 from $.85 million in the three
months ended March 31, 2002. General and administrative, selling and R&D
expenses increased, as a percentage of net sales, to 20% in the three months
ended March 31, 2003 from 11% in the three months ended March 31, 2002 as the
result of the decrease in net sales for the quarter. General and administrative
expenses increased approximately 28%, or $.1 million to $.47 million for the
three months ended March 31, 2003 from the comparable period in 2002, largely
resulting from increased legal and professional fees and increased payroll and
related expenses. Selling expenses increased by $.09 million, or 33%, in the
three months ended March 31, 2003 compared to the three months ended March 31,
2002. Selling expenses increased primarily as a result of increased commission
and expense reimbursements of our manufacturer's representatives, payroll and
advertising and promotional expenses. Research and development expenses
increased by $60,000, or 29%, to $272,000 in the three months ended March 31,
2003, primarily as the result of increased expenditures for product formulation
testing and increased payroll and consulting expenses. 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, primarily the 30% increase
in operating expenses, operating income decreased by $156,000, or 42%, to a
profit of $213,000 in the three months ended March 31, 2003 from $369,000 in the
three months ended March 31, 2002.
13
INTEREST AND FINANCE EXPENSE. Interest expense increased by $1,000 in the three
months ended March 31, 2003 from the three months ended March 31, 2002. The
increase was primarily the result of interest expense on the borrowings from
related parties.
OTHER INCOME. Other income increased by $41,000 from income of $7,000 to income
of $48,000 in the three months ended March 31, 2003 from the three months ended
March 31, 2002, primarily as the result of income derived from the exchange of
Euros.
INCOME TAXES. As the result of our profit from continuing operations in the
three months ended March 31, 2003, we recorded an income tax provision of
$74,000 for the period, while the income tax provisions were $115,000 for the
three months ended March 31, 2002.
RESULTS OF 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 unaudited consolidated statements of operations.
Three Months Ended
March 31,
------------------ -------------------
2003 2002
------------------ -------------------
Net sales $ -- $ 197,755
Operating (loss) -- ( 99,784)
Net (loss) $ -- $ ( 70,258)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, and December 31, 2002, our working capital and current ratio
was approximately $6.9 million and $1.8 million and 2.78 to 1 and 1.29 to 1,
respectively. The substantial increase in our working capital and current ratio
at March 31, 2003, compared to December 31, 2002, was primarily due to the net
proceeds we received from the public sale of our common stock.
Cash flows used by continuing operating activities were $113,000 in the three
months ended March 31, 2003 compared to $174,660 provided by continuing
operations in the three months ended March 31, 2002. The cash flows used by
continuing operating activities in the three months ended March 31, 2003
increased primarily due to the reduction made to accounts payable.
Cash flows used in investing activities were $58,000 in the three months ended
March 31, 2003, compared to $248,000 in the three months ended March 31, 2002.
The decrease in cash used in investing activities in the three months ended
March 31, 2002, was entirely attributable to decreased capital expenditures in
connection with our most recent factory expansion.
We have a $1.5 million revolving line of credit, as amended, with our bank that
had an outstanding balance as of March 31, 2003 of $0. 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 March 31,
2003, the interest rate was the one-month Libor rate of 1.3375% plus 2.50%
(3.8375%). 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 and not to exceed 60 percent of the total outstanding). We have
granted our bank a security interest in all of our assets as security for the
repayment of the lines of credit.
The Bank agreement contains various covenants which the Company is required to
maintain, and as of March 31, 2003, the Company was in compliance with these
covenant requirements.
Cash flows provided by financing activities, after the repayment of some
$1,330,000 of debt and $1,022,000 reduction to the line of credit for the three
months ended March 31, 2003 were $3,252,000, resulting primarily from the
$5,917,000 in net proceeds received for the public sale of our common stock to
an affiliate. Cash flows provided by financing activities for the same three
month period ended March 31, 2002, were $530,000, derived primarily from
$500,000 in proceeds from related party borrowings.
14
On April 18, 2003, Color Imaging established a stock repurchase program under
which Color Imaging's common stock, with an aggregate market value up to the
lesser of $1 million or 1 million shares, may be acquired in the open market or
through private or other transactions. As of April 30, 2003, Color Imaging has
not repurchased any of our common stock.
We believe that existing cash balances, cash generated by operating activities,
and funds available under our credit facility will be sufficient to finance our
operating and investing activities for at least the next 12 months, which will
include expenditures of approximately $500,000 for manufacturing and research
and development equipment, approximately $100,000 for a significant upgrade to
our accounting and manufacturing computer system and the repurchase of our stock
under the stock repurchase program of up to the lesser of $1,000,000 or
1,000,000 shares of our common stock.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS
RISK FACTORS
RISKS RELATED TO OUR BUSINESS:
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CUSTOMERS.
For the three months ended March 31, 2003, two customers accounted for
approximately 52% 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, 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 March 31, 2003, receivables from two customers comprised 52% 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 33% 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 33% of our sales for the three months ended March 31, 2003, were
derived from products limited to a specific supplier. For the three months ended
March 31, 2003, we purchased 41% 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
15
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
decline, our business will be materially and adversely affected.
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.
16
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 41%, 37%, 24% and 10% of net sales for
the three months ended March 31, 2003, and 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 three
months ended March 31, 2003, our sales were made to customers outside the United
States as follows:
o Europe (including Israel and Africa) - 20%
o Mexico - 12%
o Asia - 4%
o Other - 5%
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 $37,209 for the three
months ended March 31, 2003. 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.
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
17
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.
18
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
19
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.
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, ALLOWING THESE STOCKHOLDERS TO CONTROL MATTERS REQUIRING
APPROVAL OF THE STOCKHOLDERS.
As a result of such 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 April 21, 2003, we had issued and outstanding 12,908,333 shares of common
stock and 901,993 outstanding warrants and 920,000 outstanding options to
purchase additional shares of common stock, exclusive of 16,672 shares of our
common stock and warrants to purchase 33,344 shares of our common stock that
have been repurchased pursuant to a repurchase agreement and will be cancelled
upon their receipt from escrow. 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.
20
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;
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 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 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, but are not limited to:
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;
21
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.
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.
22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
Market risk is the risk of loss to future earnings, to fair values or to future
cash flows that may result from changes in the price of a financial instrument.
The value of a financial instrument may change as a result of changes in
interest rates, exchange rates, commodity prices, equity prices and other market
changes. Market risk is attributed to all market sensitive financial
instruments, including long-term debt.
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
$37,209 in the quarter ended March 31, 2003, and we incurred a net foreign
currency transaction gain of $2,858 and a loss of $1,877 in the years ended
December 31, 2002 and 2001, respectively. Our pricing for our products sold in
Euros is currently at the rate of 0.96 Euros relative to the U.S. dollar. 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.
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. At March 31,
2003, there were no amounts outstanding under the line of credit agreement and,
accordingly, a sustained increase in the reference rate of 1% would not cause
our annual interest expense to change.
Color Imaging's investment policy requires investments with high credit quality
issuers and or over night repurchase agreements with our bank. 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, or the overnight
purchase of securities held in our bank's investment portfolio. 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 March 31, 2003, we are not subject to 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.
ITEM 4. Controls and Procedures
a) On April 25, 2003, our President and principal executive officer and
Chief Financial Officer participated in a meeting during which there was an
evaluation of our disclosure controls and procedures. Based on such evaluation,
they believe such controls and procedures are effective.
b) Our President and principal executive officer and Chief Financial
Officer are involved in ongoing evaluations of internal controls. On April 25,
2003, in anticipation of the filing of this Form 10-Q, they reviewed our
internal controls and have determined, based on such review, that, since the
date of their review, there have been no significant changes in our internal
controls or in other factors that would significantly affect our internal
controls subsequent to such evaluation.
23
PART II
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
On January 23, 2003, the Company's registration statement on Form SB-2,
registering up to 7 million shares of the Company's common stock, was declared
effective (Registration Statement No. 333-76090), and the offering was commenced
by the Company's officers and directors. On March 13, 2003, the Company
completed the public sale of 4,500,000 shares of the Company's common stock at a
price of $1.35 per share, whereby the Company received $6,075,000 in gross
proceeds from an affiliate, and the Company terminated the offering before the
sale of all 7 million of registered shares. From the effective date of the
Company's registration statement through March 31, 2003, the Company incurred
total expenses for professional fees and printing of $30,129 in connection with
the issuance and distribution of the Company's common stock. The net proceeds
received by the Company, after expenses of $30,129, was $6,044,871. None of the
aforementioned expenses were direct or indirect payments to directors, officers,
their associates or persons owning ten (10) percent or more of the common stock
of the Company.
24
Our intended uses of the $6,075,000 of proceeds received from the public sale of
our common stock, and our uses through March 31, 2003, are listed below in
descending order of priority:
Purpose: Amount Used Reallocated Remaining
------------------- ---------- ---------- ----------- ----------
Accounts payable and other corporate
and offering expenses. . . . . . . . . . . . . . . $1,000,000 $ 413,816 $ 0 $ 586,184
To retire debt (1). . . . . . . . . . . . . . . . . $ 350,000 $ 324,301 $ 25,699 $ 0
To retire debt (2). . . . . . . . . . . . . . . . . $1,050,000 $ 956,883 $ 93,113 $ 0
To acquire capital assets . . . . . . . . . . . . . $1,500,000 $ 20,000 $ 0 $1,480,000
For other general corporate purposes
including working capital. . . . . . . . . . . . . $2,175,000 $ 0 $ 118,812 $2,293,812
---------- ---------- ----------
Total: $6,075,000 $1,715,000 $4,360,000
Pending application:
-------------------
Short-term investments. . . . . . . . . . . . . . . $2,625,000
Pay down of revolving line of credit. . . . . . . . $1,735,000
----------------
(1) On November 30, 2000, we entered into a loan for $500,000 with a 5-year
term, secured by specific manufacturing equipment, maturing November 30,
2004, with General Electric Capital Corporation for the purchase of toner
manufacturing equipment. The interest rate is 10.214% and the monthly
principal and interest payments are $10,676.39.
(2) On June 24, 1999, we entered into a loan for $1,752,000 with a 7-year term,
secured by our business assets, maturing June 24, 2006, with SouthTrust
Bank for the refinancing of obligations owing the bank for the acquisition
of equipment and that due under a previous working capital line of credit.
The interest rate is 7.90% per annum and the monthly principal and interest
payments are $27,205.00.
During March 2003, using proceeds from the offering on Form SB-2, the Company
retired debt owed to General Electric Capital Corporation and SouthTrust Bank,
and to the extent proceeds were not required in the amounts outlined for those
purposes, they have been reallocated to be used for general corporate purposes.
Pending application of the proceeds of our offering, we temporarily reduced our
revolving line of credit with our bank and have retained the balance of the net
proceeds in a deposit account with the bank, pending authorization of the board
of director's to make the investments recommended by management.
No direct or indirect payments to directors, officers, their associates or
persons owing ten (10) percent or more of the Company's common stock were made
with proceeds from the Company's offering on Form SB-2
On March 4, 2003, the Company completed the repurchase from a stockholder of
12,939 shares of the Company's common stock together with warrants to purchase
25,878 shares of the Company's common stock at an exercise price of $2.00 per
share for $25,878. The shares and warrants were originally sold in the Company's
private placement that was completed in December 2001, and the shares and
warrants repurchased by the Company were cancelled.
On February 27, 2003, the Company entered into an agreement with a stockholder
to repurchase 150,000 shares of common stock and warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $2.00 per share.
Under the agreement, the stockholder has a one-time right to cancel the sale of
the common stock and warrants not yet paid for by the Company upon written
notice to the Company. Upon receipt of such notice, the Company is not obligated
to purchase the remaining common stock and warrants. The agreement provides that
the Company is to pay $2.00 for each common share and warrant to purchase two
common shares of the Company's common stock. The shares and warrants are to be
repurchased in approximately equal installments over nine months, beginning in
March and ending in November 2003. On March 24, 2003, the Company repurchased
16,672 of the Company's common shares and warrants to purchased 33,344 common
shares, paying $33,344. The shares and warrants repurchased by the Company are
held in escrow, pending the completion of the repurchase in November 2003, or
its earlier cancellation, at which time they will be cancelled.
25
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
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.
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.
26
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.
27
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.
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.
28
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 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)
10.8 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.
10.9 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.
10.10 Employment and Deferred Compensation Agreement Amendments between
Charles R. Allison and Color Imaging, Inc., December 27, 2002,
incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-K for the year ended December 31, 2002
10.11 $1,752,000 Installment Note Amendment between SouthTrust Bank and
Color Imaging, Inc. dated February 5, 2003, incorporated by reference
to Exhibit 10.12 to the Registrant's Form 10-K for the year ended
December 31, 2002
29
10.12 Commercial Lease Agreement Amendment between Kings Brothers LLC and
Color Imaging, Inc. dated February 5, 2003, incorporated by reference
to Exhibit 10.13 to the Registrant's Form 10-K for the year ended
December 31, 2002
10.13 Purchase and Sale and Release Agreement between Michael Edson and
Color Imaging, Inc. dated February 27, 2003, incorporated by reference
to Exhibit 10.14 to the Registrant's Form 10-K for the year ended
December 31, 2002
10.14 Purchase and Sale and Release Agreement between Stephen Chromik and
Color Imaging, Inc. dated February 27, 2003, incorporated by reference
to Exhibit 10.15 to the Registrant's Form 10-K for the year ended
December 31, 2002
10.15 Form of Indemnification Agreement, incorporated by reference to the
post effective Amendment No. 1 to Form SB-2 filed April 1, 2003.
99.1+ Certification pursuant to 18 U.S.C. Section 1350 of Sueling Wang,
principal executive officer, dated April 30, 2003.
99.2+ Certification pursuant to 18 U.S.C. Section 1350 of Morris E. Van
Asperen, chief financial officer, April 30, 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.
(b) REPORTS ON FORM 8-K
On January 24, 2003, the Company filed a Current Report on Form 8-K announcing
On January 23, 2003, Color Imaging, Inc.'s registration statement on Form SB-2
(SEC Reg. No. 333-76090) was declared effective by the Securities and Exchange
Commission in accordance with Item 5 of Form 8-K.
On March 7, 2003, the Company filed a Current Report on Form 8-K announcing that
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, and that subject to
acceptance by Color Imaging of the investment in accordance with the offering
procedures, Color Imaging intended to terminate the offering effective March 13,
2003 and accept no additional subscriptions in accordance with Item 5 of Form
8-K.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COLOR IMAGING, INC.
/S/ SUELING WANG
--------------------------------------
April 30, 2003 Sueling Wang, PhD
President (principal executive officer)
/S/ MORRIS E. VAN ASPEREN
--------------------------------------
Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
31
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sueling Wang, president and principal executive officer of registrant,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Color Imaging, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidating subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
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 of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 functions):
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
quarterly 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.
COLOR IMAGING, INC.
/S/ SUELING WANG
---------------------------------------
April 30, 2003 Sueling Wang, PhD
President (principal executive officer)
32
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Morris E. Van Asperen, executive vice president and chief financial
officer of registrant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Color Imaging, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidating subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
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 of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 functions):
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
quarterly 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.
COLOR IMAGING, INC.
/S/ MORRIS E. VAN ASPEREN
------------------------------------
April 30, 2003 Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
33
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