UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-18450
COLOR IMAGING, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3453420
----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4350 PEACHTREE INDUSTRIAL BOULEVARD, SUITE 100
NORCROSS, GEORGIA 30071 30071
----------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(770) 840-1090 FAX (770) 242-3494
---------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
As of April 21, 2004, there were 12,713,005 shares of Common Stock outstanding.
COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2004
(Unaudited) and December 31, 2003(Audited)........................3
Condensed Statements of Operations (Unaudited)
for the Three Months ended March 31, 2004 and 2003................4
Condensed Statements of Cash Flows (Unaudited)
for the Three Months ended March 31, 2004 and 2003................5
Notes to Interim Unaudited Condensed Financial
Statements .......................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risks........22
Item 4. Controls and Procedures ...........................................22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings .................................................24
Item 2. Changes in Securities, Use of Proceeds and
Issuers Purchases of Equity Securities...........................24
Item 3. Defaults Upon Senior Securities....................................25
Item 4. Submission of Matters to a Vote of Security Holders................25
Item 5. Other information .................................................25
Item 6. Exhibits and Reports on Form 8-K...................................26
Signatures...................................................................28
Exhibits
2
PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC.
CONDENSED BALANCE SHEETS
31-Mar-04 31-Dec-03
ASSETS (Unaudited) (Audited)
--------------- ---------------
CURRENT ASSETS:
Cash $ 1,570,656 $ 2,213,830
Accounts receivable - net of allowance for doubtful accounts
of $69,250 and $67,839 for 2004 and 2003, respectively 2,411,021 1,941,404
Inventories 5,656,671 5,624,328
Related party portion of IDR bond - current 87,912 87,912
Other current assets 61,533 114,721
--------------- --------------
TOTAL CURRENT ASSETS 9,787,793 9,982,195
--------------- --------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,950,768 6,973,834
--------------- --------------
OTHER ASSETS:
Related party portion of IDR bond 647,428 647,428
Other assets 39,846 291,978
--------------- ---------------
687,274 939,406
--------------- ---------------
$ 17,425,835 $ 17,895,435
=============== ===============
- LIABILITIES & STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Revolving credit lines $ -- $ --
Accounts payable 2,078,403 2,413,695
Current portion of notes payable 5,723 5,612
Current portion of notes payable - related parties 340,042 343,736
Current portion of bonds payable 370,000 370,000
Other current liabilities 201,572 393,579
--------------- ---------------
TOTAL CURRENT LIABILITIES 2,995,740 3,526,622
--------------- ---------------
LONG TERM LIABILITIES:
Notes payable 10,037 11,509
Notes payable - related parties 26,481 120,102
Bonds payable 2,725,000 2,725,000
Deferred tax liability 359,650 292,700
--------------- ---------------
LONG TERM LIABILITIES 3,121,168 3,149,311
--------------- ---------------
TOTAL LIABILITIES 6,116,908 6,675,933
--------------- ---------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000,000 shares;
12,730,505 shares issued and outstanding on March 31, 2004 127,305 127,305
and December 31, 2003, respectively.
Additional paid-in capital 12,708,368 12,708,368
Treasury stock at cost ( 13,105) --
Accumulated deficit (1,513,641) (1,616,171)
--------------- ---------------
11,308,927 11,219,502
--------------- ---------------
$ 17,425,835 $ 17,895,435
=============== ===============
See accompanying notes.
3
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2004 2003
------------ ------------
SALES $ 5,601,217 $ 5,629,405
C0ST OF SALES 4,195,184 4,310,155
------------ ------------
GROSS PROFIT 1,406,033 1,319,250
------------ ------------
OPERATING EXPENSES
Administrative 396,668 466,647
Research & development 310,176 271,967
Sales & marketing 598,084 367,274
------------ ------------
1,304,928 1,105,888
------------ ------------
INCOME FROM OPERATIONS 101,105 213,362
------------ ------------
OTHER INCOME (EXPENSE)
Other income 93,580 48,146
Financing expenses (23,955) (75,966)
------------ ------------
69,625 (27,820)
------------ ------------
INCOME BEFORE TAXES 170,730 185,542
PROVISION FOR INCOME TAXES 68,200 74,000
------------ ------------
NET INCOME $ 102,530 $ 111,542
============ ============
INCOME (LOSS)
PER COMMON SHARE
Basic $ .01 $ .01
Diluted $ .01 $ .01
============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 12,730,505 9,332,780
Assumed conversion 17,857 --
------------ ------------
Diluted 12,748,362 9,332,780
============ ============
See accompanying notes
4
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income from continuing operations $ 102,530 $ 111,542
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 148,404 146,726
Deferred income taxes 66,950 72,000
Decrease (increase) in:
Accounts receivable and other receivables (469,617) 115,455
Inventories (32,343) 163,228
Prepaid expenses and other assets 305,320 147,891
Increase (decrease) in:
Accounts payable and accrued liabilities (527,299) (869,387)
------------ ------------
Net cash (used in) operations (406,055) (112,545)
------------ ------------
Cash flows (used in) investing activities:
Capital expenditures (125,338) (57,824)
------------ ------------
Net cash (used in)
investing activities (125,338) (57,824)
------------ ------------
Cash flows from financing activities:
Net (payments) under line of credit -- (1,022,470)
Net proceeds from sale of common stock -- 5,917,086
Repurchase of common shares and warrants (13,105) (59,223)
Net (payments) under related party borrowings (97,315) (250,947)
Principal payments of long-term debt (1,362) (1,332,407)
------------ ------------
Net cash (used in) provided by
financing activities (111,781) 3,252,039
------------ ------------
Net (decrease) increase in cash (643,174) 3,081,670
Cash at beginning of year 2,213,830 128,501
------------ ------------
Cash at end of period $ 1,570,656 $ 3,210,171
============ ============
Supplemental disclosure of cash flow Information:
Cash paid during the period for:
Interest and financing expense $ 20,411 $ 80,545
============ ============
Income taxes $ 0 $ 0
============ ============
See accompanying notes
5
COLOR IMAGING, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals
and adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004
NOTE 2. COMMON STOCK AND EQUIVALENTS
During the first quarter ended March 31, 2004, the Company repurchased in the
open market 17,500 shares of the Company's common stock at an average price of
$0.75 per share. On April 1, 2004, the shares were cancelled and retired by the
Company's transfer agent.
During the three months ended March 31, 2004 the Company did not grant any
options to employees. In computing the number of options exercisable, shares of
common stock subject to options or warrants that are currently exercisable or
will become exercisable within 60 days of the date of this report are deemed
outstanding. The following is a summary of total outstanding and exercisable
options and stock warrants at March 31, 2004:
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 3.41 years 790,000 $2.25
Warrants $2.00 100,000 $2.00 1.28 years 100,000 $2.00
---------------- ------------------- --------- ----------------
Options and warrants 1,070,000 $2.07 3.20 years 890,000 $2.22
================ ================
On April 1, 2004 the Company granted options to an officer to purchase 100,000
shares of the Company's common stock at an exercise price of $.73 per share.
Options to purchase 20,000 shares of the Company's common stock vested
immediately and the remainder vest at the rate of 20,000 per year beginning on
the first anniversary date of the grant and continuing annually thereafter and
expire five years from their respective date of vesting.
NOTE 3. INVENTORIES
Inventories consisted of the following components as of March 31, 2004 and
December 31, 2003:
March 31, 2004 December 31, 2003
----------------- -----------------
Raw materials $ 1,271,928 $ 631,960
Work-in-process 1,930,297 1,715,684
Finished goods 2,550,841 3,374,773
Obsolescence allowance (96,395) (98,089)
----------------- -----------------
Total $ 5,656,671 $ 5,624,328
================= =================
6
NOTE 4. CHANGES TO BORROWING ARRANGEMENTS
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance as of March 31, 2004 of $0, 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 March 31, 2004, the interest rate was the
one-month Libor rate of 1.04% plus 2.50% (3.59%). 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). On February 6, 2004,
the Bank issued an irrevocable standby letter of credit in the amount of $1.5
million for the benefit of a non-affiliated foreign supplier. The letter of
credit has an expiration date of June 30, 2005. 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 and the obligations under the letter of credit. The Bank
agreement also contains various covenants that the Company is required to
maintain, and as of March 31, 2004, the Company was in compliance with these
covenants.
NOTE 5. SIGNIFICANT CUSTOMERS
In the three month period ended March 31, 2004, one customer accounted for 30%
of net sales. The Company does not have a written or oral contract with this
customer. All sales are made through purchase orders. Accounts receivable from
this customer at March 31, 2004, was $619,860.
NOTE 6. SIGNIFICANT SUPPLIERS
In the three months ended March 31, 2004, the Company purchased 33% and 21% of
its raw materials, components and supplies from two foreign suppliers with the
latter being an affiliate. On February 6, 2004, the Company's Bank issued on
behalf of the Company an irrevocable standby letter of credit in the amount of
$1.5 million for the benefit of its largest non-affiliated foreign supplier. At
March 31, 2004, the account payable to these suppliers was $608,897 and
$255,476, respectively (see also Note 8).
NOTE 7. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving the development and manufacture of products used in electronic
printing. All of the Company's assets are domestic. The sales to unaffiliated
customers by geographic region from continuing operations for the three-month
periods ended March 31 are as follows:
2004 2003
------------ ------------
Sales to Unaffiliated Customers:
United States $ 3,182,361 $ 3,314,623
Europe 1,222,352 1,142,286
Mexico 808,546 670,635
Asia 260,518 236,943
All Others 127,440 264,918
------------ ------------
Total $ 5,601,217 $ 5,629,405
============ ============
7
NOTE 8. 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
rental payments for quarter ended March 31, 2004, were $136,182.
(B) 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 Kings Brothers, LLC. The 1.03% revenue bonds, 2.03% inclusive of the
1% letter of credit fee, as of March 31, 2004, are payable in varying annual
principal and monthly interest payments through July 2019. The bond is secured,
as amended on April 7, 2003, by specific equipment assets of the Company and by
real property owned by Kings Brothers, LLC. The bonds along with the line of
credit and term loan are held by two related financial institutions.
A loan agreement between the Authority and the Company and Kings Brothers, LLC
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 Kings
Brothers, LLC to pay down the mortgage on the real property leased to the
Company. The Company and the Related Party are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and the Kings Brothers, LLC, 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 Kings Brothers, LLC is responsible to the Company is reflected in current
and other assets of the Company. Kings Brothers, LLC amounts owed to the
Authority are secured by a lien on the real property leased by the Company and
by a personal guarantee, as amended, executed by Director and President of the
Company, Sueling Wang. At this time, the Company believes that the Kings
Brothers, LLC portion of the bond is fully collectible. As of March 31, 2004,
the bond principal outstanding was $3,095,000 and the portion due from Kings
Brothers, LLC was $735,340.
(C) PURCHASES:
The Company purchased from an affiliate for the three months ended March 31,
2004, $730,065 of injection molded cartridges and accessories for copiers and
laser printers. Accounts payable to the affiliate at March 31, 2004, was
$255,476. See also Note 6.
(D) MARKETING AND LICENSE AGREEMENT:
On June 1, 2003, the Company entered into a Marketing and Licensing Agreement
with its foreign affiliate. Per the Marketing and Licensing Agreement the
affiliate agrees to indemnify and hold harmless the Company for any costs and
expense arising from any defective licensed product, and/or any recalled
licensed product including litigation arising therefrom. Further the affiliate
agrees to credit the Company for product cost, shipping and related expenses
arising from any defective licensed product, and/or any recalled licensed
product.
(E) 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 with
interest extra beginning on April 1, 2003, in the amount of $7,500. The Company
borrowed the $500,000 to meet a supplier commitment for product. Principal and
interest paid Sueling Wang on the note for the quarter ended March 31, 2004 was
$22,500 and $1,086, respectively. As of March 31, 2004 the principal outstanding
was $82,500.
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. Principal and interest paid
Jui-Chi Wang on the note for the quarter ended March 31, 2004 was $12,469 and
$833, respectively. As of March 31, 2004 the principal outstanding was $47,337.
8
NOTE 8. RELATED PARTY TRANSACTIONS (C0NTINUED):
(E) NOTES PAYABLE (CONTINUED):
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
amount 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 $22,170. Principal and interest paid Jui-Hung Wang on the note for the
quarter ended March 31, 2004 was $62,345 and $4,163, respectively. As of March
31, 2004 the principal outstanding was $236,686.
(F) 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 March 31, 2004, Company directors Jui-Hung Wang, Jui-Chi Wang, Jui-Kung
Wang and Sueling Wang each owned 9.69%, 10.17% and 1.77%, respectively, of
General Plastic Industrial Co., Ltd.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussions should be read in conjunction with our condensed
financial statements and the related notes thereto.
BACKGROUND
On June 28, 2000, Color Imaging, formerly known as Advatex Associates, Inc.
merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and Logical
Imaging Solutions and Color Image became wholly-owned subsidiaries of Advatex.
On December 31, 2000, Color Image was merged with and into Color Imaging. On
September 30, 2002, we divested Logical Imaging Solutions in exchange for 1.7
million shares of our common stock and warrants to purchase up to 15% of the
common stock of Digital Color Print or Logical Imaging Solutions. As the result
of our disposing of Logical Imaging Solutions, Inc. we no longer offer printing
systems to commercial printers nor the support services and consumables related
thereto. As a further result of Color Imaging's divestiture of Logical Imaging
Solutions, our investments in the furthering of Logical Imaging Solutions'
technologies and carrying its operations have ceased. Significantly, since the
merger on June 28, 2000, Color Imaging had invested approximately $2.35 million
in the operations of Logical Imaging Solutions and the development of its
technologies.
COLOR IMAGING, INC.
Since 1989, 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, including expansion through sourcing from
strategic partners, has led to the creation over the years of hundreds of
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), Lanier(TM),
Gestetner(TM), Savin(TM), Sharp(TM), Xerox(TM), Canon(TM), Minolta(TM),
Konica(TM), and Toshiba(TM) copiers. 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 OEM, distributors and
dealers of copier products.
Our strategy for growing revenue and operating profit is to expand, including
through strategic acquisition(s), our printer and copier products business. The
key elements of our strategy are (1) increasing vertical integration by
supplying complete toner and cartridge devices, (2) capitalizing on our research
and development expertise of producing specialty, color and digital copier and
or multifunctional device toners, (3) exploiting the efficiencies associated
with the investment made in manufacturing facilities, (4) expanding our sources
for products from strategic suppliers that we can add value to or resell and
that complement our product lines, (5) expanding into new geographic markets,
and (6) broadening our sales channels.
RECENT DEVELOPMENTS
On April 1, 2004, Patrick J. Wilson joined Color Imaging, Inc. as Senior Vice
President of Marketing and Sales. With over thirty years in the copier and toner
industry in executive, general management, marketing, manufacturing and sourcing
positions, Mr. Wilson brings significant expertise in management, product
development and marketing to Color Imaging. Prior to his appointment, he
consulted with Color Imaging for three years; and was instrumental in
significantly expanding our copier product line and distribution channels. Mr.
Wilson began his career with 3M Copier Division which became Harris/3M and
eventually Lanier Worldwide, a $1.2 billion company. He has a BS degree in
Chemical Engineering from Michigan Tech and an MBA from Xavier University.
10
OVERVIEW
The following discussion and analysis should be read in conjunction with our
financial data and our Financial Statements and notes appearing elsewhere in
this report.
Net sales for the three months ended March 31, 2004 declined by approximately
$28,000, or less than 1%, to $5.6 million, compared to 2003. Net sales in 2004
decreased primarily due to reduced sales to our largest customers for the first
quarter 2004 compared to the same period of 2003. In the three months ended
March 31, 2004 and 2003, our net sales were primarily generated from the sale of
finished consumable products for electronic printers and photocopying machines
and comprised approximately 76% and 71% of net sales, respectively. For the
three months ended March 31, 2004 and 2003, our two largest imaging products
customers accounted for 30% and 5% and 33% and 19% of net sales, respectively.
Sales to these customers consist primarily of analog copier products, and as a
result are expected to decline over time.
Net sales made outside of the United States increased to approximately $2.4
million, or 43% of total sales for the three months ended March 31, 2004,
compared to $2.3 million, or 41% for the three months ended March 31, 2003. This
increase in international sales resulted primarily from the increase in sales to
customers other than 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 months ended March
31, 2004, as well as for Color Imaging's two general product lines.
Backlog Backlog
at start at end
of New Net of
Year Orders Revenue Quarter
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
2004:
Copier Products $ 1,896 $ 4,110 $ 3,927 $ 2,079
Printer Products 575 1,783 1,674 684
-------- -------- -------- --------
Total 2,471 5,893 5,601 2,763
======== ======== ======== ========
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
A critical accounting policy is one that is both important to the portrayal of
Color Imaging's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its financial
statements.
VALUATION ALLOWANCE FOR ACCOUNTS RECEIVABLE. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. These allowances are based on historical experience,
credit evaluations and specific customer collection issues we have identified.
Since our accounts receivable are often concentrated in a relatively few number
of customers, a significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results.
11
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.
VALUATION OF LONG-LIVED ASSETS. We periodically evaluate whether events and
circumstances have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of our long-lived assets, such as our
investment in our toner manufacturing equipment. We have approximately $8.1
million invested in such equipment and plant improvements, with a carrying value
of $6.5 million, that have estimated lives of up to twenty years. Should
competing technologies or offshore competitors cause our manufacturing
technology to be non-competitive, or should other events or circumstances
indicate that the carrying amount of these assets would not be recoverable, the
estimated life of these assets may need to be shortened and their carrying value
could be materially affected. If the sum of the undiscounted expected cash flows
from an asset to be held and used in operations is less than the carrying value
of the asset, an impairment loss is recognized.
WARRANTY. We provide a limited warranty, generally ninety (90) days, to all
purchasers of our products. Accordingly, we do not make a provision for the
estimated cost of providing warranty coverage, and instead we expense these
costs as they are incurred. On occasion, we have been required and may be
required in the future to provide additional warranty coverage to ensure that
our products are ultimately accepted or to maintain customer goodwill. While our
warranty costs have historically not been significant, we cannot guarantee that
we will continue to experience a similar level of predictability with regard to
warranty costs as we have in the past. In addition, the introduction of more
expensive finished products, technological changes or previously unknown defects
in raw materials or components may result in more extensive and frequent
warranty claims than anticipated, which could have a material adverse impact on
our operating results for the periods in which such additional costs
materialize.
RESULTS OF OPERATIONS
Color Imaging's net sales were $5.6 million for the three months ended March 31,
2004, a decrease of approximately 0.5% from March 31, 2003. The net sales by
product category were as follows:
% Increase
(Dollars in thousands) 2004 % (Decrease) 2003 %
---------- ----- ---------- ---------- -----
Product Category:
Cartridges and bottles
Copier finished products $ 3,600 64% 18% $ 3,051 54%
Printer finished products 660 12% (32%) 966 17%
---------- ---------- ----------
4,260 76% 6% 4,017 71%
Bulk toner and parts 1,341 24% (17%) 1,612 29%
---------- ---------- ----------
Total net revenue $ 5,601 100% ( 1%) $ 5,629 100%
========== ========== ==========
12
The following table sets forth certain information derived from the Company's
unaudited interim statements of operations:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
------ ------
(PERCENTAGE OF NET SALES)
Net sales 100 100
Cost of sales 75 77
Gross profit 25 23
Administrative expenses 7 8
Research and development 5 5
Sales and marketing 11 6
Operating income 2 4
Interest expense 1 1
Depreciation and amortization 2 3
Income before taxes 3 3
Provision for income taxes 1 1
Net income 2 2
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
NET SALES. Our net sales decreased by $28,000, or 0.5%, to $5.6 million for the
three months ended March 31, 2004, from $5,629 million for the three months
ended March 31, 2003. Net sales made in the United States were $3.2 million, a
decrease of $0.1 million, or 4%, from $3.3 million made in the comparable period
in 2003. Net sales made outside of the United States increased by approximately
$0.1 million, or 4%, for the current quarter compared to the same quarter of
2003. The decrease in net sales for the current quarter compared to that of a
year ago from our two largest customers was offset by the increase in our sales
to other customers. Of the $5.6 million in net sales, $3.6 million, or 64%, were
attributable to our copier finished products, while net sales of these same
products were $3.1 million, or 54%, for the comparable period in 2003. The
revenue increase from copier finished products from 2003 to 2004 was 18%,
reflecting primarily increased sales of our color toner products to customers
other than our two largest customers. Sales of our laser finished products for
the three months ended March 31, 2004 were $.66 million compared to $.97 million
for the same period of 2003. We believe that sales of our copier products will
continue to increase while sales of our laser printing products will be level or
decrease during 2004, as the result of the sales of new copier color products
recently introduced and increased competition for laser printer products.
COST OF GOODS SOLD. Cost of goods sold decreased by approximately $115,000, or
3%, to $4.2 million from $4.3 million for the three months ended March 31, 2004
and for the comparable period in 2003, primarily as the result of the decrease
in lower margin net sales to our two largest customers. Cost of goods sold as a
percentage of net sales decreased by 2 percentage points from 77% for the three
months ended March 31, 2003 to 75% for the three months ended March 31, 2004,
primarily as the result of reduced sales derived from certain very low margin
products previously sold to our largest customer and a larger percentage of
sales being derived from sales of products with higher gross margins. With the
expected increase in sales derived from our copier color toner products, we
expect our cost of goods sold to further decrease as a percentage of net sales
even with increased sales derived from very low margin all in one imaging
products.
GROSS PROFIT. As a result of the above factors, gross profit increased to $1.4
million in the three months ended March 31, 2004 from $1.3 million in the three
months ended March 31, 2004, or approximately $89,000, while net sales for the
same period decreased by $28,000. Gross profit as a percentage of net sales
increased by 2 percentage points from 23% to 25% for the three months ended
March 31, 2004, as compared to the corresponding period of the prior year.
OPERATING EXPENSES. Operating expenses increased $.2 million, or 18%, to $1.3
million in the three months ended March 31, 2004 from $1.1 million in the three
months ended March 31, 2003. General and administrative, selling and R&D
expenses increased, as a percentage of net sales, to 23% in the three months
ended March 31, 2004 from 20% in the three months ended March 31, 2003. General
and administrative expenses decreased approximately 15%, or $70,000 to $397,000
for the three months ended March 31, 2004 from the comparable period in 2003,
largely resulting from decreased legal and professional fees in connection with
our offering on Form SB-2 and our stock repurchase negotiations from an investor
in our private placement closed in 2001 and no provision having been made for
the bonus plan for 2004. Selling expenses increased by $231,000, or 63%, in the
three months ended March 31, 2004 compared to the three months ended March 31,
2003. Selling expenses increased primarily as a result of increased commission
and expense reimbursements of our manufacturer's representatives, advertising
and promotional expenses and expenses in connection with our recently opened
West Coast sales office. Research and development expenses increased by $38,000,
or 14%, to $310,000 in the three months ended March 31, 2004, primarily as the
result of increased payroll expenses and expenditures for product testing.
13
OPERATING INCOME. As a result of the above factors, operating income decreased
by $112,000, or 53%, to a profit of $101,000 in the three months ended March 31,
2004 from $213,000 in the three months ended March 31, 2003.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $52,000, or 68%, in
the three months ended March 31, 2004 from the three months ended March 31,
2003. The decrease was primarily the result of reduced borrowings, having used
proceeds from our public offering on Form SB-2 to retire debt.
OTHER INCOME. Other income increased by $46,000, or 94%, from income of $48,000
to income of $94,000 in the three months ended March 31, 2004 from the three
months ended March 31, 2003, primarily as the result of income derived from the
exchange of Euros.
INCOME TAXES. As the result of our profit in the three months ended March 31,
2004, we recorded an income tax provision of $68,200 for the period, while the
income tax provisions were $74,000 for the three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, and December 31, 2003, our working capital and current ratio
was approximately $6.8 million and $6.5 million and 3.27 to 1 and 2.83 to 1,
respectively. Our working capital and current ratio have benefited primarily
from the net proceeds we received from the public sale of our common stock
during March 2003.
Cash flows used by operating activities were $406,000 in the three months ended
March 31, 2004 compared to $112,000 in the three months ended March 31, 2003.
The cash flows used by continuing operating activities in the three months ended
March 31, 2004 increased primarily due to the increase in accounts receivable
and a decrease in accounts payable and other liabilities.
Cash flows used in investing activities were $125,000 in the three months ended
March 31, 2004, compared to $58,000 in the three months ended March 31, 2003.
The increase in cash used in investing activities in the three months ended
March 31, 2004, was entirely attributable to increased capital expenditures in
connection with improvements being made to our factory.
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance as of March 31, 2004 of $0, 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 March 31, 2004, the interest rate was the
one-month Libor rate of 1.04% plus 2.50% (3.59%). This revolving line of credit
has a June 30, 2004 expiration date, and we plan to renew it for up to one year
to expire June 30, 2005. 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). On
February 6, 2004, the Bank issued an irrevocable standby letter of credit in the
amount of $1.5 million for the benefit of a non-affiliated foreign supplier. The
letter of credit has an expiration date of June 30, 2005, and guarantees the
payment of moneys owed the supplier for materials purchased from them by the
Company. At March 31, 2004, the Company's accounts payable to this supplier were
approximately $609,000. 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
and the obligations under the letter of credit.
The Bank agreement also contains various covenants that the Company is required
to maintain, and as of March 31, 2004, the Company was in compliance with these
covenants.
Cash flows used by financing activities were $112,000, primarily for the
repayment of affiliate debt, for the three months ended March 31, 2004 compared
to cash flows provided by financing activities of $3,252,000 for the same period
in 2003, resulting largely from the $5,917,000 in net proceeds received for the
public sale of our common stock to an affiliate.
On April 18, 2003, Color Imaging established a stock repurchase program under
which Color Imaging's common stock, with an aggregate market value up to the
lesser of $1 million or 1 million shares, may be acquired in the open market or
through private or other transactions. Through April 21, 2004, Color Imaging has
repurchased 62,000 shares of our common stock for approximately $42,000, or for
an average price of $0.678 per share.
We believe that existing cash balances, cash expected to be generated by
operating activities, and funds available under our credit facility will be, in
aggregate, sufficient to finance our operating and investing activities for at
least the next 12 months, which will include expenditures not to exceed
approximately $450,000 for manufacturing, $150,000 for research and development
equipment, $175,000 potentially for computer software upgrades to accommodate
electronic data interchange, the repurchase of our stock under the stock
repurchase program of up to the lesser of $1,000,000 or 1,000,000 shares of our
common stock and any advances made by our bank on our behalf under our
off-balance sheet arrangement of $1.5 million for a standby letter of credit
issued to a non-affiliated foreign supplier.
14
FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS
RISK FACTORS
RISKS RELATED TO OUR BUSINESS:
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CUSTOMERS.
For the quarter ended March 31, 2004, two customers accounted for approximately
35% of our net sales. We do not have contracts with these customers and all of
the sales to them are made through purchase orders. While our products typically
go through the customer's required qualification process, which we believe gives
us an advantage over other suppliers, this does not guarantee that the customer
will continue to purchase from us. The loss of either of these customers,
including through an acquisition, other business combination or the loss by them
of business from their customers could have a substantial and adverse effect on
our business. We have in the past, and may in the future, lose one or more major
customers or substantial portions of our business with one or more of our major
customers. If we do not sell products or services to customers in the quantities
anticipated, or if a major customer reduces or terminates its relationship with
us, market perception of our products and technology, growth prospects, and
financial condition and results of operation could be harmed.
OUR RELIANCE ON SALES TO A FEW MAJOR CUSTOMERS AND GRANTING CREDIT TO THOSE
CUSTOMERS PLACES US AT FINANCIAL RISK.
As of March 31, 2004, receivables from two customers comprised 29% 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 35% OF OUR BUSINESS DEPENDS ON A FOREIGN SUPPLIER APPROVED BY TWO
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 35% of our sales for the quarter ended March 31, 2004 were derived
from products limited to a specific foreign supplier. For the quarter ended
March 31, 2004, we purchased 33% 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
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.
15
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.
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 43% and 41% of net sales in the
quarters ended March 31, 2004 and 2003, respectively. We expect that shipments
to international customers will continue to account for a material portion of
net sales. During the quarter ended March 31, 2004, our sales were made to
customers outside the United States as follows:
o Europe (including Eastern Europe) - 22%
o Mexico - 14%
o Asia/Southeast Asia - 5%
o Other - 2%
16
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 sales 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 gains of approximately $55,000
and $37,000 during the quarters ended March 31, 2004 and 2003, 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
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 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 confidentiality agreements
with executive officers and certain other key individuals, we have few
employment agreements and they 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.
17
WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUE AND BE UNABLE TO
MAINTAIN OUR CLIENT RELATIONSHIPS IF WE LOSE OUR PRODUCTION CAPACITY.
We manufacture all of the products we sell in our existing facility in Norcross,
Georgia. If our existing production facility becomes incapable of manufacturing
products for any reason, we may be unable to meet production requirements, we
may lose revenue and we may not be able to maintain our relationships with our
customers. Without our existing production facility, we would have no other
means of manufacturing products until we were able to restore the manufacturing
capability at our facility or develop an alternative manufacturing facility.
Although we carry business interruption insurance to cover lost revenue and
profits in an amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact on
relations with our existing customers resulting from our inability to produce
products for them.
OUR ACQUISITION STRATEGY MAY PROVE UNSUCCESSFUL.
We intend to pursue acquisitions of businesses or technologies that management
believes complement or expand the existing business. Acquisitions of this type
involve a number of risks, including the possibility that the operations of any
businesses that are acquired will be unprofitable or that management attention
will be diverted from the day-to-day operation of the existing business. An
unsuccessful acquisition could reduce profit margins or otherwise harm our
financial condition, by, for example, impairing liquidity and causing
non-compliance with lending institution's financial covenants. In addition, any
acquisition could result in a dilutive issuance of equity securities, the
incurrence of debt or the loss of key employees. Certain benefits of any
acquisition may depend on the taking of one-time or recurring accounting charges
that may be material. We cannot predict whether any acquisition undertaken by us
will be successfully completed or, if one or more acquisitions are completed,
whether the acquired assets will generate sufficient revenue to offset the
associated costs or other adverse effects.
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.
18
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
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.
19
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 30% 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 April 21, 2004, we had issued and outstanding 12,713,005 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
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.
20
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.
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.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the risk of loss to future earnings, to fair values or to future
cash flows that may result from changes in the price of a financial instrument.
The value of a financial instrument may change as a result of changes in
interest rates, exchange rates, commodity prices, equity prices and other market
changes. Market risk is attributed to all market sensitive financial
instruments, including long-term debt.
We do not hold any investments or assets outside of the United States. However,
we are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates.
We estimate that about 80% of our transactions are denominated in U.S. dollars,
excepting those sales in Euros. 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 approximately $55,000 in the quarter ended March
31, 2004, and we incurred a net foreign currency transaction gain of $149,000
and $2,858 in the years ended December 31, 2003 and 2002, respectively. Our
pricing for our products sold in Euros is currently at the rate of 0.96 Euros
relative to the U.S. dollar. A 10% change in the value of the Euro from .96
Euros relative to the United States dollar would cause approximately an $8,000
foreign currency translation adjustment in an average month, a type of other
comprehensive income (loss), which would be a direct adjustment to stockholders'
equity.
Our revolving line of credit bears interest based on interest rates tied to the
prime rate or LIBOR rate, either of which may fluctuate over time based on
economic conditions. As a result, we are subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market rates fluctuate and we are in a borrowing mode. At March 31,
2004, there were no amounts outstanding under the line of credit agreement and,
accordingly, a sustained increase in the reference rate of 1% would not cause
our annual interest expense to change.
Color Imaging's investment policy requires investments with high credit quality
issuers and or over night repurchase agreements with our bank. Investments made
by Color Imaging will principally consist of U.S. government and government
agency obligations and investment-grade, interest-bearing corporate debt
securities with varying maturity dates of five years or less, or the overnight
purchase of securities held in our bank's investment portfolio. Because of the
credit criteria of 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. Color Imaging had $1.1 million
invested in short-term securities available-for-sale through a fund at March 31,
2004, and we received dividends of approximately $11,000 while recording a net
asset value decrease of approximately $1,100 for the quarter ended March 31,
2004.
Management believes that a reasonable change in raw material prices could have a
material impact on future earnings or cash flows, because we generally are not
able to offset increases to our costs with higher prices for our products.
ITEM 4. CONTROLS AND PROCEDURES
a) On April 27, 2004, our Chief Executive Officer and Chief Financial Officer
participated in a meeting during which there was an evaluation of our disclosure
controls and procedures as of March 31, 2004. Based on such evaluation, they
believe such controls and procedures are effective.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, 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.
Based upon the Company's Disclosure Controls evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, subject to
the limitations noted above, the Company's Disclosure Controls are effective to
give reasonable assurance that the information required to be disclosed by the
Company in its periodic reports is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure and is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
22
b) Our Chief Executive Officer and Chief Financial Officer are involved in
ongoing evaluations of internal controls. On April 27, 2004, in anticipation of
the filing of this Form 10-Q, they reviewed our internal controls and have
determined, based on such review, that, there have been no significant changes
in our internal controls or in other factors that would significantly affect our
internal controls during the quarter ended March 31, 2004.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUERS PURCHASE OF EQUITY
SECURITIES
On January 23, 2003, the Company's registration statement on Form SB-2,
registering up to 7 million shares of the Company's common stock, was declared
effective (Registration Statement No. 333-76090), and the offering was commenced
by the Company's officers and directors. On March 13, 2003, the Company
completed the public sale of 4,500,000 shares of the Company's common stock at a
price of $1.35 per share, whereby the Company received $6,075,000 in gross
proceeds from an affiliate, and the Company terminated the offering before the
sale of all 7 million of registered shares. The net proceeds received by the
Company, after expenses of $174,416, 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 March 31, 2004, 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) $ (884,958) $ 0
To retire debt (1) . . . . . . . . . . . . $ 350,000 $ (324,301) $ (25,699) $ 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 $ (41,940) $ 1,000,000 $ 958,060
For other general corporate purposes
including working capital . . . . . . . . $ 2,175,000 $(1,445,000) $ (231,226) $ 498,774
----------- ------------ -----------
Total: $ 6,075,000 $(3,436,940) $ 2,638,060
Pending application:
-------------------
Short-term investments . . . . . . . . . . $ 1,138,060
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 2003 through March 31, 2004, under the repurchase program the
Company has repurchased 62,000 shares of our common stock on the open
market at an average price of $0.678. Approximately $958,000 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
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.
24
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
There were no private purchases by the Company of its equity securities during
the quarter ended March 31, 2004.
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
2003 through March 31, 2004, under the repurchase program the Company has
repurchased 62,000 shares of our common stock on the open market at an average
price of $0.68. Approximately $958,000 remains available for future common stock
repurchases.
--------------------------------------------------------------------------------------------------
ISSUER (MARKET) PURCHASE OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------------
Maximum Number
Total Number of (or Approximate
Shares Purchased Dollar Value) of
Total Number Average Price as Part of Publicly Shares that May Be
of Shares Paid per Publicly Announced Purchased Under the
Period Purchased Share ($) Plans or Programs Plans or Programs
-------------------- ---------------- --------------- -------------------- -----------------------
During 2003 44,500 0.65 44,500
During 2004
--------------------
January 7,000 0.72 7,000
February 3,500 0.76 3,500
March 7,000 0.77 7,000
---------------- --------------- -------------------- -----------------------
Total 2004 17,500 0.75 44,500 1,000,000
---------------- --------------- -------------------- -----------------------
Total 62,000 0.68 62,000 1,000,000
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
25
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
No. Description
--------- --------------
2.1 Merger Agreement and Plan of Reorganization dated May 16, 2000,
by and between Advatex Associates, Inc., Logical Imaging
Solutions Acquisition Corp., Color Imaging Acquisition Corp.,
Logical Imaging Solutions, Inc., and Color Image, Inc.,
incorporated by reference to the Registrant's Form 8-K filed on
July 17, 2000.
2.2 Amendment No. 1 to the Merger Agreement and Plan of
Reorganization dated June 15, 2000, incorporated by reference to
the Registrant's Form 8-K filed on July 17, 2000.
2.3 Amendment No. 2 to the Merger Agreement and Plan of
Reorganization dated June 26, 2000, incorporated by reference to
the Registrant's Form 8-K filed on July 17, 2000.
2.4(1) Share Exchange Agreement dated as of September 11, 2002 between
Color Imaging, Inc., Logical Imaging Solutions, Inc., Digital
Color Print, Inc., and the shareholders of Digital Color Print,
Inc., incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K filed September 26, 2002.
2.5 Amendment No. 1 to Share Exchange Agreement dated as of September
20, 2002 between Color Imaging, Inc., Logical Imaging Solutions,
Inc., Digital Color Print, Inc., and the shareholders of Digital
Color Print, Inc., incorporated by reference to Exhibit 2.2 to
the Registrant's Form 8-K filed September 26, 2002.
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 to the Registration statement on Form SB-2 filed July
15, 2002.
3.2 Bylaws, incorporated by reference to the Registrant's Form 10-QSB
for the quarter ended March 31, 2002. 4.1 Stock Purchase
Agreement between the Company and Wall Street Consulting Corp.
dated October 30, 2001, incorporated by reference to Exhibit 4.1
to the Registration statement on Form SB-2 filed May 31, 2002.
4.2 Promissory Note of Wall Street Consulting Corp. dated October 30,
2001, incorporated by reference to Exhibit 4.2 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.3 Form of Warrant issued to Selling Stockholders, incorporated by
reference to Exhibit 4.3 to the Registration statement on Form
SB-2 filed November 28, 2001.
4.4 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.
Exhibit
No. Description
--------- ------------
10.1+* Employment Agreement between Color Imaging and Patrick J. Wilson
dated April 1, 2004.
10.2+* Amendment to Employment Agreement between Color Imaging and
Morris E. Van Asperen dated April 23, 2004.
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.
(b) REPORTS ON FORM 8-K
None.
27
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COLOR IMAGING, INC.
/S/ JUI-KUNG WANG
--------------------------------------
April 27, 2004 Jui-Kung Wang
Chief Executive Officer
/S/ MORRIS E. VAN ASPEREN
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Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
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