UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
Commission file number 0-18450
COLOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3453420
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4350 Peachtree Industrial Blvd, Suite 100
Norcross, GA 30071
(Address of Principal Executive Offices) (Zip Code)
(770) 840-1090
(770) 242-3494 Facsimile
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required by file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (4,683,211 shares) was approximately $3,090,919 at June 30, 2003
(the last business of day of the most recently completed second fiscal quarter)
based on the closing price of our common stock of $0.66.
The number of common shares outstanding as of February 13, 2004 was 12,730,505.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS.............................................................3
ITEM 2 PROPERTIES..........................................................18
ITEM 3 LEGAL PROCEEDINGS...................................................18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................18
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS.............................................19
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA................................23
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................23
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........32
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................33
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................57
ITEM 9A CONTROLS AND PROCEDURES.............................................57
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................57
ITEM 11 EXECUTIVE COMPENSATION..............................................60
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......63
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................63
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES..............................65
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....66
SIGNATURES..........................................................69
CERTIFICATIONS......................................................73
PART I
ITEM 1. BUSINESS
OVERVIEW
Since 1989, Color Imaging, Inc. ("Color Imaging") has developed, manufactured
and marketed products used in electronic printing. Color Imaging formulates and
manufactures black text and specialty toners, including color and magnetic
character recognition toners for numerous laser printers, facsimile machines and
analog and digital photocopiers. Color Imaging's toners permit the printing of a
wide range of user-selected colors and also the full process color printing of
cyan, yellow, magenta and black. Magnetic character recognition toners enable
the printing of magnetic characters that are required for the high-speed
processing of checks and other financial documents. Color Imaging also supplies
other consumable products used in electronic printing and photocopying,
including toner cartridges, cartridge components, photoreceptors and imaging
drums.
Color Imaging has continually expanded its product line and manufacturing
capabilities. This expansion has led to the creation of more than 130 different
black text, color, magnetic character recognition and specialty toner
formulations, including aftermarket toners and imaging products for printers and
facsimile machines manufactured by Brother(TM), Canon(TM), Delphax(TM), Hewlett
Packard(TM), IBM(TM), Lexmark(TM), Sharp(TM), Xerox(TM), Minolta(TM), Mita(TM),
Panafax(TM), Pentax(TM), Pitney Bowes(TM), Epson(TM), Fuji-Xerox(TM),
Toshiba(TM), Kyocera(TM), Okidata(TM), and Panasonic(TM). Color Imaging also
manufactures and/or markets toners for use in Ricoh(TM), Sharp(TM), Xerox(TM),
Canon(TM), Lanier(TM) and Toshiba(TM) copiers. Color Imaging also offers product
enhancements, including imaging supplies that enable standard laser printers to
print magnetic character recognition data. Color Imaging markets branded
products directly to OEMs and its aftermarket products worldwide to distributors
and re-manufacturers of laser printer toner cartridges and to dealers and
distributors of copier products.
Color Imaging's business is derived from a single segment, imaging supplies and
related spare parts and consumables, used in copiers, printers and facsimile
machines. The percentage of our net sales derived from finished products, both
manufactured and purchased from others for resale, for the years ended December
31, 2003, 2002, and 2001 were 72%, 77%, and 75%, respectively, while our sales
of bulk toners and parts for the same periods were 28%, 23% and 25%,
respectively. While we intend to increase our net sales of bulk toners that we
manufacture to more fully utilize our plant capacity, we believe that the net
sales of finished products will continue to be the majority of our net sales.
Sales to our two largest customers will continue to decline and are expected to
be about 10% of 2004 net sales. These two customers both have, in the past,
elected to produce themselves some of the products formerly manufactured by us,
and since many of the products are older analog copier toners and developers
whose sales in the marketplace are declining in general. For the 2003 year, two
unrelated distributors/customers of imaging supplies accounted for 19% and 14%
of net sales from continuing operations. For the 2002 year, these same two
unrelated distributors/customers of imaging supplies accounted for 47% and 20%
of net sales from continuing operations. For the 2001 year, three
distributors/customers of imaging supplies accounted for 42%, 16% and 12% of net
sales from continuing operations. The Company does not have a written or oral
contract with any of these customers. All sales are made through purchase
orders.
BACKGROUND.
Color Imaging, formerly known as Advatex Associates, Inc., was incorporated in
Delaware in 1987. On May 16, 2000, Advatex, Logical Acquisition Corp., Color
Acquisition Corp., Logical Imaging Solutions, Inc. and Color Image, Inc. entered
into a Merger Agreement and Plan of Reorganization pursuant to which Logical
Acquisition Corp. merged with and into Logical Imaging Solutions and Color
Acquisition Corp. merged with and into Color Image. Pursuant to the Merger
Agreement, stockholders of Logical Imaging Solutions and Color Image exchanged
their shares for shares of common stock of Advatex. Logical Imaging Solutions
stockholders converted their shares into shares of common stock of Advatex at
the ratio of 1.84843 shares of common stock of Advatex for each one share of
Logical Imaging Solutions. Color Image stockholders converted their shares into
shares of common stock of Advatex at the ratio of 15 shares of common stock of
Advatex for each one share of Color Image. Following the conversion of shares by
Logical Imaging Solutions and Color Image stockholders, stockholders of Logical
Imaging Solutions and Color Image owned approximately 85% of the outstanding
shares of common stock of Advatex and stockholders of Advatex before the merger
owned approximately 15% and Logical Imaging Solutions and Color Image became
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wholly-owned subsidiaries of Advatex. The purpose of the merger was to combine
Color Image's toner and consumable expertise and manufacturing plant with
Logical Imaging Solutions' advanced printing system capabilities to offer a
wider product range and ensure product supply for Logical Imaging Solutions'
Solution Series printing systems. Management also anticipated that the merger
with a company that was subject to the Securities Exchange Act of 1934 would
also permit the reorganized business to offer shares to other acquisition
candidates, in lieu of cash.
On July 7, 2000, pursuant to a vote of our stockholders, we changed our name to
Color Imaging, Inc. On December 31, 2000, Color Image, Inc. was merged with and
into Color Imaging. On September 11, 2002, we entered into a share exchange
agreement with Digital Color Print, Inc. and four of our directors to divest our
wholly owned subsidiary, Logical Imaging Solutions, Inc. On September 30, 2002,
the share exchange transaction was completed and Color Imaging disposed of its
wholly-owned subsidiary, Logical Imaging Solutions, Inc., in a common stock
share exchange with Digital Color Print, Inc., which is owned by four former
directors. Since its founding in 1993, Logical Imaging Solutions, Inc.'s
development efforts have focused on creating a high-speed digital variable data
printing system for commercial printing applications that combines software,
hardware and consumable products not only for black text for image printing but
also in color. See "Discontinued Operations", and Note 3 of Notes to Financial
Statements.
RECENT DEVELOPMENTS
The Board of Directors of Color Imaging at a meeting held on February 17, 2004,
set May 18, 2004, as the date for the next annual meeting of the stockholders
and established a record date for voting thereat of March 26, 2004.
MARKET OVERVIEW AND INDUSTRY
Color Imaging's market for imaging products is the installed base of electronic
printing devices: laser printers and facsimile machines and analog and digital
copiers. Color Imaging competes within this market with products supplied by the
OEM manufacturers and with other suppliers of aftermarket imaging products.
Additional products in this category include enhancement products that extend
the capabilities of the OEM's product, such as magnetic character recognition
toners that enable the printing of magnetic characters on checks and other
financial documents. We market our products worldwide and regionally primarily
to distributors of imaging products who sell to dealers and large end-users. To
a lesser extent, we sell to OEMs, re-manufacturers and a few dealers directly.
We believe the trends in the electronic printing and photocopying industry, and
of original equipment manufacturers of these devices, are (1) the introduction
of products utilizing digital and color printing technologies as opposed to
analog and black text printing, (2) offering business color printing solutions
at a cost per page that are increasingly competitive, (3) reduce the selling
price of their devices while increasing their printing speed, functionality and
networkability, (4) increase the technological barriers through the use of
specialized toners (chemical toners incorporating polyesters and proprietary raw
materials), patents and microprocessors (machine readable microchips with
internet connectivity for supplies management) and (5) endeavor to control the
market for consumable supplies through the use of OEMs' technologies as barriers
to market entry for re-manufacturers of these products or manufacturers of like,
new, aftermarket products. Over time, we believe that digital printers and
photocopy machines that print at speeds of up to 100 pages per minute will merge
into one device, delivering multifunctional capability and color printing, that
are net-workable at both lower prices and operating costs to the end user.
Consumables for these devices will become increasingly difficult to
remanufacture, thereby reducing the market share of re-manufacturers and
increasing the opportunity of increased market share for newly manufactured
finished product from aftermarket suppliers, such as Color Imaging. In our
experience, new aftermarket consumable products are typically 25% cheaper than
OEM's consumables with like functionality - a savings to the consumer. Seeing
that the aftermarket has increasingly gained acceptance as product quality has
steadily improved, we believe that Color Imaging is positioning itself to take
advantage of these trends.
Color Imaging's solution is, through its own technological capability and that
of strategic suppliers, to develop and introduce compatible, newly manufactured,
aftermarket products, ahead of other aftermarket competitors, at a price
significantly below that of the OEM and make these products increasingly
available through distribution channels closer to the end-user.
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GROWTH STRATEGY
Our strategy for growing revenue and operating profit is to expand, including
through strategic acquisition(s), our printer and copier products business. The
key elements of our strategy are (1) increasing vertical integration by
supplying complete toner and cartridge devices, (2) capitalizing on our research
and development expertise of producing specialty, color and digital copier and
or multifunctional device toners, (3) exploiting the efficiencies associated
with the investment made in manufacturing facilities, (4) expanding our sources
for products from strategic suppliers that we can add value to or resell that
complement our product lines, (5) expanding into new geographic markets, and
broadening our sales channels.
Color Imaging's development of new toner products is focused on providing an
aftermarket product for electronic printing devices that achieves a high level
of market acceptance. Color Imaging endeavors to offer equivalent toner products
with equal or better quality at lower prices than the OEM's toner product.
Color Imaging is committed to increasing the value added of its toner products
to the end user by providing not only the toners but also the toner cartridge or
canister that is compatible with the OEM's equipment. Color Imaging believes
that by developing toner cartridge and canister devices for specific electronic
printing or copying machines, and integrating those devices with compatible
toners, the market for Color Imaging's toner products will expand. Color Imaging
believes that this approach will also result in increased gross margins.
Color Imaging will continue to emphasize its high margin specialty toner
capability, primarily color and magnetic character recognition toners, while
providing lower margin black text toners in commodity bulk to a number of large
customers. The bulk quantity of black text toners is currently being offered to
maximize the efficiencies of Color Imaging's manufacturing plant. The
availability of this complete research and development and manufacturing
facility allows for the continued expansion of specialty toner products.
During 2004, Color Imaging expects to increase its sales of higher margin
digital, color and magnetic character recognition toners and substantially
increase the sales of new all-in-one, toner and drum cartridges for certain
popular personal copiers and laser printers. The introduction of new products in
2003 and 2004 and the expansion of our sales channels is expected to help Color
Imaging increase revenues in 2004, offsetting the further loss of revenues from
our two largest customers. While the all-in-one cartridges will be at margins
lower than those realized on products utilizing our digital, color and magnetic
character recognition toners, we expect these products to contribute to improved
gross and net profitability during 2004.
DISCONTINUED OPERATIONS
Four of our directors, Messrs. Brennan, St. Amour, Langsam and Hollander had
expressed concern over the potential restructure or reorganization of our
subsidiary, Logical Imaging Solutions, and the lack of the planned use of any
proceeds from our then pending offering on Form SB-2 for the further development
of its technology, as they were of the opinion that Logical Imaging Solutions'
business prospects demanded a greater investment. After informal discussion with
Dr. Sueling Wang and Mr. Van Asperen beginning in July 2002, they submitted an
informal proposal whereby a new company, Digital Color Print, Inc., to be
initially owned by Messrs. Brennan, St. Amour, Langsam and Hollander, would
acquire the capital stock of Logical Imaging Solutions in exchange for shares of
our common stock and warrants to purchase shares of the common stock of Logical
Imaging Solutions and/or Digital Color Print approximating up to 15% of its then
outstanding shares.
On September 11, 2002, an agreement was reached and was later amended on
September 20, 2002, to provide a minimum of $100,000 of cash to be on hand for
Logical Imaging Solutions, and the number of shares to be received by Color
Imaging was increased from 1.6 million to 1.7 million. In addition, Mr. Brennan
agreed that his employment agreement would be immediately terminated upon the
transaction's closing and severance of $6,057.69 per two-week period, plus
reimbursement of health and life premium costs, formerly payable through June
10, 2003 would terminate as of March 10, 2003.
After having met all of the conditions, including the approval of the majority
of the disinterested directors and having obtained a fairness opinion that
indicated the transaction was fair to Color Imaging and its stockholders
unaffiliated with Digital Color Print, the divestiture of Logical Imaging
Solutions and the share exchange was completed on September 30, 2002. Effective
upon the closing, Messrs. St. Amour, Langsam and Hollander resigned as directors
5
of Color Imaging. Mr. Brennan had previously resigned as a director of Color
Imaging effective September 10, 2002.
Based upon guidance provided by APB 29 in connection with accounting for
nonmonetary transactions, the 1,700,000 million shares of our common stock
exchanged for all of the shares of common stock of Logical Imaging Solutions was
valued at approximately $2.68 million: the fair value (approximating the net
book value) of Logical Imaging Solutions, after converting approximately $2.35
million of intercompany advances to capital, plus the transaction costs
incurred. The warrants that we received for approximately 15% of Logical Imaging
Solutions, or Digital Color Print, have not been assigned any value, since they
are not cashless, increase from $1.50 to $2.25 and then to $3.25 per share each
year over three years, expire after three years, are not registered for resale
and have no current market.
Following the closing of the transaction, Digital Color Print offered to
exchange shares of its common stock for shares of common stock held by our
stockholders who were, per a press release of Digital Color Print, holders of
record as of October 1, 2002. We were not and did not sponsor, encourage, or
bear any responsibility for the offering by Digital Color Print. Conditions of
the share exchange agreement included that Digital Color Print shall be solely
responsible for such offering, including compliance with all applicable laws,
and it shall not accept the tender of more than an aggregate of 2,600,000
shares, inclusive of the 1,700,000 of our common shares that Digital Color Print
exchanged for all of the common stock of Logical Imaging Solutions. If Digital
Color Print completes its intended tender offer for a total of 2.6 million
shares of our issued and outstanding common stock, inclusive of the 1.7 million
exchanged for all of the common stock of Logical Imaging solutions, it will have
up to 900,000 shares of our publicly traded shares which it could sell in the
market to fund its operations. Digital Color Print has regularly sold our common
shares it received in exchange for its shares in the market throughout 2003.
Further, the agreement provides that neither Logical Imaging Solutions nor
Digital Color Print shall take any action in connection with their offering that
could have the effect of reducing the number of our stockholders below 325. For
additional information regarding this matter, please refer to our annual report
on Form 10-K for the year ended December 31, 2002, filed with the Securities and
Exchange Commission on March 11, 2003.
PRODUCTS
Our aftermarket product net revenues for each of our fiscal years ended December
31, 2003, 2002, and 2001, by category, from continuing operations are:
Category 2003 2002 2001 Primary Product Function
--------------------- ------------- ------------ ------------ --------------------------------
Cartridges & Bottles
Photocopiers $11,925,273 $16,580,635 $18,579,212 Black text and color toners for
digital and analog photocopiers
Printers & Facsimiles 3,308,612 3,533,074 3,934,059 Black text, color, specialty and
magnetic character recognition
toners for laser and thermal
printing devices
Bulk Toner & Parts 5,823,716 7,886,600 7,456,497 Filling new or remanufactured OEM
printer or copier cartridges or
bottles and new replacement parts
------------- ------------- ------------- for printers and photocopiers
$21,057,601 $28,000,309 $29,969,768
============= ============= =============
RESEARCH AND DEVELOPMENT
Our research and development activities for the past several years have focused
on black text, specialty, color and magnetic character toner formulations, and
more recently polyester-based toners for full-color digital printing and
photocopying. Color Imaging is committed to increasing revenues through new
product introductions which requires research and development expenditures,
innovative designs, significant development and testing activities and
functional solutions.
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For the twelve months ended December 31, 2003, our research and development
expenditures increased approximately $229,000, or 24%, to $1,175,000 from
approximately $947,000 for the twelve months ended December 31, 2002. For the
twelve months ended December 31, 2002, our research and development expenditures
increased approximately $156,000, or 20%, from approximately $791,000 for the
twelve months ended December 31, 2001. Our research and development expenditures
for the twelve months ended December 31, 2001, increased approximately $240,000,
or 44%, to $791,000 in 2001 from $551,000 in 2000.
It is necessary to make strategic decisions from time to time as to which
technologies will produce products with the greatest future potential.
Occasionally, a customer will ask Color Imaging to develop toner products for
their exclusive resale, and in that event the customer will generally
financially support Color Imaging's development activities. In turn, Color
Imaging will also occasionally work with suppliers to develop proprietary
technology for Color Imaging's exclusive use. These strategic relationships have
benefited us in the past, and we intend to continue to pursue such relationships
for new products.
Our chemists and consultants are focused on development of imaging products and
manufacturing systems that will increase efficiency, lower production costs or
improve the quality of our products. With certain products, we may elect to
purchase key components from third party suppliers, such as toner, bottles and
or print cartridges. We cannot predict whether we can continue to develop the
technologically advanced products required to remain competitive or that such
products will achieve market acceptance.
INTELLECTUAL PROPERTY
Color Imaging relies upon trade secrets and unpatented proprietary technology.
Color Imaging seeks to maintain the confidentiality of such information by
requiring employees, consultants and other parties to sign confidentiality
agreements and by limiting access by parties outside Color Imaging to such
information. There can be no assurance, however, that these measures will
prevent the unauthorized disclosure or use of this information or that others
will not be able to independently develop such information. Additionally, there
can be no assurance that any agreements regarding confidentiality and
non-disclosure will not be breached, or, in the event of any breach, that
adequate remedies would be available to Color Imaging.
We seek to protect technology, inventions and improvements that we consider
important through the use of trade secrets. While we do not believe that any of
our products infringe any valid claims of patents or other proprietary rights
held by third parties, there can be no assurance that these products do not
infringe any patents or other proprietary rights held by third parties. If an
infringement claim were made, the costs incurred to defend the claim could be
substantial and adversely affect us, even if we were ultimately successful in
defending the claim. If our products were found to infringe any proprietary
right of a third party, we could be required to pay significant damages or
license fees to the third party or cease production. Litigation may also be
necessary to enforce patent rights held by us, or to protect trade secrets or
techniques owned by us. Any such claims or litigation could result in
substantial costs and diversion of effort by management.
Specifically, we believe patent protection is of limited usefulness for our
technologies, because competitors have the ability (even if we had a patent) to
develop substantially equivalent technology. Therefore, we rely on trade secrets
and other unpatented proprietary technology. There can be no assurance that we
can meaningfully protect our rights in such unpatented proprietary technology or
that others will not independently develop substantially equivalent proprietary
products or processes or otherwise gain access to our proprietary technology. We
also seek to protect our trade secrets and proprietary know-how, in part, with
confidentiality agreements with employees and consultants. There can be no
assurance that the agreements will not be breached, that we will have adequate
remedies for any breach or that our trade secrets will not otherwise become
known to or independently developed by competitors.
MARKETING AND DISTRIBUTION
We market and distribute our products worldwide through both our direct sales
force and manufacturer's representatives. Color Imaging's products are marketed
primarily to distributors, OEMs and re-manufacturers. However, during 2004 we
expect to significantly increase our sales to retailers, catalog, internet
resellers and dealers.
In the twelve months ended December 31, 2003, 2002, and 2001, net revenues
primarily generated from the sale of finished consumable products for electronic
printers and photocopying machines, comprised approximately 72%, 72%, and 75% of
7
net sales, respectively. For the twelve months ended December 31, 2003, 2002,
and 2001, our two largest imaging products customers accounted for 29% and 14%,
47% and 20%, and 42% and 16% of net sales, respectively. During the twelve
months ended 2003 and 2002, there were no sales to our third largest customer of
2001 who accounted for 12% of 2001 net sales and was our largest customer
accounting for 57% of 2000 net sales, since these sales were made directly to
our largest customer during 2003 and 2002. Though our sales are on purchase
orders, these customers typically issue purchase orders three months in advance
of the product delivery date and provide us with an additional two-month rolling
forecast.
We believe that our operations are in a single industry segment involving the
development and manufacture of products used in electronic printing. All of our
assets are domestic. Our sales to unaffiliated customers by geographic region
are as follows:
2003 2002 2001
--------------------- -------------------- ---------------------
United States $ 12,507,490 59% $ 17,728,982 63% $ 22,600,553 75%
Europe/East Europe 4,416,152 21% 5,638,161 20% 5,255,415 18%
Mexico 2,502,831 12% 2,477,862 9% 834,341 3%
Asia/Southeast Asia 814,387 4% 1,253,862 5% 647,146 2%
Other 816,741 4% 901,442 3% 632,313 2%
------------ ------ ------------ ----- ------------ ------
Total $ 21,057,601 100% $ 28,000,309 100% $ 29,969,768 100%
============ ====== ============ ====== ============ ======
COMPETITION
The markets for our products are competitive and subject to rapid changes in
technology. Color Imaging in particular competes principally on the basis of
quality, flexibility, and service with a pricing strategy that reflects quality
and reliability.
Color Imaging's competitors in the toner market include large businesses with
significantly greater resources in the high-volume commodity toner market, as
well as smaller companies in the specialty, color and magnetic character toner
markets. In addition, other companies offer remanufactured toner cartridges and
printer parts that are lower priced.
Color Imaging's strategy requires that it continue to develop and market new and
innovative products at competitive prices. New product announcements by our
principal competitors, however, can have, and in the past have had, a material
adverse effect on our financial results. Such new product announcements can
quickly undermine any technological competitive edge that one manufacturer may
enjoy over another and set new market standards for quality, speed and function.
Furthermore, knowledge in the marketplace about pending new product
announcements by our competitors may also have a material adverse effect on us
inasmuch as purchasers of these products may defer purchasing decisions until
the announcement and subsequent testing of such new products.
In recent years, Color Imaging and its principal competitors, which have
significantly greater financial, marketing and technological resources than
Color Imaging, have regularly lowered prices on both printer and copier imaging
supplies and are expected to continue to do so in the future. Color Imaging is
vulnerable to these pricing pressures which, if not mitigated by cost and
expense reductions, may result in lower profitability and could jeopardize our
ability to grow or maintain market share. We expect that, as we compete more
successfully with our larger competitors, our increased market presence may
attract more frequent challenges, both legal and commercial, from our
competitors, including claims of possible intellectual property infringement.
Canon(TM), Xerox(TM) and Ricoh(TM) are the market leaders in the toner market
whose aggregate sales we believe represent approximately 75% to 85% of worldwide
toner sales. As with our other products, if pricing pressures are not mitigated
by cost and expense reductions, our ability to maintain or build market share
and profitability could be adversely affected.
Like certain of our competitors, Color Imaging is a supplier of laser printer
kits and parts. We cannot assure you that we will be able to compete effectively
for a share of this business. In addition, we cannot assure you that our
competitors will not develop new compatible laser printer products that may
perform better or sell for less than our products. Independent manufacturers
compete for the aftermarket business under either their own brand, private
label, or both, using price, aggressive marketing programs, and flexible terms
and conditions to attract customers. Depending on the product, prices for
8
compatible products produced by other manufacturers are offered below our
prices, in some cases significantly below our prices.
MANUFACTURING
We operate a toner manufacturing facility in Norcross, Georgia that we moved
into during 1999 and 2000. We have made significant capital investment in this
facility to increase production capacity and improve manufacturing efficiencies
to lower processing costs of our toner products. The installation of additional
equipment was completed in the second quarter 2002, and the equipment was placed
in service during the fourth quarter of 2002. This equipment is an integral part
of our plan to further increase production capacity, improve quality and
efficiency and to significantly lower the costs of our toner products. Our goal
for the last three years has been to reduce average toner product costs by
one-half, in response to management's assessment of the continuing price
reductions for these products in the marketplace.
MATERIALS AND SUPPLIERS
We procure a wide variety of components for use in our manufacturing processes,
including raw materials, such as chemicals and resins, electro-mechanical
components and assemblies. Although many of these components are standard
off-the-shelf parts that are available from multiple sources, we often utilize
preferred supplier relationships to ensure more consistent quality, cost and
delivery. Often Color Imaging's toner formulations are dependent on one or more
materials produced by only one vendor, since the formula was developed based on
that material's unique characteristics. Alternative materials exist, but the
differences in performance characteristics could require Color Imaging to modify
the original formula and/or its manufacturing processes to obtain a marketable
product based on the new material. Further, some chemicals are only available
from one supplier. Should these chemicals not be available from any one of these
suppliers, there can be no assurance that production of certain of our products
would not be disrupted. Some of our products incorporate technologies that are
available from a particular supplier that has been approved by one of our
customers. Approximately 34% of our sales for the year ended December 31, 2003
were derived from products limited to a specific supplier. For the year ended
December 31, 2003, we purchased 43% of our materials and supplies from that same
supplier. We do not have a long-term agreement with this supplier, and the
supplier may raise its prices at any time. In the event that these materials and
supplies, as well as those other raw materials that are sourced from a single
supplier, are not available to us, our production could be disrupted. Such a
disruption could materially harm our business.
BACKLOG
Our backlog decreased approximately $718,000 or 23% to $2.5 million as of
December 31, 2003, from $3.2 million at the same date of the previous year. The
decrease in the backlog was primarily due to decreased orders from our two
largest customers. While the backlog for our copier product decreased 30% as of
December 31, 2003 from the same period in 2002, our backlog for printer products
increased 22%. Since our two largest customers purchase copier products from us
and generally give us most of our orders for future delivery, and the sale of
copier products to them will continue to decline, our backlog for copier
products is expected to further decline in 2004. The orders included in our
backlog are generally credit approved customer purchase orders usually scheduled
to ship in the next twelve months. Color Imaging schedules production of its
products based on order backlog, customer commitments and forecasts and demand.
However, customers may delay delivery of products or cancel orders suddenly and
without sufficient notice, subject to possible cancellation penalties. Due to
possible customer changes in delivery schedules and cancellations of orders, and
the fact that not all of our customers give us orders for future delivery, Color
Imaging's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period. Delays in delivery schedules and/or a reduction
of backlog during any particular reporting period could have a material adverse
effect on our business and results of operations. In addition, a backlog does
not provide any assurance that Color Imaging will realize a profit from those
orders or indicate in which period revenue will be recognized. See the
disclosures in Item 7 of this report for a breakdown of our backlog and net
sales by product category.
GOVERNMENT REGULATION
Color Imaging's manufacturing operations are subject to laws and regulations,
relating to environmental matters that impose limitations on the discharge of
pollutants into the air, water and soil and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. In this regard,
Color Imaging is required to have a permit in order to conduct various aspects
9
of its business. The Air Protection Branch of the State of Georgia's Department
of Natural Resources Environmental Protection Division issued a permit to Color
Imaging in 2000 to construct and operate a copier and printer toner
manufacturing facility at our headquarters. The permit is conditioned upon
compliance by us with all the provisions of the Georgia Air Quality Act, and
specifically the Rules, Chapter 391-3-1, in effect. In addition to operating and
maintaining the equipment, in a manner consistent with good air pollution
control practice to minimize emissions, we must maintain records, conduct tests,
and comply with certain allowable emissions and operational limitations. The
permit is subject to revocation, suspension, modification or amendment for
cause, including evidence of our noncompliance. Compliance with these laws and
regulations in the past has not had a material adverse effect on our capital
expenditures, earnings or competitive position. There can be no assurance,
however, that future changes in environmental laws or regulations, or in the
criteria required to obtain or maintain necessary permits, will not have a
material adverse effect on us.
EMPLOYEES
As of December 31, 2003, we had ninety-one (91) employees. As of December 31,
2002, we had seventy-seven (77) employees, including one (1) part-time employee,
while at December 31, 2001, we had ninety-two (92) employees, including one (1)
part-time employee. As of December 31, 2003, of Color Imaging's 91 employees, 18
were engaged in research and development activities and 34 in manufacturing and
operations related positions, with the remainder in sales, marketing or
administrative positions. Of Color Imaging's employees, five (5) hold PhD
degrees and nine (9) hold masters degrees. None of our employees is represented
by a labor union or is covered by a collective bargaining agreement. We have not
experienced any work stoppages and consider our relations with employees to be
good.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS:
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CUSTOMERS.
For the year ended December 31, 2003, two customers accounted for approximately
43% 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 December 31, 2003, receivables from two customers comprised 24% of
accounts receivable. A concentration of our receivables from a small number of
customers places us at risk should these receivables become uncollectible. 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 34% OF OUR BUSINESS DEPENDS ON A FOREIGN SUPPLIER APPROVED BY ONE
OF OUR CUSTOMERS.
Some of our products incorporate technologies that are available from a
particular foreign supplier that has been approved by one of our customers.
Approximately 34% of our sales for the year ended December 31, 2003 were derived
from products limited to a specific foreign supplier. For the year ended
December 31, 2003, we purchased 43% of our supplies from that same foreign
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 foreign supplier, product shipments could be prevented or delayed,
which could result in a loss of sales. If we are unable to fulfill existing
10
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 manufacture of our products, and we use
numerous suppliers to supply materials and certain finished products. We
generally do not have guaranteed supply arrangements with our suppliers. Because
of the variability and uniqueness of customers' orders, we do not maintain an
extensive inventory of materials for manufacturing or resale. Key suppliers
include providers of special resins, toners and toner related products,
including those from our largest supplier who is also foreign, 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, including our largest supplier, 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. Thereafter we further
expanded our capacity by placing in service additional manufacturing equipment
during 2002 and 2003. To fully utilize these new additions to the factory, new
formulations for toner have to be developed specifically for manufacture on this
new equipment or orders for larger quantities of existing toners must be
obtained. While we have been successful in developing formulas for new equipment
in the past and increasing sales of many of our existing toner products, our
continued success will be dependent on our ability to develop additional
formulations or increase our sales from existing formulations and manufacture
the toners with the new equipment to achieve a reduction in production costs. We
cannot assure you that we will be successful in developing all of the
formulations needed in the future or that we will be able to manufacture toner
at a lower production cost on a regular basis or that such products will achieve
market acceptance. If we are not successful in increasing the sales of our
manufactured products, or if our existing sales from manufactured products
declines, our business will be materially and adversely affected.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP, OR USE OR HAVE
ACCESS TO 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, maintain trade secret protection and operate
without infringing the proprietary rights of others. Future claims of
intellectual property infringement could prevent us from obtaining products
incorporating the 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 or those acquired from others infringe the
intellectual property rights of another.
11
Success in the aftermarket imaging industry depends, in part, on developing
consumable products that are compatible with the printers, photocopiers and
facsimile machines made by the OEMs, and that have a selling price less than
that of like consumable supplies offered by the OEM. For example, if the OEMs
introduce chemical toners with better imaging characteristics and higher yields,
microprocessor chips that communicate between the toner cartridge and the
device, or introduce products using patented or other proprietary technologies,
then the aftermarket industry has to respond with ongoing development programs
to offer compatible products that emulate the OEMs' without infringing upon the
OEM's intellectual property.
Technical innovations are inherently complex and require long development cycles
and appropriate professional staffing. Our future business success depends on
our ability, and that of critical suppliers, to develop and introduce new
products that successfully address the changing technologies of the OEMs, meet
the customer's needs and win market acceptance in a timely and cost-effective
manner. If we do not develop and introduce products compatible with the OEM's
technologies in a timely manner in response to changing market conditions or
customer requirements, our business could be seriously harmed.
The challenges we face in implementing our business model include establishing
market acceptance of existing products and successfully developing or acquiring
new products for resale 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 for
resale 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%, and 25% of net sales in the
years ended December 31, 2003, 2002, and 2001, respectively. We expect that
shipments to international customers will continue to account for a material
portion of net sales. During the year ended December 31, 2003, our sales were
made to customers outside the United States as follows:
o Europe (including Eastern Europe) - 21%
o Mexico - 12%
o Asia/Southeast Asia - 4%
o Other - 4%
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. On foreign customer accounts other than
those we feel are credit worthy and justify open credit terms with us, we
mitigate the risk of non-payment and collection of foreign accounts receivable
by obtaining foreign credit insurance on those customers who qualify. 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 $149,110 and $2,858
and a charge of $1,877 during the years ended December 31, 2003, 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 increasing 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
12
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
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
the market in which we operate does not accept our products.
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
13
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.
ACTS OF DOMESTIC TERRORISM AND WAR HAVE IMPACTED GENERAL ECONOMIC CONDITIONS AND
MAY IMPACT THE INDUSTRY AND OUR ABILITY TO OPERATE PROFITABLY
On September 11, 2001, acts of terrorism occurred in New York City and
Washington, D.C. During 2001 and 2003, the United States launched military
attacks on Afghanistan and Iraq. As a result of those terrorist acts and acts of
war, there has been a disruption in general economic activity. The demand for
printing products and services may decline as layoffs in the transportation and
other industries affect the economy as a whole. There may be other consequences
resulting from those acts of terrorism and war, and any others which may occur
in the future, including civil disturbance, war, riot, epidemics, public
demonstration, explosion, freight embargoes, governmental action, governmental
delay, restraint or inaction, quarantine restrictions, unavailability of
capital, equipment, personnel, which we may not be able to anticipate. These
terrorist acts and acts of war may continue to cause a slowing of the economy,
and in turn, reduce the demand of printing products and services, which would
harm our ability to make a profit. In addition, they could disrupt our ability
to obtain raw materials at reasonable prices, this in turn could adversely
affect our sales and profit margins. We are unable to predict the long-term
impact, if any, of these incidents or of any acts of war or terrorism in the
United States or worldwide on the U.S. economy, on us or on the price of our
common stock.
COMPLIANCE WITH GOVERNMENT REGULATIONS MAY CAUSE US TO INCUR UNFORESEEN
EXPENSES.
Our black text, color and magnetic character toner supplies and manufacturing
operations are subject to domestic and international laws and regulations,
particularly relating to environmental matters that impose limitations on the
discharge of pollutants into the air, water and soil and establish standards for
treatment, storage and disposal of solid and hazardous wastes. In addition, we
are subject to regulations for storm water discharge, and as a requirement of
the State of Georgia have developed and implemented a Storm Water Pollution
Prevention Plan. We are also required to have a permit issued by the State of
Georgia in order to conduct various aspects of our business. Compliance with
these laws and regulations has not in the past had a material adverse affect on
our capital expenditures, earnings or competitive position. There can be no
assurance, however, that future changes in environmental laws or regulations, or
in the criteria required to obtain or maintain necessary permits, will not have
a material adverse affect on our operations.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AS A RESULT OF MANY FACTORS.
Our quarterly operating results fluctuate due to various factors. Some of these
factors include the mix of products sold during the quarter, the availability
and costs of raw materials or components, the costs and benefits of new product
introductions, and customer order and shipment timing. Because of these factors,
our quarterly operating results are difficult to predict and are likely to vary
in the future.
14
DUE TO INHERENT LIMITATIONS, THERE CAN BE NO ASSURANCE THAT OUR SYSTEM OF
DISCLOSURE AND INTERNAL CONTROLS AND PROCEDURES WILL BE SUCCESSFUL IN PREVENTING
ALL ERRORS OR FRAUD, OR IN MAKING ALL MATERIAL INFORMATION KNOWN IN A TIMELY
MANNER TO THE APPROPRIATE MANAGEMENT.
Though we have concluded with reasonable assurance that our books, records and
accounts are kept in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets, transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, receipts and expenditures and access to assets
is permitted in accordance with authorizations of management and directors of
the Company, we do not have internal auditors and we depend on a small staff
with which it is sometimes difficult to segregate certain duties or to document
our practices in policies and procedures. Further, notwithstanding management's
conclusions, the effectiveness of a system of disclosure and internal controls
and procedures is subject to certain inherent limitations, including cost and
staffing limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls and fraud. Due
to such inherent limitations, there can be no assurance that any system of
disclosure or internal controls and procedures will be successful in preventing
all errors or fraud, or in making all material information known in a timely
manner to the appropriate management.
RISKS RELATING TO OUR INDUSTRY:
WE OPERATE IN A COMPETITIVE AND RAPIDLY CHANGING MARKETPLACE.
There is significant competition in the toner and consumable imaging products
industry in which we operate. In addition, the market for digital color printers
and copiers and related consumable products is subject to rapid change and the
OEM technologies are becoming increasingly difficult barriers to market entry.
Many competitors, both OEMs and other after market firms, have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. These competitors
may be able to devote substantially more resources to developing their business
than we can. Our ability to compete depends upon a number of factors, including
the success and timing of product introductions, marketing and distribution
capabilities and the quality of our customer support. Some of these factors are
beyond our control. In addition, competitive pressure to develop new products
and technologies could cause our operating expenses to increase substantially.
THE IMAGING SUPPLIES INDUSTRY IS COMPETITIVE AND WE ARE RELATIVELY SMALL IN SIZE
AND HAVE FEWER RESOURCES IN COMPARISON WITH MANY OF OUR COMPETITORS.
Our industry includes large original equipment manufacturers of printing and
photocopying equipment and the related imaging supplies, as well as other
manufacturers and resellers of aftermarket imaging supplies, with substantial
resources to support customers worldwide. Our future performance depends, in
part, upon our ability to continue to compete successfully worldwide. All of the
original equipment manufacturers and many of our other competitors are
diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products, some of which compete with the
products that we offer. These competitors may bundle their products in a manner
that may discourage customers from purchasing our products. In addition, we face
competition from smaller emerging imaging supply companies whose strategy is to
provide a portion of the products and services that we offer. Loss of
competitive position could impair our prices, customer orders, revenues, gross
margins, and market share, any of which would negatively affect our operating
results and financial condition. Our failure to compete successfully with these
other companies would seriously harm our business. There is risk that larger,
better-financed competitors will develop and market more advanced products than
those that we currently offer or may be able to offer, or that competitors with
greater financial resources may decrease prices thereby putting us under
financial pressure. The occurrence of any of these events could have a negative
impact on our revenues.
OUR PRODUCTS HAVE SHORT LIFE CYCLES AND ARE SUBJECT TO FREQUENT PRICE
REDUCTIONS.
Rapidly evolving and increasingly difficult technologies, frequent new product
introductions and significant price competition characterize the markets in
which we operate. 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
15
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 often 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 28% OF THE OUTSTANDING
SHARES OF COMMON STOCK, AND AN AFFILIATE OWNS 35% OF OUR COMMON STOCK, ALLOWING
THESE STOCKHOLDERS TO CONTROL MATTERS REQUIRING APPROVAL OF THE STOCKHOLDERS.
As a result of such ownership, and potential increased ownership, by our
officers and directors, other investors will have limited control over matters
requiring approval by the stockholders, including the election of directors.
Such concentrated control may also make it difficult for the stockholders to
receive a premium for their shares of our common stock in the event we enter
into transactions that require stockholder approval. In addition, certain
provisions of Delaware law could have the effect of making it more difficult or
more expensive for a third party to acquire, or of discouraging a third party
from attempting to acquire control of us.
EXERCISE OF WARRANTS AND OPTIONS WILL DILUTE EXISTING STOCKHOLDERS AND COULD
DECREASE THE MARKET PRICE OF OUR COMMON STOCK.
As of February 13, 2004, we had issued and outstanding 12,730,505 shares of
common stock and 100,000 outstanding warrants and 970,000 outstanding options to
purchase additional shares of common stock. The existence of the remaining
warrants and options may adversely affect the market price of our common stock
and the terms under which we obtain additional equity capital.
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
16
adverse effect on our financial position and results of operations and could
divert management attention.
OUR COMMON STOCK IS LISTED ON THE OVER-THE-COUNTER (OTC) BULLETIN BOARD, WHICH
MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECREASE.
Because our common stock is listed on the OTC Bulletin Board, the liquidity of
our common stock is impaired, not only in the number of shares that are bought
and sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media, if any, of us. As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
OUR STOCK PRICE MAY BE VOLATILE AND AN INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. These factors
include:
o progress of our products through development and marketing;
o announcements of technological innovations or new products by us or
our competitors;
o government regulatory action affecting our products or competitors'
products in both the United States and foreign countries;
o developments or disputes concerning patent or proprietary rights;
o actual or anticipated fluctuations in our operating results;
o the loss of key management or technical personnel;
o the loss of major customers or suppliers;
o the outcome of any future litigation;
o changes in our financial estimates by securities analysts;
o fluctuations in currency exchange rates;
o general market conditions for emerging growth and technology
companies;
o broad market fluctuations;
o recovery from natural disasters; and
o economic conditions in the United States or abroad.
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.
17
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 and making use of that capacity, our
expected acquisition of business or technologies, our plans for broadening our
sales channels and the outlets for our products, 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 all in one cartridges, digital copier, color and
magnetic character recognition toner products during 2004, sales, our
expectations for operations, demand, technology, products, business ventures,
major customers, major suppliers, retention of key officers, management or
employees, competition, capital expenditures, credit arrangements and other
statements regarding matters that are not historical facts, involve predictions
which are based upon a number of future conditions that ultimately may prove to
be inaccurate. Our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon our business. We cannot predict whether future developments
affecting us will be those anticipated by management, and there are a number of
factors that could adversely affect our future operating results or cause our
actual results to differ materially from the estimates or expectations reflected
in such forward-looking statements.
ITEM 2. PROPERTIES
We currently lease a facility of approximately 180,000 square feet in Norcross,
Georgia from an affiliated party. This facility serves as our executive
headquarters and houses our toner manufacturing facilities, as well as our
research and development and sales and marketing departments. On February 5,
2003, we amended the lease to extend the term from March 31, 2009 to March 31,
2013 for this facility and it includes three options at our election to extend
the term for five years each. On September 30, 2002, we divested Logical Imaging
Solutions and no longer have the facility in Santa Ana, California. Management
considers its facility to be sufficient for its operations for the foreseeable
future. On August 15, 2003, we entered into a one-year lease for a 2,450 square
foot facility in Buena Park, CA to serve as a west coast sales office and local
warehouse.
ITEM 3. LEGAL PROCEEDINGS
Color Imaging is not a party to nor is any of its property subject to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2003.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the Over the Counter Bulletin Board (the OTC
Bulletin Board) under the symbol CIMG. Prior to July 7, 2000, our common stock
was traded on the OTC Bulletin Board under the symbol ADTX. The following table
sets forth the high and low prices of our common stock for the quarters
indicated as quoted on the OTC Bulletin Board.
2002 2003
----------------------- ----------------------
HIGH LOW HIGH LOW
---------- ---------- --------- ---------
First Quarter....... $ 3.3500 $ 2.1000 $ 1.5800 $ 0.4500
Second Quarter...... 2.5600 1.2500 0.8200 0.4000
Third Quarter....... 2.3500 1.0100 0.7000 0.5100
Fourth Quarter...... 1.6000 0.8000 0.7800 0.5400
The above quotations represent prices, adjusted for stock splits, between
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
HOLDERS
As of February 2, 2004, there were 323 holders of record of our common stock.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings to finance our
operations and fund the growth of our business. Any payment of future dividends
will be at the discretion of our board of directors and will depend upon, among
other things, our earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of dividends
and other factors that our board of directors deems relevant.
19
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
As of the year ended December 31, 2003, the following securities were authorized
for issuance under our equity compensation plans:
--------------------------------------- ------------------------ -------------------- --------------------------
Number of securities
remaining available
for future issuance
under equity
Number of securities to Weighted-average compensation plans
be issued upon exercise exercise price of (excluding securities
Plan Category of outstanding options outstanding options reflected in column)
--------------------------------------- ------------------------ -------------------- --------------------------
Equity compensation plans approved by 970,000 $ 2.00 530,000
security holders
--------------------------------------- ------------------------ -------------------- --------------------------
Equity compensation plans not approved None N/A N/A
by security holders
--------------------------------------- ------------------------ -------------------- --------------------------
Total 970,000 $ 2.00 530,000
--------------------------------------- ------------------------ -------------------- --------------------------
After the merger, on June 28, 2000, we granted options to acquire 500,000 shares
of our common stock to senior members of our management at an exercise price of
$2.00 per share. The options vest over a two to four year period and expire 5
years from their respective date of vesting.
During the year ended December 31, 2001, the board of directors granted officers
and employees options to acquire 535,000 shares of our common stock and outside
directors options to acquire 175,000 shares of our common stock at an exercise
price of $2.75 per share. Of the 535,000 options granted to officers and
employees, 25% vested immediately and the remainder will vest over 3 years. The
officer and employee options expire 5 years from their respective date of
vesting. Each outside director was granted options to acquire 25,000 shares of
our common stock, for a total of 175,000 options, effective upon his or her
election or appointment to the board of directors. The outside director options
vest over 5 years, beginning with the first anniversary date of his or her
appointment to the board, and expire 3 years from their respective date of
vesting.
The board of directors granted options to acquire 100,000 shares of our common
stock to an officer at an exercise price of $2.00 per share during the year
ended December 31, 2002. 25% vested immediately and the remainder will vest over
3 years. The options expire 5 years from their respective date of vesting.
The board of directors granted options to acquire 100,000 shares of our common
stock to an officer at an exercise price of $0.77 per share during the year
ended December 31, 2003. 25% vested immediately and the remainder will vest over
3 years. The options expire 5 years from their respective date of vesting. The
board of directors also granted to two new directors during the year ended
December 31, 2003, options to purchase 25,000 shares each at an exercise price
of $0.45 for a total of 50,000 options, effective upon his or her election or
appointment to the board of directors. The director options vest over 5 years,
beginning with the first anniversary date of his or her appointment to the
board, and expire 3 years from their respective date of vesting.
As a result of employment terminations, resignations or retirements, as of
December 31, 2003, options to purchase 390,000 shares of common stock by
management or our employees have lapsed, and options to purchase 100,000 shares
of our common stock granted to directors have lapsed.
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
20
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 $144,287, was $5,900,584. 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.
On April 18, 2003, the Company established a stock repurchase program under
which the Company may purchase on the open market the lesser of the aggregate
value of $1,000,000 or 1,000,000 shares in compliance with Rule 10b-18, and we
have reallocated proceeds for this program.
Our intended uses, as reallocated, of the $6,075,000 of proceeds received from
the public sale of our common stock, and our uses through December 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 $ (115,042) $ 0 $ 884,958
To retire debt (1) . . . . . . . . . . . . $ 350,000 $ (324,301) $ (25,698) $ 0
To retire debt (2) . . . . . . . . . . . . $ 1,050,000 $ (956,883) $ (93,117) $ 0
To retire debt (3) . . . . . . . . . . . . $ 0 $ (235,000) $ 235,000 $ 0
To acquire capital assets. . . . . . . . . $ 1,500,000 $ (318,774) $ 0 $ 1,181,226
To repurchase our stock (4) $ 0 $ (28,835) $ 1,000,000 $ 971,165
For other general corporate purposes
including working capital . . . . . . . . $ 2,175,000 $ (945,000) $(1,116,185) $ 113,815
------------ ------------ ------------
Total: $ 6,075,000 $(2,923,835) $ 3,151,165
Pending application:
-------------------
Short-term investments . . . . . . . . . . $ 1,651,165
Pay down of revolving line of credit . . . $ 1,500,000
----------------
(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 were $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 were $27,205.00.
(3) On July 24, 1999, as amended, we entered into a borrowing arrangement under
a revolving line of credit in the maximum amount of $2.5 million. During
March 2003 we temporarily used $1,735,000 of our proceeds from our public
offering on Form SB-2 to pay down the line of credit to $0, which at that
time had an interest rate of 3.8375%. On June 16, 2003, we renewed and
restructured the line of credit with the bank, reducing the maximum
availability to $1.5 million and permanently retiring $235,000.
(4) From July through December 31, 2003, under the repurchase program the
Company has repurchased 44,500 shares of our common stock on the open
market at an average price of $0.65. Approximately $971,000 remains
available for future common stock repurchases.
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.
During March 2003, pending application of the proceeds from the offering on Form
SB-2, the Company paid down its line of credit with the bank by the then
outstanding principal balance of $1,735,000. On June 16, 2003, with the renewal
21
of our line of credit with SouthTrust Bank, we permanently reduced our revolving
line of credit to $1,500,000; and, as a result, we retired $235,000 of that debt
with our bank.
Pending application, we have retained the balance of the net proceeds in a
deposit account with the bank and an investment account with a securities firm
related to the bank.
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
ISSUER PRIVATE PURCHASES OF EQUITY SECURITIES
With the approval of the board of directors of the Company, 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. The shares and warrants repurchased by the
Company were retired and cancelled as of December 31, 2003.
With the approval of the board of directors of the Company, 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. From March 24, 2003 through December 31, 2003, the Company
repurchased 150,000 of the Company's common shares and warrants to purchased
300,000 common shares, paying $300,000. The shares and warrants repurchased by
the Company were retired and cancelled as of December 31, 2003.
ISSUER MARKET PURCHASES OF EQUITY SECURITIES
On April 18, 2003, the Company established a stock repurchase program under
which the Company may purchase on the open market the lesser of the aggregate
value of $1,000,000 or 1,000,000 shares in compliance with Rule 10b-18 until
September 30, 2004, and we have reallocated proceeds for this program. From July
through December 31, 2003, under the repurchase program the Company has
repurchased 44,500 shares of our common stock on the open market at an average
price of $0.65. Approximately $971,000 remains available for future common stock
repurchases.
--------------------------------------------------------------------------------------------------
ISSUER (MARKET) PURCHASE OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------------
Maximum Number
Total Number of (or Approximate
Shares Purchased Dollar Value) of
Total Number Average Price as Part of Publicly Shares that May Be
2003 of Shares Paid per Publicly Announced Purchased Under the
Calendar Month Purchased Share ($) Plans or Programs Plans or Programs
-------------------- ---------------- --------------- -------------------- -----------------------
July 13,000 0.72 13,000
August 3,500 0.58 3,500
September 14,000 0.61 14,000
October 7,000 0.57 7,000
November 7,000 0.70 7,000
---------------- --------------- -------------------- -----------------------
Total 44,500 0.65 44,500 1,000,000
---------------- --------------- -------------------- -----------------------
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 7 and other financial information included elsewhere in this
Report or incorporated herein by reference. The selected data presented below
are derived from the Color Imaging's Consolidated Financial Statements. Prior to
the merger on June 28, 2000, Color Imaging was a non-operating public shell. On
September 30, 2002, Color Imaging divested itself of Logical Imaging Solutions,
Inc. in a share exchange agreement with Digital Color Print, Inc. The historical
results are not necessarily indicative of future results of operations.
Fiscal Year
(Dollars in thousands, except per share data) 2003 2002 2001 2000 1999
-------- -------- --------- --------- ---------
Income Statement Data:
Total revenue $ 21,058 $ 28,000 $ 29,970 $ 11,385 $ --
Operating income (loss) 667 988 732 (292) --
Net income (loss) from continuing operations 433 430 254 (386) --
Net loss from discontinued operations -- (261) (204) (272) (384)
Net income (loss) 433 169 50 (658) (384)
Diluted net income (loss) per share from
continuing operations .04 .04 .03 (.05) --
Balance Sheet Data:
Cash and short-term investments $ 2,214 $ 129 $ 394 $ 338 $ 950
Net assets of discontinued operations 0 0 2,264 1,547 570
Total assets 17,895 16,114 19,817 19,295 1,520
Working capital 6,456 1,797 4,352 1,891 1,520
Long-term obligations 3,149 4,683 4,798 5,446 --
Retained earnings (accumulated deficit) (1,616) (2,049) (2,218) (2,268) (1,610)
Total stockholders' equity 11,220 5,241 7,608 5,036 1,520
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
On June 28, 2000, Color Imaging, formerly known as Advatex Associates, Inc.
merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and Logical
Imaging Solutions and Color Image became wholly-owned subsidiaries of Advatex.
The financial information contained in this report is in conformity with the
purchase method of accounting. The assets, liabilities and operating results of
Color Image are only included in the consolidated financial statements of Color
Imaging from the date of acquisition, June 28, 2000, or for only the last six
months of the year ended December 31, 2000 and for the full years ended December
31 thereafter, and discontinued operations are those of Logical Imaging
Solutions for all periods. On December 31, 2000, Color Image was merged with and
into Color Imaging. On September 30, 2002, we divested Logical Imaging Solutions
in exchange for 1.7 million shares of our common stock and warrants to purchase
up to 15% of the common stock of Digital Color Print or Logical Imaging
Solutions. As the result of our disposing of Logical Imaging Solutions, Inc. we
no longer offer printing systems to commercial printers nor the support services
and consumables related thereto. As a further result of Color Imaging's
divestiture of Logical Imaging Solutions, our investments in the furthering of
Logical Imaging Solutions' technologies and carrying its operations have ceased.
Significantly, since the merger on June 28, 2000, Color Imaging invested
approximately $2.35 million in the operations of Logical Imaging Solutions and
the development of its technologies with $675,000 of that amount having been
invested during the nine-month period ended September 30, 2002.
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 and
that complement our product lines, (5) expanding into new geographic markets,
and (6) broadening our sales channels.
23
The following discussion and analysis should be read in conjunction with our
financial data and our Financial Statements and notes appearing elsewhere in
this report.
Net sales for the year ended December 31, 2003 were $21 million compared to $28
million, and $30 million in 2002 and 2001, respectively. Net sales in 2003, as
well as 2002, decreased primarily due to substantially reduced sales to our
largest customers. In the twelve months ended December 31, 2003, 2002, and 2001,
our net sales were primarily generated from the sale of finished consumable
products for electronic printers and photocopying machines, which comprised
approximately 72%, 77% and 75% of net sales, respectively. For the twelve months
ended December 31, 2003, 2002 and 2001, our two largest imaging products
customers accounted for 29% and 14%, 47% and 20% and 54% (with the sales to our
third largest customer attributed to this customer) and 16% of net sales,
respectively. During the twelve months ended 2003 and 2002, there were no sales
to our third largest customer of 2001 who accounted for 12% of 2001 net sales,
since these sales were made directly to our largest customer during 2003 and
2002. Sales to these customers consist primarily of analog copier products, and
as a result are expected to decline over time. Net sales to our two largest
customers are expected to further decline in 2004. Including the net sales of
our third largest customer of 2001 with those of our largest customer, net sales
to our two largest customers were $9.1 million, or 43%, $18.8 million, or 67%
and $21.2 million or 71% in 2003, 2002 and 2001, respectively. We do not have a
written or oral contract with our two largest 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.
Based on this and other information, we anticipate significant additional
decreases in sales to those customers in 2004. Consistent with the purchase
orders and forecasts provided to us by our major customers, we provide our major
suppliers with purchase orders three months in advance and an additional rolling
forecast for two months. In April 2001, we changed our purchasing arrangement
with our largest supplier to FOB origination from FOB destination, and we
adjusted our pricing to reflect the change to costs.
Net sales made outside of the United States decreased 17% to approximately $8.6
million, or 41% of total sales for the twelve months ended December 31, 2003,
compared to $10.3 million, or 37% for the twelve months ended December 31, 2002.
This 17% decrease in international sales resulted primarily from the decrease in
sales to our two largest customers.
The following table reflects the consolidated new orders, net of cancellations,
revenues and backlog as of the beginning and end of the three years ended
December 31, 2003, as well as for Color Imaging's two general product lines.
Backlog Backlog
at start at end
of New Net of
Year Orders Revenue Year
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
2003:
Copier Products $ 2,718 $ 13,338 $ 14,160 $ 1,896
Printer Products 473 6,999 6,897 575
-------- -------- -------- --------
Total 3,191 20,337 21,057 2,471
======== ======== ======== ========
2002:
Copier Products $ 1,921 $ 20,518 $ 19,721 $ 2,718
Printer Products 483 8,269 8,279 473
-------- -------- -------- --------
Total 2,404 28,787 28,000 3,191
======== ======== ======== ========
2001:
Copier Products $ 2,401 $ 20,178 $ 20,658 $ 1,921
Printer Products 856 8,939 9,312 483
-------- -------- -------- --------
Total $ 3,257 $ 29,117 $ 29,970 $ 2,404
======== ======== ======== ========
24
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
A critical accounting policy is one that is both important to the portrayal of
Color Imaging's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.
VALUATION ALLOWANCE FOR ACCOUNTS RECEIVABLE. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. These allowances are based on historical experience,
credit evaluations and specific customer collection issues we have identified.
Since our accounts receivable are often concentrated in a relatively few number
of customers, a significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results. Over
the last three years our total write-offs were approximately $50,000, or
averaged less than $20,000 per year. As of December 31, 2003, we had $1,941,000
of accounts receivable net of a $68,000 valuation allowance.
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. Over the last three years we have made
inventory obsolescence reserves totaling approximately $557,000, or an average
of $186,000 per year, and we have written-down or disposed of approximately
$491,000 of inventory, or an average of $164,000 per year. Our experience over
the last few years has indicated an obsolescence rate of approximately $20,000
per month. As of December 31, 2003, we had approximately $5,624,000 of inventory
net of a $98,000 valuation provision.
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. Our manufacturing equipment is
suitable for, and is used to make, a large number of products, and as such we
have not experienced any impairment due to the discontinuation of any
product(s). During the years 2000 through 2002 we moved and expanded our
manufacturing facilities, upgrading the technologies we employ, and during 2003
we continued to upgrade and take out of service equipment that has reached its
25
useful life or was no longer competitive, much of all of which was fully
depreciated. We have approximately $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. We
incurred no material warranty expenses for 2003 and 2002. 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, manufactured by us and by others and distributed by us
through more sales channels, 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 decreased approximately 25% to $21 million for the
year ended December 31, 2003, compared to approximately $28 million for the year
ended December 31, 2002. Net sales by product category were:
% Increase % Increase
(Dollars in thousands) 2003 (Decrease) 2002 (Decrease) 2001
----------- ----------- ----------- ----------- -----------
Product Category:
Cartridges and bottles
Copier finished products $11,925 (28%) $16,581 (11%) $18,579
Printer finished products 3,309 ( 6%) 3,533 (10%) 3,934
----------- ----------- ----------- ----------- -----------
15,234 (24%) 20,114 (11%) 22,513
Bulk toner and parts 5,823 (26%) 7,886 6% 7,457
----------- ----------- ----------- ----------- -----------
Total net revenue $21,057 (25%) $28,000 (7%) $29,970
=========== =========== =========== =========== ===========
The following table sets forth, for the periods indicated, selected information
derived from Color Imaging's consolidated statements of operations and expressed
as a percentage of net sales.
Twelve Months Ended December 31,
---------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net Sales 100 100 100
Costs of goods sold 75 84 85
Gross profit 25 16 15
Administrative expense 8 5 5
Deferred charge write-off 0 0 1
Research and development 6 3 3
Sales and marketing 8 5 4
Operating Income 3 3 2
Interest and financing costs 1 1 1
Depreciation and amortization 7 2 2
Income before taxes 3 2 1
Provision for taxes (credit) 1 1 0
Net income (loss) from continuing operations 2 1 1
26
YEARS ENDED DECEMBER 31, 2003 AND 2002
Net Sales. Our net sales decreased by $6.9 million, or 25%, to $21.1 million for
the twelve months ended December 31, 2003, from $28 million for the twelve
months ended December 31, 2002. Net sales made in the United States were $12.5
million, a decrease of $5.2 million, or 29%, from $17.7 million made in the
comparable period in 2002. The decrease in net sales made in the United States
resulted primarily from reduced sales to our two largest customers and lower
demand for our bulk toners. While sales to our two largest customers decreased
by 51% from $18.8 million to $9.1 million for the twelve months ended December
31, 2003 compared to 2002, and are expected to continue to decline in 2004,
sales to other than our two largest customers increased from $9.2 million to
$11.9 million, or by 29%. Of the $21 million in net sales, $15.2 million, or
72%, were attributable to cartridges and bottled toner products, compared to
$20.1 million or 77% for the comparable period in 2002. The decrease in
cartridge and bottled toner sales of $4.9 million or 24% was primarily the
result of decreased sales to our two largest customers. The revenue decrease
from bulk toner and parts was $2 million or 28% compared to 2002, largely as a
result of our discontinuing a number of products and increased competition for
certain low margin laser toners. In the twelve months ended December 31, 2003,
our two largest customers, a distributor and an OEM, accounted for approximately
29% and 14%, respectively, of net sales. In the twelve months ended December 31,
2002, these two customers accounted for approximately 47% and 20%, respectively,
of net sales. During 2004 we expect that sales to our other customers will more
than offset the further declines in sales to these two customers.
Cost of Goods Sold. Cost of goods sold decreased by $7.6 million, or 33%, to
$15.8 million from $23.4 million for the twelve months ended December 31, 2003
from the comparable period in 2002, primarily as the result of the decrease in
net sales but also as a result of lower manufacturing costs. Cost of goods sold
as a percentage of net sales decreased by 9 percentage points from 84% for the
twelve months ended December 31, 2002 to 75% for the twelve months ended
December 31, 2003. The decrease in the cost of goods sold as a percentage of net
sales was primarily the result of reduced sales derived from certain very low
margin products previously sold to our largest customer that have been
discontinued, the effects of previous price increases on a few analog copier
products and higher levels of sales derived from higher margin color copier
products. Having recently placed more efficient manufacturing equipment in
service, we expect our cost of goods sold on products we manufacture to further
decrease as a percentage of net sales, but there can be no assurance in this
regard. Further, higher cost of goods sold on products purchased for resale
could offset the percentage decrease expected from more efficient manufacturing
operations.
Gross Profit. As a result of the above factors, gross profit increased to $5.3
million, or 25% of net sales, in the twelve months ended December 31, 2003 from
$4.6 million, or 16% of net sales, in the twelve months ended December 31, 2002,
or $0.7 million, while net sales for the same period decreased by approximately
$6.9 million, or 25%.
Operating Expenses. Operating expenses increased $1 million, or 28%, to $4.6 in
the twelve months ended December 31, 2003 from $3.6 million in the twelve months
ended December 31, 2002. General and administrative, selling and R&D expenses
increased, as a percentage of net sales, to 22% in the twelve months ended
December 31, 2003 from 13% in the twelve months ended December 31, 2002 as the
result of the decrease in net sales for the year and the increases in general
and administrative, research and development and sales and marketing expenses.
General and administrative expenses increased approximately 28%, or $367,000 to
$1,680,000 for the twelve months ended December 31, 2003 from the comparable
period in 2002, largely resulting from a $140,000 bonus granted the President by
the board, $83,000 for increased payroll, including information technology
payrolls, $37,000 in connection with our recently opened West Coast office, and
professional fees in connection with the repurchase of our securities from two
investors in our 2001 private placement. Selling expenses increased by $414,000,
or 30%, in the twelve months ended December 31, 2003 compared to the twelve
months ended December 31, 2002. Selling expenses increased primarily as a result
of $251,000 of increased commissions and expenses of manufacturer's
representatives, $117,000 of expenses in connection with our West Coast office,
$75,000 of advertising and sample expenses, a $40,000 provision for bad debts
and $13,000 for foreign credit insurance. With our net sales being derived
increasingly from the sales of our direct sales staff and through our
manufacturer's representatives and our increase planned in 2004 for advertising
and promotional expenses, we expect our selling expenses to further increase in
2004. Research and development expenses increased by $229,000, or 24%, to
$1,176,000 in the twelve months ended December 31, 2003, primarily as the result
of $97,000 of increased testing expenses in connection with new products under
development, $74,000 of increased payroll and consulting expenses and $22,000 of
recruiting expenses. We expect to continue to increase research and development
expenditures in an effort to develop and bring to market more new products
27
before our competition, while also reformulating certain product formulas to
manufacture a greater percentage of our products on our more efficient
production equipment.
Operating Income. As a result of the above factors, operating income decreased
by $321,000, or 33%, to $667,000 in the twelve months ended December 31, 2003
from $988,000 in the twelve months ended December 31, 2002.
Interest and Finance Expense. Interest expense decreased by $166,000, or 50%, in
the twelve months ended December 31, 2003 from the twelve months ended December
31, 2002. The decrease was primarily the result of reduced interest bearing debt
levels.
Other Income. Other income increased by $172,000, from income of $47,000 to
income of $219,000 in the twelve months ended December 31, 2003 from the twelve
months ended December 31, 2002, primarily as the result of $149,000 of Euro
currency gains.
Income Taxes. As the result of our profit from continuing operations in the
twelve months ended December 31, 2003, we recorded an income tax provision of
$288,700 for the period, while the income tax provision was $274,000 for the
twelve months ended December 31, 2002.
YEARS ENDED DECEMBER 31, 2002 AND 2001
Net Sales. Our net sales decreased by $1.97 million, or 7%, to $28 million for
the twelve months ended December 31, 2002, from $29.97 million for the twelve
months ended December 31, 2001. Net sales made in the United States were $17.7
million, a decrease of $4.9 million, or 22%, from $22.6 million made in the
comparable period in 2001. The decrease in net sales made in the United States
resulted primarily from reduced sales to our largest customer and decreased
demand generally for all of our products, while the increase in sales made
outside of the United States was primarily the result of increased sales to our
two largest customers. Of the $28 million in net sales, $20.1 million, or 72%,
were attributable to cartridges and bottled toner products, compared to $22.5
million or 75% for the comparable period in 2001. The decrease in cartridge and
bottled toner sales of $2.4 million or 11% was primarily the result of decreased
sales to our largest customer and less demand domestically for these products.
The revenue increase from bulk toner and parts was $0.4 million or 5% compared
to 2001, largely as a result of increased sales to our largest customer. In the
twelve months ended December 31, 2002, two distributors of imaging supplies
accounted for approximately 47% and 20%, respectively, of net sales, with the
latter being an OEM for which we private label. For twelve months ended December
31, 2001, these same two customers accounted for 42% and 16%, respectively.
Cost of Goods Sold. Cost of goods sold decreased by $2.18 million, or 8.5%, to
$23.42 million from $25.60 million for the twelve months ended December 31, 2002
from the comparable period in 2001, primarily as the result of the decrease in
net sales but also as a result of lower manufacturing costs. Cost of goods sold
as a percentage of net sales decreased by 1.8 percentage points from 85.4% for
the twelve months ended December 31, 2001 to 83.6% for the twelve months ended
December 31, 2002. The decrease in the cost of goods sold as a percentage of net
sales was primarily the result of reduced sales derived from certain very low
margin products previously sold to our largest customer that have been
discontinued and the effects of previous price increases on a few analog copier
products.
Gross Profit. As a result of the above factors, gross profit increased to $4.6
million in the twelve months ended December 31, 2002 from $4.4 million in the
twelve months ended December 31, 2001, or only $200,000, while net sales for the
same period decreased by approximately $2 million.
Operating Expenses. Operating expenses decreased $80,000, or 2.3%, to $3,590,000
in the twelve months ended December 31, 2002 from $3,640,000 in the twelve
months ended December 31, 2001, including a $215,000 deferred charge write-off
in 2001. General and administrative, selling and R&D expenses increased, as a
percentage of net sales, to 12.8% in the twelve months ended December 31, 2002
from 12.1% in the twelve months ended December 31, 2001 as the result of the
decrease in net sales for the year and the increase in research and development
and sales and marketing expenses. General and administrative expenses decreased
approximately 10.5%, or $153,000 to $1,312,000 for the twelve months ended
December 31, 2002 from the comparable period in 2001, largely resulting from
reduced payroll, other taxes, travel and professional investor relations
expenses. Selling expenses increased by $162,000, or 13.8%, in the twelve months
ended December 31, 2002 compared to the twelve months ended December 31, 2001.
Selling expenses increased primarily as a result of increased sales commission,
advertising and payroll expenses. Research and development expenses increased by
$156,000, or 19.7%, to $947,000 in the twelve months ended December 31, 2002,
28
primarily as the result of efforts being redirected to toner research and
development from the acquisition and construction of capitalized test fixtures
utilized by Logical Imaging Solutions.
Operating Income. As a result of the above factors, operating income increased
by $256,000, or 35%, to $988,000 in the twelve months ended December 31, 2002
from $732,000 in the twelve months ended December 31, 2001.
Interest and Finance Expense. Interest expense decreased by $65,000 in the
twelve months ended December 31, 2002 from the twelve months ended December 31,
2001. The decrease was primarily the result of reduced interest bearing debt
levels.
Other Income. Other income increased by $7,000 from income of $40,000 to income
of $47,000 in the twelve months ended December 31, 2002 from the twelve months
ended December 31, 2001.
Income Taxes. As the result of our profit from continuing operations in the
twelve months ended December 31, 2002, we recorded an income tax provision of
$274,000 for the period, while the income tax provisions was $121,000 for the
twelve months ended December 31, 2001.
RESULTS OF DISCONTINUED OPERATIONS
On September 30, 2002, we completed a share exchange agreement with Digital
Color Print, Inc., whereby we received 1.7 million shares of our common stock in
exchange for all of the shares of the common stock of our subsidiary, Logical
Imaging Solutions, Inc. The financial statements included herein, reflect the
divestiture of Logical Imaging Solutions, Inc. as discontinued operations.
The following table sets forth, for the periods indicated, selected information
relating to the discontinued operations of Logical Imaging Solutions that has
been derived from our consolidated statements of operations.
Twelve Months Nine Months Twelve Months
Ended Ended Ended
December 31, September 30, December 31,
---------------- ----------------- -----------------
2003 2002 2001
---------------- ----------------- -----------------
Net revenue $ -- $ 464,628 $ 551,400
Operating (loss) -- (406,570) (289,328)
Net (loss) $ -- $ (261,326) $ (204,154)
================ ================= =================
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of December 31, 2003, Color Imaging had cash on hand of $2,214,000 and
$1,500,000 of availability under our revolving credit line with our bank. Our
working capital and current ratio was approximately $6.5 million and $1.8
million and 2.83 to 1 and 1.29 to 1, respectively, at December 31, 2003 and
2002.
Color Imaging generated $258,000 of cash flows from operating activities in the
twelve months ended December 31, 2003, compared to $950,000 derived from
continuing operating activities in the twelve months ended December 31, 2002.
The decrease in operating cash flows from continuing operations in the twelve
months ended December 31, 2003 was primarily due to an increase of $544,000 in
inventories of which nearly $500,000 was inventory in connection with the
introduction of new all-in-one cartridge products. The increase in cash flows
from continuing operations in the twelve months ended December 31, 2002 was
primarily due to the reduction in inventories and higher net income. Operating
cash flows used by discontinued operations were $0 and $676,000 for the years
ended December 31, 2003 and 2002, respectively, resulting in net operating cash
flows provided by operations of $258,000 and $273,000 for the years ended
December 31, 2003 and 2002, respectively.
Cash flows used in investing activities were $473,000 in the twelve months ended
December 31, 2003, compared to $568,000 in the twelve months ended December 31,
2002. The decrease in cash used in investing activities in the twelve months
ended December 31, 2003, was entirely attributable to decreased capital
expenditures in connection with our most recent factory expansion completed at
the end of the third quarter of 2002. During 2004 we plan approximately $700,000
of additional capital expenditures.
29
Cash flows provided by financing activities for the twelve months ended December
31, 2003 was $2,300,000, derived primarily from $5,900,000 of net proceeds from
the sale of our common stock. Cash flows provided by financing activities for
the twelve months ended December 31, 2002 was $29,000, resulting primarily from
the $1,000,000 in net loans we received from three directors.
We have a $1.5 million revolving line of credit with our bank that had an
outstanding balance as of December 31, 2003 of $0. The interest rate is the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50%. As of December 31, 2003, the interest rate was the
one-month Libor rate of 1.12% plus 2.50% (3.62%). This revolving line of credit
has a June 30, 2004 expiration date. Under the line of credit, we are permitted
to borrow up to 75% of eligible accounts receivable and 50 percent of eligible
inventories (up to a maximum of $750,000 of such inventories and not to exceed
50 percent of the total outstanding). Based on the foregoing formula, we had
$1,500,000 of the additional monies available to us to borrow from the bank as
of December 31, 2003. We have granted our bank a security interest in all of our
assets as security for the repayment of the line of credit. The bank agreement
contains various covenants that Color Imaging is required to maintain, and
throughout 2003 and as of December 31, 2003, we were in compliance with these
covenants. Further, we expect to remain in compliance with the bank's covenant
requirements throughout 2004. Effective April 1, 2004, we plan to issue a
standby letter of credit to our largest vendor in the amount of $1.5 million for
the import of certain toner products, and our bank has indicated that an
increase to our credit facility to $3 million to accommodate the letter of
credit, and the extension of the expiration date of our line of credit to June
30, 2005, has been approved, subject to documentation acceptable to the bank.
Our liquidity is affected by many factors, some based on the normal operations
of our business and others related to the uncertainties of the industry and
global economies. Although our cash requirements will fluctuate based on the
timing of these factors, we believe that current cash and cash equivalents, cash
flows from operations and amounts available under our credit agreement are
sufficient to fund our planned capital expenditures, working capital needs and
other operating cash requirements throughout 2004.
COMMITMENTS
Our minimum payment obligations relating to long-term debt and other contractual
obligations are as follows:
CONTRACTUAL OBLIGATIONS LESS THAN 1 AFTER
(IN THOUSANDS) YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS TOTAL
------------ ------------ ------------ ------------ ------------
IDR bonds $370 $1,390 $165 $1,170 $3,095
Long-term debt 6 11 17
Related party debt 344 120 464
Operating leases, automobiles 29 44 73
Unconditional purchase obligations1 2,245 2,245
Facility lease, related party 545 1,717 1,217 2,466 5,945
Facility lease, other 11 11
Deferred compensation arrangement2 30 90 60 120 300
------------ ------------ ------------ ------------ ------------
Total $3,580 $3,372 $1,442 $3,756 $12,150
============ ============ ============ ============ ============
------------------------
(1) Unconditional commitments, open purchase orders, to purchase raw materials,
plastic cartridges and bottles, parts and other products for use in
manufacturing and finished products for resale in the ordinary course of
business with future delivery dates. Due to minimum order quantities and long
lead times for many of these products, we have made purchase commitments that
may be in excess of future production requirements, and it could take several
months to use all of these product commitments in the manufacture of our
products. These purchase commitments are not expected to result in any
significant losses, though those in connection with older analog copier products
have a higher risk of obsolescence than those used in the manufacture of our
other products.
(2) During January 2004 the deferred compensation and salary continuation
arrangement was cancelled when the retired officer exercised his option to have
the life insurance policy owned by Color Imaging in connection with the plan
transferred to him.
30
OTHER COMMERCIAL COMMITMENTS LESS THAN AFTER
(IN THOUSANDS) 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS TOTAL
----------- ----------- ----------- ----------- -----------
Lines of credit 1 $ 0 $ 0 $ 0 $ 0 $ 0
Standby letters of credit 2 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total $ 0 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
------------------------
(1) Color Imaging has a $1.5 million revolving line of credit with its bank that
expires June 30, 2004. As of December 31, 2003, there was no outstanding
principal balance. A renewal of the line of credit to June 30, 2005, is
currently being documented.
(2) On January 28, 2004, Color Imaging applied for a
$1.5 million irrevocable standby letter of credit with an expiration date of
June 30, 2005, to secure its payments to a vendor for the importation of toner
related products. Color Imaging expects to have the letter of credit issued by
its bank during February 2004.
OFF BALANCE SHEET ARRANGEMENTS
As a condition of the Share Exchange Agreement, as amended, of September 2002,
between Logical Imaging Solutions, Inc. and Digital Color Print, Inc. and Color
Imaging, Logical Imaging Solutions and Digital Color Print assumed the
responsibility for an operating lease for equipment used by Logical Imaging
Solutions upon which Color Imaging is a co-obligor. The aggregate payment
obligations remaining as of September 2002 were less than $50,000, and as a
condition of the Share Exchange Agreement Logical Imaging Solutions and Digital
Color Print pledged 50,000 shares of the common stock of Color Imaging to secure
their performance of all of the terms and conditions of the lease.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q for the quarter ended September 30,
2003) with its affiliate General Plastic Industrial Co Ltd. Per the Marketing
and Licensing Agreement General Plastic Industrial Co Ltd agrees to indemnify
and hold harmless Color Imaging for any costs and expense arising from any
defective licensed product, and/or any recalled licensed product including
litigation arising therefrom. Further General Plastic Industrial Co Ltd agrees
to credit Color Imaging for product cost, shipping and related expenses arising
from any defective licensed product, and/or any recalled licensed product.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," was issued effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The adoption of SFAS No. 150
did not result in the reclassification of any financial instruments in the
Company's financial statements.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued effective for contracts entered
into or modified after June 30, 2003, with certain exceptions. This statement
amends and clarifies financial accounting and reporting for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity." The Company does not currently
engage in hedging activities and the adoption of this statement did not have any
effect on its financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 addresses consolidation by business enterprises of variable
interest entities that possess certain characteristics. The interpretation
requires that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of operations of
the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. In December 2003, the FASB issued FASB Interpretation No. 46R,
31
"Consolidation of Variable Interest Entities--an interpretation of ARB 51
(revised December 2003)" ("FIN No. 46R"), which includes significant amendments
to previously issued FIN No. 46. Among other provisions, FIN No. 46R includes
revised transition dates for public entities. The Company is now required to
adopt the provisions of FIN No. 46R no later than the end of the first reporting
period that ends after March 15, 2004. The adoption of this interpretation is
not expected to have a material effect on the Company's financial statements or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any investments or assets outside of the United States. However,
we are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates.
We estimate that about 80% of our transactions are denominated in U.S. dollars,
excepting those sales in Euros to our second largest customer's operations in
Europe. Accordingly, beginning in 2001, we became 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
$149,110 and $2,858 in 2003 and 2002 and loss of $1,877 in 2001. Our pricing for
our products sold in Euros is currently at the rate of 0.96 to 1.00 Euros
relative to the U.S. dollar, and at December 31, 2003, according to information
available from the Pacific Exchange Rate Service, the exchange rate for the Euro
relative to the U.S. dollar was 1.2597. 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
LIBOR rate, which may fluctuate over time based on economic conditions. As a
result, we are subject to market risk for changes in interest rates and could be
subjected to increased or decreased interest payments if market rates fluctuate
and we are in a borrowing mode.
Color Imaging's investment policy requires investments with high credit quality
issuers and limits the amount of credit exposure to any one issuer. Investments
made by Color Imaging will principally consist of U.S. government and government
agency obligations and investment-grade, interest-bearing corporate debt
securities with varying maturity dates of five years or less. Because of the
credit criteria of the Color Imaging's investment policies, the primary market
risk associated with these investments is interest rate risk. Color Imaging does
not use derivative financial instruments to manage interest rate risk or to
speculate on future changes in interest rates. During 2003 Color Imaging made
investments that resulted in interest income of $21,173 and a loss in net asset
value of $14,587, for a net gain of $5,586 with some $1,421,000, all of which
were available-for-sale, so invested as of December 31, 2003. Color Imaging did
not have any monies invested in securities at December 31, 2002.
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.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Annual Report on Form 10-K:
Page
Financial Statements:
Independent Auditors' Report..................................................34
Consolidated Balance Sheets December 31, 2003 and 2002 ......................35
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 .............................................36
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002, and 2001.................................37
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.............................................38
Notes to Consolidated Financial Statements December 31, 2003,
2002 and 2001.................................................................39
33
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COLOR IMAGING, INC.
NORCROSS, GEORGIA
We have audited the accompanying consolidated balance sheets of Color Imaging,
Inc. (a Delaware corporation) and subsidiary as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2003.
Our audits also included the financial statement schedule listed on the Index of
Item 15(a). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Color Imaging, Inc.
and subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
Unites States of America.
LAZAR LEVINE & FELIX LLP
New York, New York
January 30, 2004
34
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
--------------- ---------------
- ASSETS -
CURRENT ASSETS:
Cash $ 2,213,830 $ 128,501
Accounts receivable - net of allowance for doubtful accounts
of $67,839 and $64,178 for 2003 and 2002, respectively 1,941,404 2,390,019
Inventories 5,624,328 5,080,237
Deferred taxes -- --
Related party portion of IDR bond - current 87,912 83,160
Other current assets 114,721 304,672
--------------- ---------------
TOTAL CURRENT ASSETS 9,982,195 7,986,589
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,973,834 7,038,111
--------------- ---------------
OTHER ASSETS:
Related party portion of IDR bond 647,428 735,340
Deferred offering costs -- 121,924
Other assets 291,978 231,571
--------------- ---------------
939,406 1,088,835
--------------- ---------------
$ 17,895,435 $ 16,113,535
=============== ===============
- LIABILITIES & STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Revolving credit lines $ -- $ 1,022,470
Accounts payable 2,413,695 3,543,680
Current portion of notes payable 5,612 363,789
Current portion of notes payable - related parties 343,736 401,937
Current portion of bonds payable 370,000 350,000
Other current liabilities 393,579 507,782
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,526,622 6,189,658
--------------- ---------------
LONG TERM LIABILITIES:
Notes payable 11,509 989,667
Notes payable - related parties 120,102 598,063
Bonds payable 2,725,000 3,095,000
Deferred tax liability 292,700 --
--------------- ---------------
LONG TERM LIABILITIES 3,149,311 4,682,730
--------------- ---------------
TOTAL LIABILITIES 6,675,933 10,872,388
--------------- ---------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000,000 shares;
12,730,505 and 8,437,965 shares issued and outstanding on 127,305 84,380
December 31, 2003 and 2002, respectively
Additional paid-in capital 12,708,368 7,205,909
Accumulated deficit (1,616,171) (2,049,142)
--------------- ---------------
11,219,502 5,241,147
--------------- ---------------
$ 17,895,435 $ 16,113,535
=============== ===============
See notes to consolidated financial statements.
35
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
SALES $ 21,057,601 $ 28,000,309 $ 29,969,768
COST OF SALES 15,789,078 23,421,429 25,598,095
------------ ------------ ------------
GROSS PROFIT 5,268,523 4,578,880 4,371,673
------------ ------------ ------------
OPERATING EXPENSES:
Administrative 1,679,576 1,312,317 1,464,683
Deferred charge write-off -- -- 215,371
Research and development 1,176,085 946,848 791,498
Sales and marketing 1,745,812 1,331,454 1,168,585
------------ ------------ ------------
4,601,473 3,590,619 3,640,137
------------ ------------ ------------
INCOME FROM OPERATIONS 667,050 988,261 731,536
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 219,059 47,201 39,782
Interest and financing costs (164,438) (330,606) (395,598)
------------ ------------ ------------
54,621 (283,405) (355,816)
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 721,671 704,856 375,720
PROVISION FOR INCOME TAXES 288,700 274,246 121,790
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 432,971 430,610 253,930
(LOSS) FROM OPERATIONS OF SUBSIDIARY
DISPOSED OF - NET OF INCOME TAX -- (261,326) (204,154)
------------ ------------ ------------
NET INCOME $ 432,971 $ 169,284 $ 49,776
============ ============ ============
INCOME (LOSS) PER COMMNON SHARE:
Basic:
Continuing operations $ .04 $ .04 $ .03
Discontinued operations -- (.02) (.02)
------------ ------------ ------------
Basic earnings per share $ .04 $ .02 $ .01
============ ============ ============
Diluted:
Continuing operations $ .04 $ .04 $ .03
Discontinued operations -- (.02) (.02)
------------ ------------ ------------
Diluted earnings per share $ .04 $ .02 $ .01
============ ============ ============
Weighted average shares outstanding:
Basic 11,966,981 9,686,429 7,985,071
Diluted 11,979,554 9,686,429 8,560,369
See notes to consolidated financial statements.
36
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ADDITIONAL STOCK TOTAL
COMMON PAID-IN SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL RECEIVABLE DEFICIT EQUITY
-------------- -------------- -------------- -------------- -------------- --------------
Balance at December 31, 2000 7,490,948 $ 74,909 $ 7,229,293 $ -- $(2,268,202) $ 5,036,000
Exercise of stock warrants 55,452 555 110,349 -- -- 110,904
Exercise of stock warrants -
cashless 1,104,815 11,048 (11,048) -- -- --
Common stock, issued for services 10,000 100 24,900 -- -- 25,000
Common stock, issued in private
placement 1,437,960 14,380 2,520,445 (149,000) -- 2,385,825
Net income for the year -- -- -- -- 49,776 49,776
-------------- -------------- -------------- -------------- -------------- --------------
Balance at December 31, 2001 10,099,175 100,992 9,873,939 (149,000) (2,218,426) 7,607,505
Stock subscription received -- -- (5,649) 149,000 -- 143,351
Exercise of stock warrants -
cashless 38,790 388 (388) -- -- --
Common stock, exchanged for
subsidiary disposed of (1,700,000) (17,000) (2,661,993) -- -- (2,678,993)
Net income for the year -- -- -- -- 169,284 169,284
-------------- -------------- -------------- -------------- -------------- --------------
Balance at December 31, 2002 8,437,965 84,380 7,205,909 -- (2,049,142) 5,241,147
Stock subscription received 4,500,000 45,000 5,855,584 -- -- 5,900,584
Common stock, repurchased
and retired (207,460) (2,075) (353,125) -- -- (355,200)
Net income for the year -- -- -- -- 432,971 432,971
-------------- -------------- -------------- -------------- -------------- --------------
Balance at December 31, 2003 12,730,505 $ 127,305 $12,708,368 $ -- $(1,616,171) $11,219,502
============== ============== ============== ============== ============== ==============
See notes to consolidated financial statements.
37
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------- ------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 432,971 $ 430,610 $ 253,930
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 537,369 542,661 569,731
Deferred income taxes 292,700 190,509 121,001
Allowance for doubtful accounts 3,661 (8,733) 72,911
Compensatory stock -- -- 25,000
(Increase) decrease in:
Accounts receivable 444,955 512,717 476,987
Inventory (544,091) 524,738 (862,087)
Prepaid expenses and other assets 251,468 (100,415) 51,228
Due from related party - IDR bond 83,160 79,596 76,032
Increase (decrease) in:
Accounts payable and accrued liabilities (1,244,188) (1,221,997) (1,521,895)
------------- ------------- -------------
Net cash provided (used) by continuing operations 258,005 949,686 (737,162)
Net cash (used) by discontinued operations -- (676,202) (921,043)
------------- ------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 258,005 273,484 (1,658,205)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (473,093) (567,702) (254,630)
------------- ------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES: (473,093) (567,702) (254,630)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit (1,022,470) (439,946) 63,416
Principal payments of long-term debt (1,336,335) (339,667) (271,792)
Principal payments of IDR bond (350,000) (335,000) (320,000)
Proceeds from related party borrowing -- 1,100,000 --
Principal repayments to related party (536,162) (100,000) --
Proceeds from sale of stock 5,900,584 143,351 2,496,729
Payments for the repurchase of common stock and warrants (355,200) -- --
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,300,417 28,738 1,968,353
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 2,085,329 (265,480) 55,518
Cash at beginning of year 128,501 393,981 338,463
------------- ------------- -------------
CASH AT END OF YEAR $ 2,213,830 $ 128,501 $ 393,981
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 147,694 $ 299,226 $ 385,656
Income taxes -- -- --
NONCASH ITEMS:
Common stock issued $ -- $ 388 $ 11,148
See notes to consolidated financial statements.
38
COLOR IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1. DESCRIPTION OF COMPANY:
Color Imaging, Inc., (Color) develops, manufactures and markets products used in
electronic printing and photocopying. Color designs, manufactures and delivers
black text toners, specialty toners, including color and MICR (magnetic
characters used on checks and other financial documents). Color also supplies
other consumable products used in electronic printing and photocopying,
including toner cartridges, cartridge components, photoreceptors, imaging drums
and parts.
See Note 3 regarding Discontinued Operations - Disposal of Logical Imaging
Solutions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its now discontinued subsidiary. All significant inter-company balances and
transactions have been eliminated in consolidation.
(B) ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in Color's financial
statements and accompanying notes. Actual results could differ from those
estimates.
(C) FAIR VALUE FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, trade receivables and payables
approximates fair value because of the short maturity of those instruments. The
carrying value of the Company's debt is considered to approximate the fair value
of these instruments based on the borrowing rates currently available to the
Company for loans with similar terms and maturities.
(D) CONCENTRATION OF CREDIT RISK:
Financial instruments, which potentially subject the Company to concentrations
of credit risk are cash equivalents, marketable securities and accounts
receivable. The Company attempts to limit its credit risk associated with cash
equivalents and marketable securities and at December 31, 2003 its investments
were in cash held in highly rated financial institutions. With respect to
accounts receivable, the Company limits its credit risk by performing ongoing
credit evaluations and, when deemed necessary, requiring cash in advance,
payment by credit card, letters of credit or guarantees. The Company's customer
base is comprised principally of domestic distributors and dealers of copier
supplies and re-manufacturers of laser printing consumable products. The
Company's international customers are comprised principally of an OEM and a
large international distributor. Management does not believe significant risk
exists in connection with the Company's concentrations of credit at December 31,
2003.
(E) CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
39
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(F) INVENTORIES:
Inventories are stated at the lower of cost or market with cost determined by
the first-in, first-out (FIFO) method for raw materials, work-in-process and
finished goods. Consideration is given to deterioration, obsolescence and other
factors in evaluating the estimated market value of inventory based upon
management's judgment and available information. Costs in inventory include
materials, direct labor, and applied manufacturing overhead.
(G) PROPERTY, PLANT AND EQUIPMENT:
Property, plant, and equipment are recorded at cost. Replacements and major
improvements are capitalized; maintenance and repairs are expensed as incurred.
Gains or losses on asset dispositions are included in the determination of net
income.
Depreciation of the Company's property, plant, and equipment is computed using
the straight-line method. The average estimated useful lives are as follows:
Years
----------
Leasehold improvements 10
Machinery and equipment 5 - 20
Furniture and fixtures 7 - 10
(H) INTANGIBLE ASSETS:
Intangible assets are comprised of patents and intellectual property. All
intangible property is amortized by the straight-line method, over their
respective useful lives, commencing upon completion of commercialization.
Intangibles are periodically reviewed to assess recoverability from future
operations using undiscounted cash flows in accordance with SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". To the extent
carrying values exceed fair values, an impairment loss is recognized in
operating results.
(I) STOCK-BASED COMPENSATION:
The Company has adopted SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
also amends certain disclosure requirements under Accounting Principle Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
In accordance with the provisions of SFAS No. 148, the Company has elected to
continue applying the intrinsic value approach under the APB No. 25 in
accounting for its stock-based compensation plans. Accordingly, the Company does
not recognize compensation expense for stock options when the stock price at the
grant date is equal to or greater than the fair market value of the stock at
that date. The Company generally recognizes compensation expense only when it
grants options with a discounted exercise price, at which time any resulting
compensation expense is recognized ratably over the associated service period,
which is generally the option vesting term.
40
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(I) STOCK-BASED COMPENSATION (CONTINUED):
The following table illustrates the effect on net income (loss) and net income
(loss) per share as if the fair value based method had been applied to all
outstanding and vested awards in each period:
2003 2002 2001
------------ ------------ ------------
Net income, as reported $ 432,971 $ 169,284 $ 49,776
Less: Pro forma stock based
compensation expense - net of tax 80,908 65,457 46,755
------------ ------------ ------------
Pro forma net income $ 352,063 $ 103,827 $ 3,021
============ ============ ============
Basic Earnings per share:
As reported. $ .04 $ .02 $ .01
Pro forma .03 .01 .00
Diluted Earnings per share:
As reported $ .04 $ .02 $ .01
Pro forma .03 .01 .00
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the average vesting period of the options.
(J) INCOME TAXES:
The asset and liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for operating
loss and tax credit carry forwards and for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless it is more likely than not
that such asset will be realized.
(K) REVENUE RECOGNITION:
The Company recognizes revenues in accordance with Staff Accounting Bulletin
101, Revenue Recognition in Financial Statements (SAB 101).
The Company designs, manufactures and acquires from third parties and sells
toner and parts used in electronic printing and photocopying. Revenue from such
product sales is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. At this time the earnings process is complete and the risks and
rewards of ownership have transferred to the customer, which is generally when
the goods are shipped and all significant obligations of the Company have been
satisfied.
41
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(L) ADVERTISING COSTS:
In accordance with SOP No. 93-7, Reporting on Advertising Costs, the Company
expenses all advertising expenditures as incurred. The Company incurred
$146,255, $106,077 and $57,473 in advertising costs during 2003, 2002 and 2001,
respectively.
(M) RESEARCH AND DEVELOPMENT EXPENSES:
Research and development costs are charged to expense when incurred and
aggregated $1,176,085, $946,848 and $791,498 for 2003, 2002 and 2001,
respectively, from continuing operations.
(N) EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) per common share are calculated under the provisions of SFAS No.
128, "Earnings per Share". SFAS No. 128 requires the Company to report both
basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding plus all potential dilutive
common shares outstanding.
(O) FOREIGN CURRENCY TRANSACTIONS:
During 2001, the Company began selling its products in certain overseas markets
where the prices were denominated in Euros. All balance sheet accounts resulting
from foreign transactions are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet date and statements of operations items
are translated at the weighted average exchange rates for the year. The
resulting translation adjustments are made directly to a separate component of
stockholders' equity. Gains and losses from foreign currency transactions, such
as those resulting from the settlement of foreign receivables (or payables) are
included in the consolidated statements of operations. As of December 31, 2003,
there were no material balance sheet items resulting from foreign currency
transactions. Aggregated gains of $149,110 and $2,858 and a loss of $1,877 from
the settlement of foreign receivables was recognized for the 2003, 2002 and 2001
years, respectively, and are included in other expense on the statements of
operations.
(P) DEFERRED CHARGES:
The Company, in connection with an offering of its securities, incurs certain
costs that are deferred and then charged against the proceeds of the offering or
charged to expense in the event the offering is not completed.
The Company also defers certain expenditures related to the activities
associated with the acquisition of business assets, which the Company has
determined have a future economic benefit. These expenditures are then
capitalized into the cost of the assets upon acquisition. Management reviews
these assets whenever the circumstances and situations change such that there is
an indication that the carrying amount is not recoverable. When management's
best estimate of the future economic benefit of these assets is less than the
carrying amount, the carrying amount is reduced to the fair value and a
write-off is recognized. Deferred charges written off are not restored.
42
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(Q) RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," was issued effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The adoption of SFAS No. 150
did not result in the reclassification of any financial instruments in the
Company's financial statements.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued effective for contracts entered
into or modified after June 30, 2003, with certain exceptions. This statement
amends and clarifies financial accounting and reporting for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity." The Company does not currently
engage in hedging activities and the adoption of this statement did not have any
effect on its financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 addresses consolidation by business enterprises of variable
interest entities that possess certain characteristics. The interpretation
requires that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of operations of
the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. In December 2003, the FASB issued FASB Interpretation No. 46R,
"Consolidation of Variable Interest Entities--an interpretation of ARB 51
(revised December 2003)" ("FIN No. 46R"), which includes significant amendments
to previously issued FIN No. 46. Among other provisions, FIN No. 46R includes
revised transition dates for public entities. The Company is now required to
adopt the provisions of FIN No. 46R no later than the end of the first reporting
period that ends after March 15, 2004. The adoption of this interpretation is
not expected to have a material effect on the Company's financial statements or
results of operations.
NOTE 3. DISCONTINUED OPERATIONS:
On September 30, 2002, the Company completed a share exchange agreement with
Digital Color Print, Inc. and four of its former directors, whereby the Company
received 1.7 million shares of its common stock in exchange for all of the
shares of the common stock of its subsidiary, Logical Imaging Solutions, Inc.,
("Logical"). Based upon guidance provided by APB 29 in connection with
accounting for non-monetary transactions, the fair value of the 1.7 million
shares of common stock received was $2,678,993; the fair value (approximating
the net book value) of Logical plus the transaction costs incurred.
43
NOTE 3. DISCONTINUED OPERATIONS (CONTINUED):
Logical designed, manufactured and delivered complete printing systems,
including software, control units and print engines to its customers. Logical's
development efforts focused on creating a digital variable printing process that
provides high-speed, color printing systems for commercial applications.
Following is summary financial information for Logical:
Nine Months Ended Year Ended
September 30, 2002 December 31, 2001
------------------ ------------------
Net sales $ 464,628 $ 551,400
------------------ ------------------
Loss before taxes (406,570) (289,328)
Income tax benefit (145,244) (85,174)
------------------ ------------------
Net loss from discontinued
operations $ (261,326) $ (204,154)
================== ==================
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 was not 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.
In addition, the share exchange agreement, as amended, also provided that Mr.
Brennan's (the Company's former chief executive officer) employment agreement
would be immediately terminated upon the transaction's closing and severance of
$6,058 per two-week period, plus reimbursement of health and life insurance
premium costs formerly payable through June 10, 2003 will terminate as of March
10, 2003.
The financial statements and related notes presented herein have been restated
to reflect discontinued operations accounting as a result of this transaction.
NOTE 4. INVENTORIES:
Inventories for continuing operations consisted of the following components as
of December 31, 2003 and 2002:
2003 2002
------------- -------------
Raw materials $ 631,960 $ 427,752
Work-in-process 1,715,684 1,021,496
Finished goods 3,374,773 3,665,953
Obsolescence allowance ( 98,089) ( 34,964)
------------- -------------
Total $ 5,624,328 5,080,237
============= =============
44
NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment of continuing operations consisted of the following as of
December 31, 2003 and 2002:
2003 2002
------------ ------------
Furniture and fixtures $ 112,159 $ 88,836
Test equipment 712,176 527,151
Manufacturing machinery and equipment 6,805,761 6,544,886
Leasehold improvements 1,364,608 1,360,737
------------ ------------
8,994,704 8,521,610
Less: accumulated depreciation
and amortization (2,020,870) (1,483,499)
------------ ------------
$ 6,973,834 $ 7,038,111
============ ============
Depreciation and amortization expense amounted to $537,369, $542,661 and
$569,731 in 2003, 2002 and 2001, respectively.
NOTE 6. RELATED-PARTY TRANSACTIONS:
(A) LEASE:
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from which the Company leases its Norcross,
Georgia, plant. The real property lease agreement between the Company and Kings
Brothers, LLC, was entered into on April 1, 1999, and was amended on February 5,
2003, extending the expiration date from March 31, 2009 to March 31, 2013 (the
Related Party - see Note 8). The rental payments for 2003, 2002 and 2001 were
$531,444, $518,484 and $505,836, respectively.
Minimum annual lease commitments are as follows:
2004 $ 544,728
2005 558,346
2006 572,305
2007 586,612
2008 601,278
Thereafter 3,081,549
------------
Total minimum lease payments $ 5,944,818
============
(B) PURCHASES:
The Company purchases copier and laser printer products from an entity in which
three directors have a beneficial ownership interest. Purchases for the 2003,
2002 and 2001 years aggregated $2,091,785 $2,148,279 and $2,061,683,
respectively. See also Note 14.
45
NOTE 6. RELATED-PARTY TRANSACTIONS (CONTINUED):
(C) NOTES PAYABLE:
On March 14, 2002, the Company borrowed $500,000 from director, Sueling Wang, on
an unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and is evidenced in writing. On September 2, 2002, the note was
modified to extend the term to March 1, 2005, provide for a $100,000 principal
payment, decreased the interest rate to 6% per annum, provided for interest only
payments through February 28, 2003, and 24 monthly payments of principal and
interest beginning on April 1, 2003, in the amount of $17,735.67. The Company
borrowed the $500,000 to meet a supplier commitment for product. Interest paid
Sueling Wang on the note for the years ended December 31, 2003 and 2002 was
$14,641 and $36,296, respectively. As of December 31, 2003 and 2002, the
principal outstanding was $105,000 and $400,000, respectively.
On August 21, 2002, the Company borrowed $100,000 from director, Jui-Chi Wang,
on an unsecured basis. The loan bears interest at the rate of 6% per annum,
matures on March 1, 2005 and is evidenced in writing. The Company borrowed this
amount in order to repay $100,000 borrowed from director Sueling Wang on March
14, 2002. The note is interest only through February 28, 2003, and then is fully
amortizing over 24 months with principal and interest payments payable monthly
beginning April 1, 2003 in the amount of $4,434. As of December 31, 2003 and
2002, the interest accrued and paid on the note was $ 5,115 and $2,170,
respectively. As of December 31, 2003 and 2002, the outstanding principal
balance on the note was $59,806 and $100,000, respectively.
On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, matures on March 1, 2005 and is
evidenced in writing. The Company borrowed this amount in order to make a
principal payment due on its industrial development bond in the approximate
amount of $255,000, for the acquisition of capital equipment in the approximate
of $125,000 and for general corporate purposes. The note is interest only
through February 28, 2003, and then is fully amortizing over 24 months with
principal and interest payments payable monthly beginning April 1, 2003 in the
amount of $22,169.60. As of December 31, 2003 and 2002, interest accrued and
paid on the note was $ 25,577 and $10,259, respectively. As of December 31, 2003
and 2002, the principal outstanding was $299,032 and $500,000, respectively.
(D) COMMON STOCK
On March 6, 2003, the Company received from Chi Fu Investment Co Ltd $6,075,000
of subscription proceeds for the public sale of 4,500,000 of its common shares
at a price of $1.35 per share in its offering on Form SB-2 filed with the
Securities and Exchange Commission. Chi Fu Investment Co Ltd is a wholly owned
subsidiary of the Company's affiliate, General Plastic Industrial Co., Ltd, and
as of December 31, 2003, Company directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each owned 9.69%, 10.17% and 1.77%, respectively, of General
Plastic Industrial Co., Ltd.
NOTE 7. BORROWING ARRANGEMENTS:
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance of $0 as of December 31, 2003, bearing interest at the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50%. As of December 31, 2003, the interest rate was the
one-month Libor rate of 1.12% plus 2.50% (3.62%). This revolving line of credit
has a June 30, 2004 expiration date.
Under the line of credit, the Company is permitted to borrow up to 75% of
eligible accounts receivable and 50% of eligible inventories (up to a maximum of
$750,000 and not to exceed 50% 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 also contains
various covenants that the Company is required to maintain, and as of December
31, 2003, the Company was in compliance with these covenants.
46
NOTE 7. BORROWING ARRANGEMENTS (CONTINUED):
Long-term debt was comprised of the following as of December 31,
2003 2002
------------ ------------
Term note payable to a financial institution
due in monthly installments of principal
and interest of $848 through March 2003;
bears interest at 8.0%, collateralized by
automobile with a net book value of $26,386 $ - $ 2,501
Term note payable to a financial institution
due in monthly installments of principal and
interest of $10,676 through November 2005;
bears interest at 10.215%; collateralized by
inventory, accounts receivable and equipment - 329,844
Term note payable to a financial institution in
monthly installments of principal and interest
of $27,205 through June 2006; bears interest at
7.90%; collateralized by inventory, accounts
receivable and equipment. On February 5, 2003,
the note was modified and monthly principal
installments of $23,716 began February 24, 2003,
and continue through May 2006 with interest at
the 30-day Libor rate plus 2.5% - 998,803
Various equipment notes maturing in 2006 17,121 22,308
------------ ------------
17,121 1,353,456
Less current maturities 5,612 363,789
------------ ------------
$ 11,509 $ 989,667
============ ============
The aggregate scheduled maturities of long-term debt for each of the next three
years are as follows:
2004 $ 5,612
2005 6,072
2006 5,437
-----------
Total $ 17,121
===========
47
NOTE 8. INDUSTRIAL DEVELOPMENT REVENUE BOND:
On June 1, 1999, the Development Authority of Gwinnett County (the Authority),
issued $4,100,000 of industrial development revenue bonds on behalf of the
Company and a Related Party. The 1.22% revenue bonds as of December 31, 2003,
are payable in varying annual principal and monthly interest payments through
July 2019. The bond is secured by all the assets of the Company and by real
property owned by the Related Party. The bonds along with the line of credit and
term loan (see Note 6) are held by two related financial institutions.
A loan agreement between the Authority and the Company and a Related Party
allows funds to effectively pass through the Authority to the Company. The
majority of the proceeds, $3,125,872, were used by the Company to purchase and
install certain manufacturing equipment, while $974,128 was used by the Related
Party to pay down the mortgage on the real property leased to the Company (see
Note 6). The Company and the Related Party are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and the Related Party, each has agreed to be responsible to the other
for their share of the bond obligations and that any party causing an act of
default shall be responsible for 100% of the bond obligations. The amount for
which the Related Party is responsible to the Company is reflected in current
and other assets of the Company. The Related Party amounts owed to the Authority
are secured by a lien on the real property leased by the Company and by personal
guarantees executed by members of the Related Party. At this time, the Company
believes that the Related Party portion of the bond is fully collectible. As of
December 31, 2003, the bond principal outstanding was $3,095,000 and the portion
due from the Related Party was $735,340.
The aggregate maturities of bonds payable for each of the next five years and
thereafter are as follows:
Company Related Party Total
------------- ------------- -------------
2004 $ 281,200 $ 88,800 $ 370,000
2005 296,400 93,600 390,000
2006 307,800 97,200 405,000
2007 452,200 142,800 595,000
2008 60,800 19,200 80,000
Thereafter 953,800 301,200 1,255,000
------------- ------------- -------------
Total $2,352,200 $ 742,800 $ 3,095,000
============= ============= =============
NOTE 9. STOCKHOLDERS EQUITY:
(A) COMMON STOCK AND STOCK WARRANTS:
The Company issued an aggregate of 6,000,000 shares of its common stock to the
stockholders of Logical and Image in exchange for their shares in Logical and
Image in a merger transaction consummated in 2000. Simultaneously, in 2000, the
Company effected a reverse stock split of one for 6.0779 shares of common stock.
As part of the merger, the Company granted warrants (the New Warrant) to
purchase up to 100,000 shares of the common stock of the Company to professional
advisors to the merger. The New Warrant entitles the warrant holder to purchase,
at any time and for a five-year period, a share of common stock of the Company
for $2.00 per share. In addition, original stockholders of Logical at December
31, 2001, own 225,507 similar warrants (the Old Warrant).
48
NOTE 9. STOCKHOLDERS EQUITY (CONTINUED):
(A) COMMON STOCK AND STOCK WARRANTS (CONTINUED):
The Old Warrant entitled the warrant holder to purchase, at any time until
September 15, 2002, a share of common stock of the Company for $2.70 per share.
As of December 31, 2002 and 2001, the Company had received $0 and $110,904,
respectively, in proceeds from the exercise of Old Warrants. During August 2002
seven holders of Old Warrants were issued 38,085 shares of the Company's common
stock for having exercised Old Warrants to purchase 157,116 shares of the
Company's common stock, on a cashless basis, and on September 15, 2002, Old
Warrants to purchase 12,939 shares of the Company's common stock expired.
The Company issued Units consisting of common stock and common stock underlying
warrants to investors in a private placement approved by the Board of Directors
on August 29, 2000. Each Unit in the private placement was priced at $2.00 and
consisted of one common share of the Company's common stock and one warrant to
purchase one share of common stock at an exercise price of $2.00. An additional
warrant to purchase common stock of the Company, for each Unit purchased in the
private placement, was issued to subscribers, at no additional cost, whose
investment(s) aggregated at least $300,000. The warrants expired November 30,
2003. During 2001, the Company issued and sold 1,437,960 Units for a total of
$2,925,920 in cash and notes receivable. The Company also issued, at no
additional cost, 1,312,960 additional warrants during this same period. In March
2002, subsequent to the balance sheet date of December 31, 2001, the Company
rescinded one transaction entered into during 2001 for the sale of 25,000 shares
of common stock and warrants to purchase 25,000 shares of the common stock of
the Company. This transaction was retroactively reflected in the financial
statements as of December 31, 2001. The Company paid fees of $59,520 in
connection with the private placement. Additionally, the Company issued 129,837
warrants to finders to purchase the Company's common stock at an exercise price
of $2.00. During 2001, holders of the Company's warrants exercised 2,462,500
warrants on a cashless basis and received 1,104,815 shares of the Company's
common stock. During 2002, holders of the Company's warrants exercised 1,750
warrants on a cashless basis and received 705 shares of the Company's common
stock. No underwriting discounts or commissions were paid to any person. As of
March 12, 2002, all notes receivable have been fully paid by the investors.
On October 30, 2001, the Company issued and sold 1,000,000 shares of its common
stock to one accredited investor in exchange for $2 million. The purchase price
was $2.00 per share, of which $10,000 was payable in cash and $1,990,000 was
payable in the form of a recourse promissory note, payable at the earlier of (i)
six months after the registration statement covering the shares is declared
effective or (ii) twelve months from the date of the purchase agreement. The
Company also agreed to issue up to 500,000 warrants to purchase its common stock
to the investor in the event it resells the shares at a purchase price of at
least $2.00 per share. These warrants are exercisable for one year at an
exercise price of $2 per share. In March 2002, when the shares could not be
registered with the Securities and Exchange Commission while the promissory note
was unpaid, the Company and the investor mutually rescinded this transaction and
the Company retroactively reflected this rescission as of December 31, 2001.
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. The
shares and warrants were to be repurchased in approximately equal installments
over nine months, beginning in March and ending in November 2003. From March 24,
2003 through November 30, 2003, the Company repurchased 150,000 of the Company's
common shares and warrants to purchase 300,000 common shares, paying $300,000.
As of December 31, 2003, all shares and warrants repurchased under this
agreement have been cancelled.
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. As
of December 31, 2003, all shares and warrants repurchased under this agreement
have been cancelled.
49
NOTE 9. STOCKHOLDERS EQUITY (CONTINUED):
(A) COMMON STOCK AND STOCK WARRANTS (CONTINUED):
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 6), whereby
the Company received $5,900,584 in net proceeds.
On April 18, 2003, the Company established a stock repurchase program under
which the Company'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 through September 30, 2004. As of December
31, 2003, the Company has repurchased and cancelled 44,500 shares its common
stock at a cost of $28,835.
(B) STOCK OPTIONS:
After the merger transaction, on June 28, 2000, the Company granted options to
acquire 500,000 shares of the common stock of the Company to senior members of
the Company's management at an exercise price of $2.00 per share. The options
vest over a two to four year period and expire 5 years from their respective
date of vesting.
The Company granted options to acquire 710,000 shares of the common stock of the
Company to employees, officers and directors at an exercise price of $2.75 per
share during the year ended December 31, 2001; 535,000 options were granted to
officers and employees of which 25% vested immediately and the remainder vest
over 3 years. The officer and employee options expire 5 years from their
respective date of vesting. Each outside director of the Company was granted
options to acquire 25,000 shares of the common stock of the Company, for a total
of 175,000 options, effective upon his or her election or appointment to the
board of directors. The outside director options vest over 5 years, beginning
with the first anniversary date of his or her appointment to the board, and
expire 3 years from their respective date of vesting.
On July 8, 2002, the Company granted options to acquire 100,000 shares of the
common stock of the Company to an officer at an exercise price of $2.00 per
share of which 25% vested immediately and the remainder vest over 3 years. The
options expire 5 years from their respective date of vesting.
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. On June 2, 2003, the Company
granted options to an officer to purchase 100,000 shares of the Company's common
stock at an exercise price of $.77 per share. The options vest at the rate of
25,000 per year beginning on the date of the grant and continuing annually
thereafter and expire five years from their respective date of vesting.
On June 2, 2003, the Company granted options to an officer to purchase 100,000
shares of the Company's common stock at an exercise price of $.77 per share of
which 25% vested immediately and the remainder vest over 3 years. The options
expire 5 years from their respective date of vesting.
As a result of employment terminations, resignations or retirements, as of
December 31, 2003, options to purchase 390,000 shares of common stock by
management or our employees have lapsed, and options to purchase 100,000 shares
of our common stock granted to directors have lapsed.
50
NOTE 9. STOCKHOLDERS EQUITY (CONTINUED):
(B) OPTIONS (CONTINUED):
A summary of the Company's stock option activity, and related information,
follows:
2003 2002 2001
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning
of year 945,000 $2.33 1,210,000 $2.44 500,000 $2.00
Granted 150,000 .66 100,000 2.75 710,000 2.75
Exercised - - -
Terminated (125,000) 2.30 (365,000) 2.75 -
---------- ---------- ----------
Outstanding at end of year 970,000 2.08 945,000 2.33 1,210,000 2.44
========== ========== ==========
Exercisable at end of year 706,260 $2.33 667,500 $2.22 503,750 $2.21
Weighted average fair value
of options granted during
the year $0.53 $0.98 $1.98
The weighted-average remaining contractual life of these options is 5 years.
No compensation expense has been recognized, as all options have been granted
with an exercise price equal to the fair value of the common stock upon date of
grant. No adjustment has been made for the non-transferability of the options or
for the risk of forfeiture at the time of issuance. Forfeitures are instead
recorded as incurred. The Company has determined pro forma net earnings and net
earnings per share information as if the fair value method described in SFAS No.
123, "Accounting for Stock-Based Compensation," had been applied to its employee
stock-based compensation. The fair value of stock options was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for the years ended December 31, 2003, 2002 and
2001 (see also - Note 2(i):
2003 2002 2001
------ ------ ------
Risk-free interest rate 2.68% 2.35% 4.51%
Dividend yield 0.00% 0.00% 0.00%
Expected market price volatility factor 2.42 0.88 0.26
Weighted-average expected life of option 3 years 3 years 3 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
51
NOTE 9. STOCKHOLDERS EQUITY (CONTINUED):
(B) OPTIONS (CONTINUED):
The following is a summary of total outstanding options and stock warrants at
December 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:
$0.45-$2.75 970,000 $2.08 3.66 years 706,250 $2.23
Warrants:
$2.00 100,000 $2.00 1.53 years 100,000 $2.00
--------- ---------
Options and
warrants 1,070,000 $2.07 3.46 years 806,260 $2.20
========= =========
(C) RETAINED EARNINGS:
The Company is limited in its ability to declare and pay dividends by the terms
of certain debt agreements.
NOTE 10. PENSION PLANS AND POSTRETIREMENT BENEFITS:
The Company has adopted the Color Image, Inc. Profit Sharing Retirement Plan.
Under this defined contribution plan, employees with one year or more of service
who have worked at least 1,000 hours and have reached age 21 are eligible for
participation. Participants may contribute between 1% and 15% of their
compensation as basic contributions. The Company will match 50% of the first 3%
deferred by any participant. Company contributions vest from 20% in the second
year of service to 100% in the sixth year. For the years ended December 31,
2003, 2002 and 2001, the Company incurred expenses of $23,532, $20,783 and
$24,355, respectively.
NOTE 11. INCOME TAXES:
The provision for income taxes is composed of the following :
2003 2002 2001
----------- ----------- -----------
Current:
Federal $ -- $ 70,538 $ 130,470
State -- 13,199 73,380
Deferred:
Federal 243,100 160,482 (87,500)
State 45,600 30,027 5,440
----------- ----------- -----------
$ 288,700 $ 274,246 $ 121,790
=========== =========== ===========
52
NOTE 11. INCOME TAXES (CONTINUED):
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to income tax expense attributable to income from continuing operations is:
2003 2002 2001
--------- --------- --------
Tax at U.S. statutory rates 34.00% 34.00% 34.00%
State income taxes net of
Federal tax benefit 4.02 6.38 6.16
Other-net 1.98 (1.48) (7.74)
-------- -------- --------
40.00% 38.90% 32.42%
======== ======== ========
The components of the net deferred income tax asset as of December 31, 2003 and
2002, are as follows:
2003 2002
------------ ------------
Deferred tax assets:
Inventory $ 40,000 $ --
Accounts receivable 27,000 24,388
Accrued expenses 4,800 57,000
Federal tax credits -- 110,000
Net operating loss carry-forward 683,000 66,838
------------ ------------
754,800 258,226
Valuation allowance for deferred tax assets (334,800) --
------------ ------------
420,000 258,226
Deferred tax liabilities:
Fixed assets (712,700) (258,226)
------------ ------------
Net deferred tax asset (liability) $ (292,700) $ --
============ ============
At December 31, 2003, the Company had net operating loss carryforwards (NOLs) of
$1,752,000 for income tax purposes that expire in years beginning 2020.
NOTE 12. EMPLOYMENT AGREEMENTS:
On June 28, 2000, Color Imaging entered into employment agreements with its
President, Chief Financial Officer and Vice President of Marketing and Sales.
Each of the employment agreements has a 5-year term. Color Imaging is obligated
to pay the President an annual salary of $150,000 with a guaranteed increase of
5% per annum over the term of the agreement. Color Imaging is obligated to pay
the Chief Financial Officer an annual salary of $144,000 with a guaranteed
increase of 5% over the term of his agreement. In addition to commissions earned
under Color Imaging's sales incentive program, Color Imaging is obligated to pay
the Vice President of Marketing and Sales an annual salary of $89,250 with a
guaranteed increase of 5% per annum over the term of his agreement. Each
employee may terminate the agreement upon 6 months notice to Color Imaging.
Color Imaging may terminate each employee upon 6 months notice by Color Imaging;
provided, however, that Color Imaging is obligated to pay to the employee his
annual base salary, commissions or bonuses earned, and benefits for a period of
12 months after the date of such notice.
53
NOTE 12. EMPLOYMENT AGREEMENTS (CONTINUED):
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Chief Financial Officer voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. On December 27, 2002, the
employment agreement with the Vice President of Marketing and Sales was
terminated, and in connection with his Salary Continuation and Deferred
Compensation agreement of 1998 (the "SCDC Agreement") his salary was reduced to
$45,500 effective December 30, 2002, and would be further reduced to $35,750
effective March 24, 2003. Commissions were made payable to the Vice President of
Marketing and Sales on most of Color Imaging's sales, and his retirement date
was extended from February 1, 2003 to December 31, 2003. On July 14, 2003, the
Chief Financial Officer's employment agreement was modified, giving him the
additional duties of marketing and sales, provide for commissions, a reduced
base salary of $78,000 per annum and deleting the provision providing for a
minimum 5% annual salary increase. On October 1, 2003, the Chief Financial
Officers employment agreement was again amended to return his base salary to its
former level of $151,200 and his commission program on certain sales of Color
Imaging was modified.
The employment agreements with the above named officers also commits Color
Imaging to purchasing, for their benefit, certain life insurance plans. Color
Imaging pays the premiums and is the collateral assignee of four split dollar
life insurance policies owned by the President. Pursuant to the policies, Color
Imaging will, upon his death or earlier liquidation of each such policy, be
entitled to the refund of all premium payments made by Color Imaging on the
policies, and the balance of the proceeds will be paid to the President's
designated beneficiaries. During 2003 the President repaid the loan due Color
Imaging in connection with the split dollar life insurance policies, Color
Imaging then released its collateral assignment of the policies and is no longer
required to pay any premiums in connection with the four policies. The split
dollar life insurance premiums paid by Color Imaging during 2003, 2002 and 2001
were $660, $22,773 and $13,526, respectively. The amount due from its President
in connection with these life insurance policies at the years ended December 31,
2003, 2002 and 2001 was $0, $134,877 and $112,103, respectively. For the periods
during which such plans were in place for the Chief Financial Officer for the
years ended December 31, 2003, 2002, and 2001, Color Imaging paid or reimbursed
the Chief Financial Officer $5,525, $6,446 and $0, respectively, for such
supplemental life insurance plans. On July 14, 2003, the Chief Financial
Officer's employment agreement was amended to delete the provision requiring
Color Imaging to pay or reimburse premiums in connection with his supplemental
life insurance policy. Color Imaging owns and is the beneficiary of a life
insurance policy on its Vice President of Marketing and Sales to fund a Salary
Continuation and Deferred Compensation Agreement (`SCDC Agreement"). Upon the
officer's retirement, he, or his beneficiaries, are to receive 120 monthly
payments of $2,500 per month or, as provided, the net present value of any
unpaid amounts. The life insurance premiums paid by Color Imaging to fund the
SCDC Agreement in 2003, 2002 and 2001 were $0, $20,882 and $21,977,
respectively. The SCDC Agreement was modified on December 27, 2002, changing the
retirement date of the Vice President of Marketing and Sales from February 1,
2003 to December 31, 2003. On June 27, 2003, the SCDC Agreement was further
amended, provided for the retirement of the Vice President of Marketing and
extended the date of his option to elect monthly payments or the assignment of
the life insurance policy to January 31, 2004. During January 2004, subsequent
to the balance sheet date, the former Vice President of Marketing and Sales
elected to have the life insurance policy assigned to him, thereby canceling the
obligation of Color Imaging to provide the 120 monthly payments of $2,500. As of
December 31, 2003, the accrued liability of Color Imaging in connection with the
future payments required under the SCDC Agreement was $200,338 and the cash
surrender value of the life insurance policy was $188,138.
NOTE 13. SIGNIFICANT CUSTOMERS:
For the 2003 year, two unrelated distributors/customers of imaging supplies
accounted for 29% and 14% of net sales from continuing operations. For the 2002
year, two unrelated distributors/customers of imaging supplies accounted for 47%
and 20% of net sales from continuing operations. For the 2001 year, three
distributors/customers of imaging supplies accounted for 42%, 16% and 12% of net
sales from continuing operations. The Company does not have a written or oral
contract with any of these customers. All sales are made through purchase
orders.
54
NOTE 14. SIGNIFICANT SUPPLIERS:
For the years ended December 31, 2003, 2002 and 2001, the Company purchased 43%,
44% and 51%, respectively, of its raw materials and supplies from one unrelated
foreign supplier in connection with the sale of copier products. For the years
ended December 31, 2003, 2002, and 2001, the Company purchased 16%, 10% and 7%,
respectively, of its components and parts from a related supplier in connection
with the sale of both copier and printer products. See also Note 6(b).
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2003 and 2002 (in thousands, except per share
data).
Quarter
----------------------------------------------------
2003 First Second Third Fourth
---- --------- --------- --------- ---------
Sales, net $ 5,629 $ 5,058 $ 5,361 $ 5,010
Income from continuing operations 213 400 223 (169)
Net income (loss) 112 254 152 (85)
Net income per share:
Basic .01 .02 .01 .00
Diluted .01 .02 .01 .00
Quarter
--------------------------------------------------
2002 First Second Third Fourth
---- --------- --------- --------- ---------
Sales, net $ 7,661 $ 7,970 $ 6,654 $ 5,715
Income from continuing operations 369 187 300 132
Net income, continuing operations 186 73 117 55
Net income, discontinued operations (70) (93) (98) -
Net income (loss) 116 (20) 19 55
Net income (loss) per share:
Continuing operations .02 .01 .01 .01
Discontinued operations (.01) (.01) (.01) -
--------- --------- --------- ---------
Basic .01 - - .01
========= ========= ========= =========
Continuing operations .02 .01 .01 .01
Discontinued operations (.01) (.01) (.01) -
--------- --------- --------- ---------
Diluted .01 - - .01
========= ========= ========= =========
55
NOTE 16. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving the development and manufacture of products used in electronic
printing. All of the Company's assets are domestic. The sales to unaffiliated
customers by geographic region are as follows:
2003 2002 2001
---------------------- ---------------------- ---------------------
United States $ 12,507,490 59% $ 17,728,982 63% $ 22,600,553 75%
Europe/Eastern Europe 4,416,152 21% 5,638,161 20% 5,255,415 18%
Mexico 2,502,831 12% 2,477,862 9% 834,341 3%
Asia/Southeast Asia 814,387 4% 1,253,862 5% 647,146 2%
Other 816,741 4% 901,442 3% 632,313 2%
------------ ------- ------------- ------ ------------ -------
Total $ 21,057,601 100% $ 28,000,309 100% $ 29,969,768 100%
============ ======= ============= ====== ============ =======
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed on our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
The Company's management does not expect that its disclosure controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control system, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdown can occur because of simple error or mistake. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
As of the end of the period covered by this report, December 31, 2003, (the
"Evaluation Date"), we carried out an evaluation, under the supervision and with
the participation of Color Imaging's management, including our Chief Executive
Officer, President and Chief Financial Officer, of the effectiveness of the
design and operation of Color Imaging's disclosure controls and procedures.
Based upon this evaluation, the Chief Executive Officer, President and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in timely alerting them to material information relating to Color
Imaging required to be included in our periodic SEC filings.
Changes in Disclosure Controls and Procedures
Although we concluded that our disclosures controls and procedures were
effective at the end of fiscal 2003 and in each interim period of fiscal 2003,
we recognized that further improvements could be made with regard to purchasing
and receiving. During 2003 the improvements made to our internal controls
included:
o Hiring a purchasing agent and segregating the duties of the purchasing
agent from those of warehouse receiving.
o Adopting a Code of Ethics for certain financial executives.
o Hiring an Information Technology Manager and removing those
responsibilities from the Controller.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Each of the individuals listed in the table below is currently a director and or
executive officer of Color Imaging. The name and ages of each director and
executive officer, his principal occupation, and the period during which he has
served as a director is set forth in the table. Each of the executive officers
of Color Imaging was elected by the Board of Directors to serve until the Board
of Directors' meeting immediately following the next annual meeting of
shareholders or until his earlier resignation or removal by the Board of
Directors:
NAME AGE SERVICE AS A DIRECTOR POSITION
--------------------------- ------- ----------------------------- -------------------------------------------
Jui-Kung Wang 60 Since September 2001 Chief Executive Officer, Director
and Chairman of the Board
Sueling Wang, PhD 50 Since June 2000 President, Vice Chairman and Director
Morris E. Van Asperen 60 Since June 2000 Executive Vice President, Chief Financial
Officer, Secretary and Director
Claude R. Aubert 48 Since June 2003 Vice President, Technology
Yi-Jen Wang 27 Since April 2003 Assistant Vice President and Director
Jui-Hung Wang 57 Since June 2001 Director
Jui-Chi Jerry Wang 47 Since June 2000 Director
Richard S. Eiswirth 34 Since April 2003 Director
57
Color Imaging's board of directors retains the responsibilities of the
Compensation Committee, and upon the divestiture of Logical Imaging Solutions on
September 30, 2002, and resultant resignation of the directors affiliated
therewith, the responsibilities of the Audit Committee were performed by the
entire board until the appointment of another independent director and audit
committee member in April 2003.
The employment histories of Color Imaging's directors and executive officers is
set forth below:
Jui-Kung (Elmer) Wang, Chief Executive Officer and Chairman of the Board since
August 2003, has served as a director of Color Imaging since September 2001. He
was a founder of Color Image, Inc. in 1989 and its Chairman until its merger
with Color Imaging. He is a co-founder and has served as a director of General
Plastic Industrial Co., Ltd, a leading Taiwan based manufacturer of after market
injection molded cartridges and accessories for copiers and laser printers since
1978. In 1998 Mr. Wang was a founding member of Kings Brothers LLC, which leases
space to Color Imaging we use for our headquarters and manufacturing facilities
in Norcross, Georgia. Mr. Wang has been a professor of management with Tung-Hai
University, Taiwan for over 20 years. He has received a bachelor's degree in
economics, and MBA and PhD degrees in management.
Sueling Wang, PhD., became President and Vice-Chairman of Color Imaging in June
2000. From 1989 to 2000, he served as President and director of Color Image,
Inc., which was merged with Color Imaging. Dr. Wang was also a founder of Color
Image Inc. In 1998, Dr. Wang was a founding member of Kings Brothers LLC, which
leases space to Color Imaging used for our headquarters and manufacturing
facilities in Norcross, Georgia. Dr. Wang received a M.S. degree from the
University of Windsor, in Ontario, Canada and a PhD degree from the University
of Detroit. Dr. Wang's expertise in resin synthesis brought him into the toner
industry and led to the formation of Color Image, Inc. in 1989.
Morris E. Van Asperen has served as Executive Vice President, Chief Financial
Officer and director of Color Imaging since June 2000. In June 2001 he was made
Secretary and on July 14, 2003, he was given the additional responsibilities of
Marketing and Sales. From 1998 he served as director of Logical Imaging
Solutions and was from August 2000 its Executive Vice President, Chief Financial
Officer and Secretary until it was disposed of by Color Imaging in September
2002. In 1986 he was employed by the National Bank of California as Senior Vice
President, Corporate Banking, and when he left the bank in July 2000 he was its
Executive Vice President and Credit Administrator. Mr. Van Asperen also has
extensive experience as a financial and management consultant to businesses of
up to $50 million in revenues and 1,000 employees in construction, household
goods, industrial glass, electronics manufacturing and software development.
From 1977 to 1984, he served as Vice President & Chief Financial Officer of ATE
Associates, Inc., a supplier of test fixtures and software for numerous military
aircraft programs. Mr. Van Asperen received a B.S. degree in Mathematics from
the University of Oklahoma and an M.B.A. degree from Pepperdine University.
Claude R. Aubert has served as Vice President of Technology, which includes
research and development and manufacturing, of Color Imaging since June 2003.
Prior to his joining Color Imaging in June 2003, Mr. Aubert used his time after
leaving Coates Reprographics to visit and consider employment with other toner
manufacturers. From June 2001 until late 2002 he was General Manager of Coates
Electrographics, which include toner research and development within their
world-wide development team. From April 1997 to May 2001 he was Director of
Toner Technology for Turbon International, and from October 1986 through March
1997 he was a research and development project manager for them. From August
1984 until May 1986 he was a post-doctoral research fellow at the Department of
Physics at the University of California. Mr. Aubert received his PhD in physics
in 1984 from University of Basle, Switzerland.
Yi-Jen Wang has served as a director of Color Imaging since April 2003, and is
an Assistant Vice President and Human Resources Manager, having first been
employed by Color Imaging in February 2003. Prior to that she is attend the
University of San Francisco, pursuing an MBA degree. From October 2000 to June
2001 Ms. Wang served as a property manager for Kings Brothers LLC. From June
1998 to August 2000 Ms. Wang served as controller for GPI-USA, Inc. until it
discontinued its warehouse and marketing activities in the United States. From
January 1997 to May 1998 Ms. Wang was a sales representative assistant for our
affiliate General Plastic Industrial Co Ltd, Taiwan, R.O.C. Ms. Wang received a
Bachelor of Arts degree in June 1998 from Providence University, Taiwan, R.O.C.
Jui-Hung (Jack) Wang has served as a director of Color Imaging since June 2001
and was Chairman from June 2002 through August 2003. He was a founder and
director of Color Image, Inc. until its merger with Color Imaging. He is a
founder and serves as Chairman of General Plastic Industrial Co., Ltd, a leading
Taiwan based manufacturer of after market injection molded cartridges and
accessories for copiers and laser printers. Since January 2001, Mr. Wang has
served as a director of Taiwan Yu-Tzu Company, a food company. In 1998, Mr. Wang
was a founding member of Kings Brothers LLC, which leases space to Color Imaging
used for our headquarters and manufacturing facilities in Norcross, Georgia.
From 1986 to 1994, Mr. Wang was mayor of Wu-Chi Town, Taiwan.
Richard S. Eiswirth has been a Director of the Company since April 2003 and is
Chairman of the Audit Committee. Since April 2002 he has been involved in
capital raising efforts for several start-ups. From August 1999 to April 2002,
he was Senior Executive Vice President and Chief Financial Officer of Netzee,
Inc., a publicly owned affiliate of The Intercept Group. Mr. Eiswirth was
responsible for the initial public offering and the identification, evaluation
and negotiation of ten acquisitions that fortified Netzee's product offerings.
Additionally, he facilitated the disposition of three operating units during the
company's restructuring. He has extensive experience in managing investment
bankers, brokers, attorneys, and accountants. For nine years prior to joining
Netzee, Mr. Eiswirth worked for Arthur Andersen LLP, where he was a senior
58
manager. In this capacity he provided audit, accounting, due diligence, merger
and acquisition, and consulting services to a variety of industries including
real estate, technology, banking, insurance and financial services. A certified
public accountant (CPA), Eiswirth graduated cum laude from Wake Forest
University in 1991 with a Bachelor of Arts degree in accounting.
Jui-Chi (Jerry) Wang has served as a director of Color Imaging since June 2000.
From 1994 until 2000, he served as a director of Color Image, Inc., which was
merged with Color Imaging. Since 1984, Mr. Wang has served as President of
General Plastic Industrial Co. Ltd (GPI), a Taiwan-based plastics manufacturer
specializing in injection moldings and more particularly toner cartridges and
accessories for copiers and laser printers. In 1998, Mr. Wang was a founding
member of Kings Brothers LLC, which leases space to Color Imaging used for our
headquarters and manufacturing facilities in Norcross, Georgia. Mr. Wang
received a Master's Degree in Computer Engineering from the University of
Southern California.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The members of the board of directors, certain executive officers of Color
Imaging and persons who hold more than 10% of Color Imaging's outstanding common
stock are subject to the reporting requirements of Section 16(a) of the Exchange
Act, which require them to file reports with respect to their ownership of
common stock and their transactions in common, stock. Based upon the copies of
Section 16(a) reports that the Color Imaging received from such persons for
their 2003 fiscal year transactions in the common stock and their common stock
holdings, Color Imaging believes that all reporting requirements under Section
16(a) for such fiscal year were met in a timely manner by its executive
officers, board members and greater than ten-percent stockholders, excepting (a)
the inadvertent failure to file a Form 3 by our affiliate General Plastic
Industrial Co Ltd in connection with its beneficial ownership of Chi Fu
Investment Co Ltd's greater than 10% holding of our common stock and (b) the
filing of a Form 3 disclosing the initial holdings, consisting only of a stock
option grant, to a newly hired vice president. One late Form 3 was filed on
January 29, 2004, disclosing General Plastic Industrial Co Ltd's beneficial
ownership in our common stock. One late Form 4 and one late Form 3 were filed
for Claude R. Aubert, reflecting one exempt option grant.
AUDIT COMMITTEE COMPOSITION
The Company has a separately designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Richard S. Eiswirth, CPA, is the chairman and only
member of the audit committee. The Company's Board of Directors has determined
that all members of the Company's Audit Committee are "independent" as defined
in Rules 1400(a)(14) of the NASDAQ listing standards.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors has determined that in its judgment, Mr.
Eiswirth qualifies as an "audit committee financial expert" in accordance with
the applicable rules and regulations of the Securities and Exchange Commission
("SEC"). An audit committee financial expert is a person who has (1) an
understanding of generally accepted accounting principles and financial
statements; (2) the ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and reserves; (3)
experience preparing, auditing, analyzing or evaluating financial statements
that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the registrant's financial statements, or experience
actively supervising one or more persons engaged in such activities; (4) an
understanding of internal controls and procedures for financial reporting; and
(5) an understanding of audit committee functions
CODE OF ETHICS
On December 29, 2003, the Company adopted a Code of Ethics (as defined in Item
406 of Regulation S-K) that applies to our Chief Executive Officer, Chief
Financial Officer and Controller. The Code of Ethics is filed as an Exhibit to
this Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
59
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned by
our chief executive officer and the three other most highly compensated
executive officers who were serving as such as of December 31, 2003, 2002 and
2001 (collectively, the Named Executive Officers), whose aggregate compensation
for fiscal years 2003, 2002 and 2001 exceeded $100,000 for services rendered in
all capacities to Color Imaging and its subsidiaries for that fiscal year.
Annual Compensation Long Term Compensation
---------------------------------------------- ----------------------------------------
Other Annual Restricted Securities LTIP
Compensation Stock Underlying Payments All Other
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) Awards ($) Options/SARS(#) ($) Compensation
--------------------------- -------- ----------- ----------- -------------- ------------ ---------------- ---------- --------------
Jui-Kung Wang (2) 2003 29,908 -- 6,501 -- -- -- --
Chief Executive Officer 2002 N/A -- 1,000 -- -- -- --
2001 N/A -- -- -- 25,000 -- --
Dr. Sueling Wang (3) 2003 136,826 140,000 4,203 -- -- -- --
President 2002 158,439 -- 38,736 -- -- -- --
2001 158,423 -- -- 100,000 -- --
Morris E. Van Asperen (4)
Executive Vice President, 2003 162,001 -- 9,204 -- -- -- --
Chief Financial Officer & 2002 151,200 -- 14,353 -- -- -- --
Secretary 2001 146,714 -- 5,461 -- 100,000 -- --
(1) For named executive officers the amount reported represents the cost of
group insurance benefits, Color Imaging's matching contribution to the 401(k)
plan for the officer, other life insurance policies maintained for him, and
other compensation as further described in the notes for each officer,
respectively.
(2) Mr. Wang was employed by Color Imaging on August 15, 2003, and other annual
compensation included the personal benefit of his use of a company automobile of
$4,442 and group life insurance benefit payments were $59. Also included in
other annual compensation are the fees paid to the named executive officer while
he was an outside director which were $ 2,000, $1,000 and $0 during 2003, 2002,
and 2001, respectively. The options were granted upon the officer's initial
appointment to the board of directors in September 2001 and vest ratably over
the next five years upon the anniversary date of the grant and expire three
years from their respective vesting dates. As of December 31, 2003, Mr. Wang had
25,000 options, 10,000 of which were vested, to purchase Color Imaging's common
stock at an exercise price of $2.75.
(3) Other annual compensation includes split dollar and group life insurance
premiums were $886, $22,773, and $13,526 during 2003, 2002 and 2001,
respectively. During 2003 the officer repaid the loan due to the Color Imaging
in connection with the split dollar life insurance policy and the collateral
assignment of the policy was released by Color Imaging and the plan between
Color Imaging and the officer was terminated. Options granted by action of the
board on March 21, 2001. 25% vested immediately and the balance vest 25% per
year upon each anniversary date of the grant. The options expire five years
after their respective vesting date(s). As of December 31, 2003, Dr. Wang had
300,000 options, 275,000 of which were vested, to purchase Color Imaging's
common stock at exercise prices of $2.00 and $2.75.
(4) Other annual compensation includes, by agreement, the reimbursement for a
supplemental life insurance policy for the benefit of the officer. The life
insurance premiums reimbursed or paid by Color Imaging, including those that are
part of Color Imaging's group plan, in 2003, 2002 and 2001 were $5,525, $6,446,
$0, respectively. In 2003 the officer voluntarily terminated the life insurance
reimbursement program previously funded by Color Imaging; and, subsequently, the
officer's employment agreement was modified to delete the provision of the
additional life insurance benefit. Options granted by action of the board on
March 21, 2001. 25% vested immediately and the balance vest 25% per year upon
each anniversary date of the grant. The options expire five years after their
respective vesting date(s). As of December 31, 2003, Mr. Van Asperen had 300,000
options, 250,000 of which were vested, to purchase Color Imaging's common stock
at exercise prices of $2.00 and $2.75.
60
OPTION GRANTS TABLE
Options granted the Named Executive Officers during the year ended December 31,
2003 were:
Potential realizable
value at assume
annual rates of stock Alternative to
price appreciation (f) and (g):
Individual Grants for the option term grant date value
-------------------------------------------------------------------------------------- ----------------------- ------------------
Percent of
Number of total
securities options/SARS
underlying granted Exercise or
Options/SARS employees in base price Expiration Grant date
Name (#) fiscal year (%) ($/Share) date 5% ($) (f) 10% ($) (g) present value $
------------------------ -------------- ----------------- --------------- ------------ ----------- ----------- ------------------
Jui-Kung Wang (2) None N/A N/A N/A N/A N/A N/A
Chief Executive Officer
Dr. Sueling Wang (3) None N/A N/A N/A N/A N/A N/A
President
Morris E. Van Asperen
Executive Vice
President, Chief
Financial Officer None N/A N/A N/A N/A N/A N/A
& Secretary
OPTION EXERCISES AND YEAR-END VALUE TABLE
None of the Named Executive Officers exercised stock options during 2003. The
following table sets forth certain information regarding unexercised options
held at year-end by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 2003 AND OPTION VALUES AT DECEMBER 31, 2003
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS
------------------------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
------------------------- ---------------- --------------- ------------------ -------------------
Jui-Kung Wang 0 0 10,000 15,000
Sueling Wang 0 0 275,000 25,000
Morris E. Van Asperen 0 0 250,000 50,000
(1) Mr. Allison's options lapsed, without having been exercised, on September
27, 2003, as the result of his retirement from Color Imaging on June 27, 2003.
Based on the closing price of our common stock of $0.70 on December 31, 2003, no
unexercised options were in the money for the Named Executive Officers.
EMPLOYMENT AGREEMENTS
On June 28, 2000, Color Imaging entered into employment agreements with its
President, Chief Financial Officer and Vice President of Marketing and Sales.
Each of the employment agreements has a 5-year term. Color Imaging is obligated
to pay the President an annual salary of $150,000 with a guaranteed increase of
5% per annum over the term of the agreement. Color Imaging is obligated to pay
the Chief Financial Officer an annual salary of $144,000 with a guaranteed
increase of 5% over the term of his agreement. In addition to commissions earned
under Color Imaging's sales incentive program, Color Imaging is obligated to pay
the Vice President Marketing and Sales an annual salary of $89,250 with a
guaranteed increase of 5% per annum over the term of his agreement. Each
employee may terminate the agreement upon 6 months notice to Color Imaging.
Color Imaging may terminate each employee upon 6 months notice by Color Imaging;
provided, however, that Color Imaging is obligated to pay to the employee his
annual base salary, commissions or bonuses earned, and benefits for a period of
12 months after the date of such notice.
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Chief Financial Officer voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. On December 27, 2002, the
employment agreement with the Vice President of Marketing and Sale was
terminated, and in connection with his Salary Continuation and Deferred
Compensation agreement of 1998 (the "SCDC Agreement") his salary was reduced to
$45,500 effective December 30, 2002, and would be further reduced to $35,750
effective March 24, 2003. Commissions were made payable to the Vice President of
Marketing and Sales on most of Color Imaging's sales, and his retirement date
61
was extended from February 1, 2003 to December 31, 2003. On July 14, 2003, the
Chief Financial Officer's employment agreement was modified, giving him the
additional duties of marketing and sales, provide for commissions, a reduced
base salary of $78,000 per annum and deleting the provision providing for a
minimum 5% annual salary increase. On October 1, 2003, the Chief Financial
Officers employment agreement was again amended to return his base salary to its
former level of $151,200 and his commission program on certain sales of Color
Imaging was modified.
The employment agreements with the above named officers also commits Color
Imaging to purchasing, for their benefit, certain life insurance plans. Color
Imaging pays the premiums and is the collateral assignee of four split dollar
life insurance policies owned by the President. Pursuant to the policies Color
Imaging will, upon his death or earlier liquidation of each such policy, be
entitled to the refund of all premium payments made by Color Imaging on the
policies, and the balance of the proceeds will be paid to the President's
designated beneficiaries. During 2003 the President repaid the loan due Color
Imaging in connection with the split dollar life insurance policies, Color
Imaging then released its collateral assignment of the policies and is no longer
required to pay any premiums in connection with the four policies. The split
dollar life insurance premiums paid by Color Imaging during 2003, 2002 and 2001
were $660, $22,773 and $13,526, respectively. The monies due from its President
in connection with these life insurance policies at the years ended December 31,
2003, 2002 and 2001 was $0, $134,877 and $112,103, respectively. For the periods
during which such plans were in place for the Chief Financial Officer for the
years ended December 31, 2003, 2002, and 2001, Color Imaging paid or reimbursed
the Chief Financial Officer $5,525, $6,446 and $0, respectively, for such
supplemental life insurance plans. On July 14, 2003, the Chief Financial
Officer's employment agreement was amended to delete the provision requiring
Color Imaging to pay or reimburse premiums in connection with his supplemental
life insurance policy. Color Imaging owns and is the beneficiary of a life
insurance policy on its Vice President of Marketing and Sales to fund the SCDC
Agreement. Upon the officer's retirement, he, or his beneficiaries, are to
receive 120 monthly payments of $2,500 per month or, as provided, the net
present value of any unpaid amounts. The life insurance premiums paid by Color
Imaging to fund the SCDC Agreement in 2003, 2002 and 2001 were $0, $20,882 and
$21,977, respectively. The SCDC Agreement was modified on December 27, 2002,
changing the retirement date of the Vice President Marketing and Sales from
February 1, 2003 to December 31, 2003. On June 27, 2003, the SCDC Agreement was
further amended, provided for the retirement of the Vice President of Marketing
and extended the date of his option to elect monthly payments or the assignment
of the life insurance policy to January 31, 2004. During January 2004 the former
Vice President of Marketing and Sales elected to have the life insurance policy
assigned to him, thereby canceling the obligation of Color Imaging to provide
the 120 monthly payments of $2,500. As of December 31, 2003, the accrued
liability of Color Imaging in connection with the future payments required under
the SCDC Agreement was $200,338 and the cash surrender value of the life
insurance policy was $188,138.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire board of directors of the Company serves as the Compensation
Committee of the Company. Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang,
are owners in and Chairman, Auditor and President, respectively, of General
Plastic Industrial Co., LTD (GPI), a Taiwanese manufacturer of injection molded
cartridges and accessories for copiers and laser printers. For the twelve months
ended December 31, 2003, 2002 and 2001 we purchased $2,091,785, $2,148,279 and
$2,061,683, respectively, of injected molded products from GPI.
On March 6, 2003, Color Imaging received from Chi Fu Investment Co Ltd
$6,075,000 of subscription proceeds for the public sale of 4,500,000 of our
common shares at a price of $1.35 per share in our offering on Form SB-2 filed
with the Securities and Exchange Commission. Chi Fu Investment Co Ltd is a
wholly owned subsidiary of our affiliate General Plastic Industrial Co., Ltd,
and as of December 31, 2003 our directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each own 9.69%, 10.17% and 1.77%, respectively, of General Plastic
Industrial Co., Ltd.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q on October 28, 2003) with its
affiliate General Plastic Industrial Co Ltd. Per the Marketing and Licensing
Agreement General Plastic Industrial Co Ltd agrees to indemnify and hold
harmless Color Imaging for any costs and expense arising from any defective
licensed product, and/or any recalled licensed product including litigation
arising therefrom. In addition, General Plastic Industrial Co Ltd agrees to
credit Color Imaging for product cost, shipping and related expenses arising
from any defective licensed product, and/or any recalled licensed product.
COMPENSATION OF DIRECTORS
Directors who are employees of Color Imaging receive no separate compensation
for their service as directors. Our non-employee directors are each granted by
the board of directors nonqualified options to acquire 25,000 shares of our
common stock at the then market price per common share, effective upon his or
her election or appointment to the board of directors. The non-employee director
options vest over 5 years, beginning with the first anniversary date of his or
her appointment to the board, and expire 3 years from their respective date of
vesting. Also, non-employee directors receive $1,000 for each meeting of the
board of directors physically attended and $500 for meetings conducted by
teleconference or unanimous written consent. Directors who are members of the
Audit Committee receive $500 for each meeting of the Audit Committee.
Non-employee directors are also reimbursed for travel expenses for attending
Board and committee meetings. Color Imaging has no consulting contracts or other
arrangements between it and non-employee directors in return for their services
on the board.
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to Color Imaging with respect
to the beneficial ownership of Color Imaging's common stock as of February 3,
2004 by:
o each stockholder known by Color Imaging to own beneficially more than 5% of
Color Imaging's common stock;
o each Named Executive Officer;
o each of Color Imaging's directors; and
o all directors and executive officers as a group.
Except as otherwise indicated in the footnotes, Color Imaging believes that the
beneficial owners of the common stock listed below, have sole voting power and
investment power with respect to such shares of common stock indicated. In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of the date of this report are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percent ownership of
any other person.
PERCENTAGE OF
NAME OF BENEFICIAL OWNER NO. OF SHARES OWNERSHIP(1)
---------------------------------- ------------------- ------------------
Sueling Wang (2) 1,981,551 15.2%
Morris E. Van Asperen (3) 380,906 2.9%
Jui-Chi Wang (4)(5) 5,209,450 40.9%
Jui-Hung Wang (5)(6) 5,209,178 40.9%
Jui-Kung Wang (5)(7) 4,826,209 37.9%
Claude R. Aubert (8) 25,000 *%
Yi-Jen Wang 30,000 *%
Richard S. Eiswirth 0 *%
Chi Fu Investment Co Ltd (5) 4,500,000 35.3%
General Plastic Industrial Co., Ltd (5) 4,500,000 35.3%
Executive officers and directors
as a group (7 persons) (9) 8,662,294 65.1%
----------------
* Less than 1%
(1) Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). The table above includes the number of shares underlying options
and warrants which are exercisable within 60 days after the date of this report.
(2) Includes: (a) 600,000 shares owned by Sueling Wang's four children, (b)
141,204 shares owned by Yik-Li Sih, Sueling Wang's wife, in which Dr. Wang may
be deemed to have pecuniary interest. Dr. Wang disclaims beneficial ownership of
such 741,204 shares. Also includes 275,000 shares subject to options that are
currently exercisable.
(3) Includes 250,000 shares subject to options that are currently exercisable.
(4) Includes 15,000 shares subject to options that are currently exercisable.
(5) Includes 4,500,000 shares held by Chi Fu Investment Co Ltd ("CFI"). CFI is a
wholly owned subsidiary of General Plastic Industrial Co., Ltd ("GPI"). Jui-Hung
Wang, Jui-Chi Wang and Jui-Kung Wang, owns 9.69%, 10.17% and 1.77%,
respectively, of the outstanding common stock of GPI as of December 31, 2003.
Each of Messrs. Wang disclaims beneficial ownership of the shares held by CFI
except to the extent of his pecuniary interest.
(6) Includes 10,000 shares subject to options that are currently exercisable.
(7) Includes 10,000 shares subject to options that are currently exercisable.
(8) Includes 25,000 shares subject to options that are currently exercisable.
(9) Includes 585,000 shares subject to options that are exercisable within 60
days after the date of this prospectus.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from which we lease our Norcross, Georgia
plant. For the twelve months ended December 31, 2003, 2002 and 2001 we paid
Kings Brothers LLC $531,444, $518,484 and $505,836, respectively, in lease
payments. The lease was made on April 1, 1999, and upon unanimous approval of
the board of directors and the disinterested members of the board of directors,
it was amended February 5, 2003, to extend its expiration from March 31, 2009 to
March 31, 2013.
On November 19, 2001, we borrowed $200,000 on an unsecured basis from Kings
Brothers LLC. The revolving loan bears interest at the rate of 9% per annum,
matured on November 18, 2002 and is evidenced in writing. We paid the principal
and interest outstanding on December 10, 2001, paying $790.38 in total interest
63
to Kings Brothers. We borrowed this amount for general corporate purposes,
including working capital. On March 20, 2002 the revolving loan arrangement was
cancelled.
On June 1, 1999, the Development Authority of Gwinnett County, Georgia issued
$4,100,000 of industrial development revenue bonds on behalf of us and Kings
Brothers LLC. Pursuant to a certain joint debtor agreement we are jointly and
severally liable with Kings Brothers to pay the amounts borrowed under the bond.
The 3.5% revenue bonds are payable in varying annual principal and monthly
interest payments through July 2019. The bonds are collateralized by all of our
assets and the real property leased by us and owned by Kings Brothers. The
majority of the proceeds $3,125,872 from the bond issue were used by us to
relocate our manufacturing plant, make leasehold improvements at the new
facility and to purchase certain manufacturing equipment. The remaining proceeds
in the amount of $974,128 was used by Kings Brothers to pay down the mortgage on
its real property, some of which is leased to us. The proceeds used by Kings
Brothers have been recorded as a receivable on our financial statements. We
entered into a Joint Debtor Agreement with Kings Brothers LLC concerning their
rights, duties and obligations in connection with the bonds. Kings Brothers and
we, collectively, are obligated to repay any outstanding debt under the bonds.
Amounts receivable from Kings Brothers are secured by a lien on all of Kings
Brothers' real estate, including the part we lease from them, and by personal
guarantees by the members of Kings Brothers. Principal due and paid by Kings
Brothers for the twelve months ended December 31, 2003, 2002 and 2001 was
$83,160, $79,596 and $76,032, respectively. Interest due and paid by Kings
Brothers for the twelve months ended December 31, 2003, 2002 and 2001was
$10,372, $14,612 and $30,368, respectively. As of December 31, 2003, the
principal outstanding was $3,095,000 and the portion due to us from Kings
Brothers was $735,340.
Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang, are owners in and
Chairman, Auditor and President, respectively, of General Plastic Industrial
Co., LTD (GPI), a Taiwanese manufacturer of injection molded cartridges and
accessories for copiers and laser printers. For the twelve months ended December
31, 2003, 2002 and 2001 we purchased $2,091,785, $2,148,279 and $2,061,683,
respectively, of injected molded products from GPI.
On March 14, 2002, we borrowed $500,000 from director, Sueling Wang, on an
unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and is evidenced in writing. On September 2, 2002, we entered
into a modification agreement with Sueling Wang to change the terms of the note,
extending the term to March 1, 2005, providing for a $100,000 principal payment,
decreasing the interest rate to 6% per annum, providing for interest only
payments through February 28, 2003, and providing for 24 monthly payments of
principal and interest beginning on April 1, 2003, in the amount of $17,735.67.
We borrowed the $500,000 amount to meet a supplier commitment for product.
Interest paid Sueling Wang on the note for the years ended December 31, 2003 and
2002 was $14,641 and $36,296, respectively. As of December 31, 2003 and 2002,
the principal outstanding was $105,000 and $400,000, respectively.
On August 21, 2002, we borrowed $100,000 from director, Jui-Chi Wang, on an
unsecured basis. The loan bears interest at the rate of 6% per annum, matures on
March 1, 2005 and is evidenced in writing. We borrowed this amount in order to
repay $100,000 borrowed from director Sueling Wang on March 14, 2002. The note
is interest only through February 28, 2003, and then is fully amortizing over 24
months with principal and interest payments payable monthly beginning April 1,
2003 in the amount of $4,434. As of December 31, 2003 and 2002, the interest
accrued and paid on the note was $ 5,115 and $2,170, respectively. As of
December 31, 2003 and 2002, the outstanding principal balance on the note was
$59,806 and $100,000, respectively.
On August 21 and September 2, 2002, we borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, matures on March 1, 2005 and is
evidenced in writing. We borrowed this amount in order to make a principal
payment due on our industrial development bond in the approximate amount of
$255,000, for the acquisition of capital equipment in the approximate of
$125,000 and for general corporate purposes. The note is interest only through
February 28, 2003, and then is fully amortizing over 24 months with principal
and interest payments payable monthly beginning April 1, 2003 in the amount of
$22,169.60. As of December 31, 2003 and 2002, interest accrued and paid on the
note was $ 25,577 and $10,259, respectively. As of December 31, 2003 and 2002,
the principal outstanding was $299,032 and $500,000, respectively.
Directors Jui-Chi Wang and Jui-Hung Wang purchased 350,000 and 50,000 Units
(each Unit consisted of one share of common stock and a warrant to purchase one
share of common stock at an exercise price of $2.00 per share) for $700,000 and
$100,000, including promissory notes, respectively. Jui-Chi Wang's $700,000
recourse promissory note without interest was made on December 1, 2001, due
December 31, 2001 and paid in full on December 18, 2001. Jui-Hung Wang's $99,500
recourse promissory note without interest was made on December 24, 2001, due
April 1, 2002 and paid in full on January 30, 2002. The terms of the notes were
consistent with the terms of notes of third parties who purchased Units in the
private placement from Color Imaging.
We believe that the terms of the loans and borrowings from affiliates were on
terms more favorable than were otherwise available from third parties.
On September 11, 2002, we entered into a share exchange agreement with four of
our directors, Messrs. Brennan, St. Amour, Langsam and Hollander, whereby a new
company, Digital Color Print, Inc., owned by them, acquired the capital stock of
our wholly owned subsidiary, Logical Imaging Solutions, in exchange for
approximately 1.6 million shares of the our common stock. On September 20, 2002,
we entered into an amendment to the share exchange agreement pursuant to which
the number of shares of the our common stock to be exchanged for the capital
stock of Logical Imaging Solutions was increased from 1.6 million to 1.7 million
and a requirement was added that Logical Imaging Solutions have at least
64
$100,000 on hand at closing. On September 30, 2002, the share exchange
transaction was closed, and the 1.7 million shares of our stock were received
and retired by our stock transfer agent (see Financial Statements "Note 3 -
Discontinued Operations").
On March 6, 2003, Color Imaging received from Chi Fu Investment Co Ltd
$6,075,000 of subscription proceeds for the public sale of 4,500,000 of our
common shares at a price of $1.35 per share in our offering on Form SB-2 filed
with the Securities and Exchange Commission. Chi Fu Investment Co Ltd is a
wholly owned subsidiary of our affiliate General Plastic Industrial Co., Ltd,
and as of December 31, 2003 our directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each own 9.69%, 10.17% and 1.77%, respectively, of General Plastic
Industrial Co., Ltd.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q on October 28, 2003) with its
affiliate General Plastic Industrial Co Ltd. Per the Marketing and Licensing
Agreement General Plastic Industrial Co Ltd agrees to indemnify and hold
harmless Color Imaging for any costs and expense arising from any defective
licensed product, and/or any recalled licensed product including litigation
arising therefrom. Further General Plastic Industrial Co Ltd agrees to credit
Color Imaging for product cost, shipping and related expenses arising from any
defective licensed product, and/or any recalled licensed product.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS IN FISCAL 2002 AND 2003
During fiscal 2003 and 2002 the Company incurred the following fees for
services performed by Lazar, Levine & Felix LLP:
Fiscal 2003 Fiscal 2002
-------------------- --------------------
Audit Fees $ 78,671 $ 91,717
Audit Related Fees 0 0
Tax Fees1 15,000 12,000
All Other Fees2 4,895 19,236
(1) The aggregate fees for all professional services related to tax
compliance and the preparation and filing of Federal and state income
tax returns.
(2) Other services included in fees in connection with the review of Color
Imaging's Registration Statement filings on Form SB-2 and the consent
to the inclusion of Color Imaging's financial statements contained
therein.
The Company's audit committee approved all of the services described above.
The audit committee has determined that the payments made to its independent
accountants for these services are compatible with maintaining such auditors'
independence.
AUDIT COMMITTEE'S PRE-APPROVAL POLICES AND PROCEDURES
The Committee has the sole authority to appoint or replace, compensate, and
oversee the work of any independent auditor, who must be, when required, a
registered firm as defined by law, whose purpose is the preparation or issuance
of an audit report or related work. The independent auditor's reports and other
communications are to be delivered directly to the Committee, and the Committee
is responsible for the resolution of disagreements between management and the
independent auditor regarding financial reporting.
The Committee pre-approves all audit and non-audit services and all
engagement fees and terms in connection therewith, except as otherwise permitted
by regulation or the exchange.
The fees for professional services other than Audit Fees, in aggregate, for
2003 and 2002, approved by the Committee, were approximately $19,895 and
$31,236, respectively. All of the hours expended on the principal accountant's
engagement to audit the financial statements of Color Imaging for the year 2003
and 2002 were attributable to work performed by full-time, permanent employees
of the principal accountant.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The consolidated financial statements required by this item are set
forth on the pages indicated at Item 8.
(2) Financial Statement Schedule for the years ended December 31, 2003, 2002 and
2001:
Schedule II - Valuation and Qualifying Accounts is set forth below.
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------------------------------
For the Year Balance at Charged
Ended Beginning (credited) Balance at
December 31, of Year to Expense Write-offs End of Year
------------- ---------- ---------- ---------- -----------
1. ALLOWANCE FOR
DOUBTFUL ACCOUNTS
2003 $ 64,178 $ 45,000 $ 41,339 $ 67,839
2002 72,911 -- 8,733 64,178
2001 100,000 (27,089) -- 72,911
2. RESERVE FOR
OBSOLETE INVENTORY
2003 $ 34,964 $ 275,000 $ 211,875 $ 98,089
2002 $ 73,830 $ 240,000 $ 278,866 $ 34,964
2001 32,331 41,499 -- 73,830
3. DEFERRED TAX
VALUATION ALLOWANCE
2003 $ -- $ 334,800 $ -- $ 334,800
2002 $ 53,760 $ (53,760) $ -- $ --
2001 90,000 (36,240) -- 53,760
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits:
Incorporated by reference herein to Item 15( c) below.
(b) Reports on Form 8-K.
None.
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(c) Exhibits:
The following exhibits are filed herewith or incorporated herein by reference:
(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 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.
4.5 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.
4.6 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.
4.7 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.
4.8 $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.
4.9 $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.
4.10 $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.
4.11 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.
4.12 Amended and restated $1,500,000 revolving note between Color
Imaging and SouthTrust Bank dated June 16, 2003, incorporated by
reference to Exhibit 4.12 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
4.13 Amended and restated loan and security agreement between Color
Imaging and SouthTrust Bank dated June 16, 2003, incorporated by
reference to Exhibit 4.13 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
10.1* 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.
10.2* 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.
10.3* Employment Agreement amendment between the Company and Morris E.
Van Asperen dated July 14, 2003, incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-Q for the quarter ended
June 30, 2003.
10.4+* Second Amendment to the Employment Agreement between the Company
and Morris E. Van Asperen dated October 31, 2003.
10.5* Deferred Compensation Agreement Amendment 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.
10.6* Amendment to Deferred Compensation Agreement between Color
Imaging and Charles R. Allison dated June 27, 2003, incorporated
by reference to Exhibit 10.5 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.7 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.
10.8 Amendment No. 1 to Lease Agreement between the Company and Kings
Brothers LLC dated April 1, 1999, incorporated by reference to
Exhibit10.6 to the Registration statement on Form SB-2 filed
November 28, 2001.
67
Exhibit
No. Description
---------- --------------
10.9 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.
10.10 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.
10.11 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.
10.12 Form of Indemnification Agreement, incorporated by reference to
the post effective Amendment No. 1 to Form SB-2 filed April 1,
2003.
10.13* Stock Incentive Plan, incorporated by reference to Annex 1 to the
Registrant's Definitive Proxy Statement on Schedule 14A filed on
May 5, 2003.
10.14 Marketing and Licensing Agreement between General Plastic
Industrial Co Ltd and Color Imaging, Inc. dated as of June 1,
2003 and incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-Q for the quarter ended September 30, 2003.
14.1+ Code of Ethics for Certain Financial Officers of Color Imaging,
Inc. dated December 29, 2003.
23.1+ Consent of Lazar Levine & Felix LLP
31.1+ Chief executive officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2+ Chief financial officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1+ Chief executive officer's certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2+ Chief financial officer's certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
------------------------
+ Filed herewith.
* Management contract or compensatory arrangement or plan.
(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.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COLOR IMAGING, INC.
("Registrant")
Dated: February 17, 2004 By: /s/ Jui-Kung Wang
------------------------------------
Jui-Kung Wang
Chief Executive Officer and
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jui-Kung Wang Chief Executive Officer and February 17, 2004
--------------------------- Chairman (principal executive
Jui-Kung Wang officer)
/s/ Sueling Wang President and Vice Chairman February 17, 2004
---------------------------
Sueling Wang
/s/ Morris E. Van Asperen Executive Vice President, Chief February 17, 2004
--------------------------- Financial Officer and Secretary
Morris E. Van Asperen (principal financial and accounting
Officer)
/s/ Jui-Hung Wang Director February 17, 2004
---------------------------
Jui-Hung Wang
/s/ Jui-Chi Wang Director February 17, 2004
---------------------------
Jui-Chi Wang
/s/ Yi-Jen Wang Director February 17, 2004
---------------------------
Yi-Jen Wang
/s/ Richard S. Eiswirth Director February 17, 2004
---------------------------
Richard S. Eiswirth
69
1715487