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COLOR IMAGING, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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COLOR IMAGING, INC.
4350 PEACHTREE INDUSTRIAL BOULEVARD
SUITE 100
NORCROSS, GEORGIA 30071
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 19, 2005
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Color Imaging,
Inc. ("Color Imaging" or the "Company") will be held at 10:00 a.m., local time,
on September 19, 2005, at the offices of Color Imaging, 3450 Peachtree
Industrial Boulevard, Suite 100 , Norcross, Georgia 30071, for the following
purposes:
1. To approve a series of amendments to Color Imaging's Certificate of
Incorporation to effect a reverse stock split ("Reverse Stock Split") of
our common stock at one of the ratios specified below and the repurchase of
the resulting fractional shares held by each stockholder with less than one
share after the Reverse Stock Split, followed immediately by an amendment
of Color Imaging's Certificate of Incorporation to effect a forward stock
split of Color Imaging's common shares upon the inverse of the ratio used
in the Reverse Stock Split was effected (collectively the "Stock Splits").
As a result of the Stock Splits, (a) each stockholder owning less than one
share after the Reverse Stock Split will receive $1.10 in cash, without
interest, for each Color Imaging common share owned by such stockholder
immediately prior to the Stock Splits and will no longer be a stockholder
of Color Imaging; and (b) each stockholder owning more than the number of
common shares upon which the Reverse Stock Split was effected immediately
before the Stock Splits will receive common shares equal to the number of
common shares they held prior to the Stock Splits. The Stock Splits are
proposed for the purpose of taking Color Imaging private and terminating
its reporting obligations under the Securities Exchange Act of 1934, as
amended (the "Stock Splits Proposal").
A. To effect a one-for-1500 reverse stock split of the outstanding shares
of Color Imaging's common stock.
B. To effect a one-for-2500 reverse stock split of the outstanding shares
of Color Imaging's common stock.
C. To effect a one-for-5000 reverse stock split of the outstanding shares
of Color Imaging's common stock.
2. To elect seven directors to serve until the next Annual Meeting of
Stockholders or until their respective successors are elected and
qualified.
3. To ratify the selection of Lazar Levine & Felix LLP as Color Imaging's
independent accountants for the year ending December 31, 2005.
4. To transact such other business as may properly come before the annual
meeting or any adjournment thereof.
After careful consideration, the Board of Directors of Color Imaging, acting in
part upon the unanimous recommendation of the Special Committee, unanimously
determined that the Stock Splits Proposal is advisable, fair to and in the best
interests of the Color Imaging stockholders, accordingly, recommends that you
vote "FOR" adoption of the Stock Splits Proposal. The board also recommends that
you vote "FOR" the other proposals listed above.
The Board of Directors has fixed the close of business on July 29, 2005, as the
record date (the "Record Date") for the determination of stockholders entitled
to notice of and to vote at the annual meeting and all adjourned meetings
thereof.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ MORRIS E. VAN ASPEREN
Morris E. Van Asperen
Secretary
Dated: August 22, 2005
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE RETURN
ENVELOPE AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING. IF YOU LATER DESIRE TO REVOKE YOUR PROXY FOR ANY REASON, YOU MAY DO SO
IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THIS TRANSACTION, PASSED UPON THE MERITS OR FAIRNESS OF THIS TRANSACTION, OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Summary Term Sheet.............................................................................1
Color Imaging Background.......................................................................1
Stock Splits Proposal..........................................................................1
Purpose of and Reasons for the Stock Splits....................................................2
Fairness of the Stock Splits...................................................................3
Position of the Wangs as to Fairness of the Transaction........................................4
Voting Information.............................................................................4
Certain Federal Income Tax Consequences........................................................4
Unavailability of Appraisal or Dissenters' Rights..............................................4
Escheat Laws...................................................................................5
Cautionary Notice Regarding Forward-Looking Statements.........................................5
SPECIAL FACTORS................................................................................6
Purpose of the Stock Splits....................................................................6
What is the Reverse Stock Split?...............................................................6
What is the Forward Stock Split................................................................6
What is the Pink Sheets Electronic Quotation Service?..........................................6
Reasons for the Stock Splits...................................................................7
Did the Board consider any disadvantages of going private?.....................................9
What does "going private" mean?...............................................................11
Why is the Board seeking stockholder approval for three different Reverse Split Ratios?.......11
How will the Board Select the Reverse Split Ratio?............................................11
Is there a possibility that the Board will not complete the Stock Splits even if
the stockholders approve the proposal?....................................................12
What will I receive in the Stock Splits if the proposal is approved and implemented?..........13
What if I hold shares in "street name"?.......................................................13
May I buy additional shares in order to remain a stockholder of Color Imaging?................13
How did the Board determine the fairness of the reverse stock split?..........................14
What are the interests of affiliates of Color Imaging in the reverse stock split?.............14
Will I have appraisal or dissenters' rights?..................................................14
What are the tax implications of the Stock Splits?............................................14
What are the approval requirements for the Stock Splits Proposal?.............................15
Effects of the Stock Splits...................................................................15
Alternatives to the Stock Splits..............................................................18
Background of the Stock Splits................................................................19
Fairness of the Stock Splits..................................................................26
Other Factors.................................................................................29
Conclusion....................................................................................30
Position of the Wangs as to Fairness of the Transaction.......................................31
SPECIAL FACTORS - OPINION OF CBIZ VALUATION GROUP, LLC........................................31
Purpose and Content of the Fairness Opinion...................................................33
Review of Color Imaging Current and Historical Market Performance.............................35
Going Concern Fair Value Estimates............................................................36
Discounted Cash Flow Method...................................................................37
Discounted Cash Flow Analysis - Stand-Alone Basis.............................................39
Discounted Cash Flow Analysis - Reverse Stock Split Basis.....................................40
Publicly-traded Company Analysis..............................................................40
Publicly-Traded Company Analysis - Stand-Alone Basis..........................................41
Publicly-Traded Company Analysis - Reverse Stock Split Basis..................................42
Merger and Acquisition Analysis...............................................................42
Merger and Acquisition Analysis - Stand-Alone Basis...........................................43
Acquisition Method - Reverse Stock Split Basis................................................43
Liquidation Analysis..........................................................................43
Premium Analysis..............................................................................44
Other Considerations..........................................................................44
Conclusion....................................................................................44
Engagement of CBIZ Valuation Group, LLC.......................................................45
MEETING AND VOTING INFORMATION................................................................45
Time and Place................................................................................45
Revoking Your Proxy...........................................................................45
Record Date...................................................................................46
Quorum and Required Vote......................................................................46
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Solicitation and Costs........................................................................46
PROPOSAL NO. 1 - STOCK SPLITS PROPOSAL........................................................47
Summary and Structure.........................................................................47
Recommendation of the Board...................................................................49
Potential Disadvantages of the Stock Splits to Stockholders...................................49
Share Certificates............................................................................49
Material Federal Income Tax Consequences......................................................50
Unavailability of Appraisal or Dissenters' Rights.............................................51
Reservation of Rights.........................................................................51
Escheat Laws..................................................................................51
Regulatory Approvals..........................................................................52
PROPOSAL 1-A -- APPROVAL OF AMENDMENT OF COLOR IMAGING'S AMENDED AND RESTATED................ 52
PROPOSAL 1-B -- APPROVAL OF AMENDMENT OF COLOR IMAGING'S CERTIFICATE OF INCORPORATION TO
EFFECT A ONE-FOR-2500 REVERSE STOCK SPLIT.................................................52
PROPOSAL 1-C -- APPROVAL OF AMENDMENT OF COLOR IMAGING'S CERTIFICATE OF INCORPORATION TO
EFFECT A ONE-FOR-5000 REVERSE STOCK SPLIT.................................................53
INFORMATION ABOUT COLOR IMAGING...............................................................53
Interest of Certain Persons in Matters to be Acted Upon.......................................53
Market Price and Dividend Information.........................................................54
Common Share Market Purchase Information......................................................56
FINANCIAL INFORMATION.........................................................................57
Summary Historical Financial Information......................................................57
Certain Financial Effects of the Stock Splits.................................................58
Pro Forma Financial Information...............................................................58
PRO FORMA CONDENSED BALANCE SHEET JUNE 30, 2005...............................................59
PRO FORMA CONDENSED BALANCE SHEET DECEMBER 31, 2004...........................................60
PRO FORMA CONDENSED INCOME STATEMENT SIX MONTHS ENDED JUNE 30, 2005...........................61
PRO FORMA CONDENSED INCOME STATEMENT YEAR ENDED DECEMBER 31, 2004.............................62
PROPOSAL NO. 2 - ELECTION OF DIRECTORS........................................................63
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD..........................64
Director Nominations..........................................................................64
Stockholder Communications....................................................................65
Director Attendance at Stockholder Meetings...................................................66
Meetings of the Board of Directors............................................................66
Director Compensation.........................................................................66
Audit Committee...............................................................................66
Nominating and Compensation Committees........................................................66
REPORT OF AUDIT COMMITTEE.....................................................................66
Fees Paid to Color Imaging's Independent Auditors.............................................67
Audit Committee's Pre-Approval Policies and Procedures........................................68
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION....................................69
Overview......................................................................................69
Base Salary...................................................................................69
Cash Based Incentive Plans....................................................................69
Stock Based Incentive Plans...................................................................70
Chief Executive Officer Compensation..........................................................70
EXECUTIVE COMPENSATION........................................................................71
Option Grants Table...........................................................................72
Option Exercises and Year-End Value Table.....................................................72
Employment Agreements.........................................................................72
Compensation Committee Interlocks and Insider Participation...................................73
PERFORMANCE GRAPH.............................................................................73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................75
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................76
Section 16(a) Beneficial Ownership Reporting Compliance.......................................77
PROPOSAL NO. 3 - RATIFICATION OF INDEPENDENT ACCOUNTANTS......................................77
OTHER BUSINESS................................................................................77
STOCKHOLDER PROPOSALS.........................................................................78
AVAILABLE INFORMATION.........................................................................78
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................................78
Annual Report on Form 10-K....................................................................79
EXHIBIT A - FAIRNESS OPINION.................................................................A-1
EXHIBIT B - FORM OF REVERSE STOCK SPLIT......................................................B-1
EXHIBIT C - FORM OF FORWARD STOCK SPLIT......................................................C-1
EXHIBIT D - FORM OF TRANSMITTAL LETTER.......................................................D-1
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SUMMARY TERM SHEET
The following is a summary of the material terms of the Stock Splits upon which
Color Imaging's stockholders will vote at the Annual Meeting. While this summary
describes what we believe are the most material terms and conditions of the
Stock Splits, this Proxy Statement contains a more detailed description of such
terms and conditions. We urge you to carefully review, in their entirety, this
Proxy Statement, the attached Exhibits and the documents incorporated by
reference before voting.
COLOR IMAGING BACKGROUND
Color Imaging is a Delaware corporation. Color Imaging's principal offices are
located at 4350 Peachtree Industrial Blvd, Suite 100, Norcross, GA 30071 and
Color Imaging's phone number at that address is (770) 840-1090.
Please see the section of this Proxy Statement entitled "Information About Color
Imaging" for a more detailed discussion.
STOCK SPLITS PROPOSAL
Our stockholders are now being asked to vote upon the proposed amendments of our
Certificate of Incorporation to effect the reverse stock split in which each
1500, 2500 or 5000 outstanding shares of our common stock will be combined into
one share of our common stock. Upon receiving stockholder approval, the Board
will have the sole discretion pursuant to Section 242(c) of the Delaware General
Corporation Law, to elect, as it determines to be in the best interests of Color
Imaging and its stockholders, whether or not to effect a reverse stock split,
and if so, whether to effect a one-for-1500, one-for-2500, or one-for-5000
reverse stock split. Our Board believes that stockholder approval of the
proposed amendments granting the Board this discretion, rather than approval of
only one specified reverse stock split ratio, provides the Board with maximum
flexibility to react to then-current conditions and the factors listed below
and, therefore, is in the best interests of Color Imaging and its stockholders.
The Stock Splits will consist of the following steps:
As used throughout this Proxy Statement, the term "Stock Splits" refers to a
transaction consisting of the following steps:
o The Stock Splits will take effect on the date (the "Effective Date")
that the Delaware Secretary of State accepts for filing certificates
of amendment to our Certificate of Incorporation (one amendment
effecting the reverse stock split, the other effecting the forward
stock split).
o On the Effective Date, the Company will first effect a reverse stock
split of its common shares, which will be either a 1-for-1500,
1-for-2500 or 1-for-5000 reverse stock split, depending on the
approval of the stockholders and the final determination of the Board
of Directors as to the appropriate reverse stock split ratio ("Reverse
Split Ratio").
o Each holder of less than one whole share of common stock after the
operation of the reverse stock split will receive cash instead of a
fractional share. The Company will pay each of these holders an amount
in cash (the "Cash Out Price") equal to $1.10 per share held by such
holder immediately before the reverse stock split.
o On the Effective Date, following the completion of the reverse stock
split, the Company will effect a forward stock split of the common
shares, which will be either a 1500-for-1, 2500-for-1 or 5000-for-1
forward stock split, depending on the final determination of the Board
of Directors as to the stock split ratio. The Board will use a forward
ratio which is the inverse of the Reverse Split Ratio. Each holder of
one or more shares immediately after the reverse stock split will
participate in the forward stock split, which will result in such
holder holding the same number of shares after the forward stock split
as was held by such holder immediately before the reverse stock split.
Please see the sections of this Proxy Statement entitled "Special Factors -
Effects of the Stock Splits," "Special Factors - How Will the Board Select the
Reverse Split Ratio?" and "Proposal No. 1 - Stock Splits Proposal - Summary and
Structure" for a more detailed discussion of the Stock Splits.
The Board of Directors retains the discretion to abandon the stock splits
transaction even if the stockholders approve it. The Board currently expects
that the costs will remain within the acceptable range and plans to complete the
transaction, if it is approved by the stockholders, which is expected given the
insiders and their affiliates hold a controlling interest in the Company.
However, after the annual meeting of the stockholders the Board will meet and
consider whether or not the going private transaction remains in the best
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interest of Color Imaging and its stockholders. The Board desires to complete
the transaction for the lowest cost possible, consistent with reducing the
number of holders, both of record and beneficial holders, to approximately 200.
The Company is now, in the judgment of the Board, dependent on new products that
still need to be perfected or developed, and the Board is cognizant of the need
to maintain a strong financial condition while the Company is in this
transitional period. The Board does not want to significantly lower the
Company's liquidity or incur debt in order to complete the transaction. A number
of factors or situations could cause the Board to decide to abandon the
transaction, even if approved by the stockholders. These factors or situations
include:
(1) Both the desired total cost of the transaction and the reduced number
of holders needs to be achieved, or the Board may decide to abandon the
transaction. Should the Company not be able to sufficiently reduce the number of
holders, within a total dollar expenditure amount acceptable to the Board, to a
level that reasonably assures that the Company would not revert to a publicly
reporting entity in the foreseeable future after the transaction is completed,
then the Board would likely abandon the transaction.
(2) It is likely that the Board will also abandon the transaction should
the overall expenditure necessary to complete it approach $1.0 million.
(3) Even if the overall costs of the transaction is within the budgetary
guideline set by the Board, the Board may still decide to abandon the
transaction should the then economic conditions or the financial condition of
the Company, or their outlook, be such that in the judgment of the Board it is
no longer advisable to use its cash resources to go private.
(4) If, after the completion of the transaction, the Company's financial
condition was projected to violate, or approach a violation of, its covenants
with its bank, the Board would likely decide not to complete the transaction
whether or not the bank were to agree waive such violation or be agreeable to
loosen the covenants.
The Board's decision is subject to continuing favorable business conditions, and
other factors. Factors that the Board will consider in making the final
determination are discussed at "Special Factors - Is there a possibility that
the Board will not complete the Stock Splits even if the stockholders approve
the proposal?"
PURPOSE OF AND REASONS FOR THE STOCK SPLITS
o The principal purpose of the Stock Splits is to acquire for cash
common shares from those holders of fewer than either 1500, 2500 or
5000 common shares.
o The Stock Splits are intended to reduce the number of holders of
record of the common shares to substantially below 300 and thereby
enable the Company to terminate the registration of its common shares
under Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") with the reasonable expectation of remaining
below 300 stockholders. The Company's termination of the registration
of its common shares under the Exchange Act does not require the
approval of the holders of common shares and will not be voted upon at
the meeting. Upon such termination, the Company's duty to file
periodic reports with the Commission will be suspended, and the
Company will no longer be classified as a public reporting company.
Notwithstanding such termination, the Company will continue to be
subject to the general anti-fraud provisions of federal and applicable
state securities laws and to the laws of the State of Delaware. Please
see the section of this Proxy Statement entitled "Special
Factors--Effects of the Stock Splits" for a more detailed discussion
of the foregoing.
o The following are the principal reasons the Board considered in
pursuing the Stock Splits:
- the cost savings and future costs avoided of approximately
$115,000 and $45,000 per year, respectively, that the Company
expects to realize in the future as a result of the suspension of
its periodic reporting obligations under the Exchange Act due to
the deregistration of the common shares under the Exchange Act,
including the cost savings resulting from no longer being subject
to the public company provisions of the Sarbanes-Oxley Act of
2002, as amended (the "Sarbanes-Oxley Act");
- the Sarbanes-Oxley Act of 2002 and related regulations have
increased the costs of remaining a public company, and have the
effect of increasing the burdens and potential liabilities of
being a public reporting company, such as increasing audit fees,
attorneys' fees, and insurance premiums as the potential
liability of officers and directors is increased;
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- since Color Imaging stock is not listed on a major stock exchange
or interdealer quotation system, such as the NYSE, AMEX, or
NASDAQ Stock Market, Color Imaging stockholders are not currently
realizing many of the principal benefits of public ownership;
- in light of Color Imaging's current size and resources, and the
lack of a robust trading market in its common stock, the Board of
Directors does not believe that these costs are justified, and
believes that it is in Color Imaging's best interests to
eliminate the financial and administrative burdens associated
with being and remaining a public company;
- the additional savings in terms of management's and employees'
time that will no longer be spent preparing the periodic reports
required of public companies under the Exchange Act and managing
stockholder relations and communications;
- the reduced premiums that may result for the Company's directors'
and officers' insurance policies as a result of the Company no
longer being a public reporting company;
- the decrease in expenses resulting from no longer being required
to service holders with small positions in our common shares;
- the ability of the Company to control the dissemination of
competitively sensitive business information, which is currently
disclosed in the Company's periodic reports and accordingly
available to the Company's competitors, vendors, customers and
other interested parties, potentially to the Company's detriment;
- the ability of the Company to gain greater operational
flexibility by being able to focus on long-term growth without an
undue emphasis on current earnings and other short-term metrics;
- the belief of the Board that the Stock Splits constitute the most
expeditious, efficient, cost-effective and fairest method to
convert the Company from a public reporting company to a
privately-held, non-reporting company in comparison to other
alternatives considered by the Board;
- the fact that the Company has not realized many of the benefits
normally presumed to result from being a public reporting company
due to the relatively limited liquidity of the common shares such
as enhanced stockholder value, enhanced corporate image, access
to capital markets, active trading market, analysts' reports,
ability to use company stock to attract, retain and incentivize
employees, and ability to use company stock as currency for
acquisitions; and
- allowing holders of fewer than either 1500, 2500 or 5000 common
shares, as the case may be, to liquidate their common shares for
cash at a fair market value, without the payment of brokerage
commissions or other transaction fees.
FAIRNESS OF THE STOCK SPLITS
The Board has set $1.10 per pre-split Common Share (the "Repurchase Price") as
the cash consideration to be paid by Color Imaging in lieu of issuing fractional
Common Shares (i.e., less than one whole Common Share) in connection with the
Stock Splits. The Board made this determination in good faith and received a
fairness opinion (the "Fairness Opinion") prepared by CBIZ Valuation Group, LLC
("CVG"), an independent financial advisor. The Board also considered other
factors the Board deemed relevant, as described in greater detail in this Proxy
Statement.
The Fairness Opinion was delivered to the Board to assist the Board in
establishing the terms and conditions of the Stock Splits. The Fairness Opinion
states that based upon and subject to the factors and assumptions set forth
therein as of May 2, 2005, the Repurchase Price is fair, from a financial point
of view, to Color Imaging's stockholders who would not retain their interest in
Color Imaging, and those who would retain their interest, after the transaction,
in each case excluding executive officers and directors of the Company and their
affiliates.
The full text of the Fairness Opinion, dated May 2, 2005, is attached to this
Proxy Statement as Exhibit A. We urge you to read the Fairness Opinion in its
entirety. CVG provided the Fairness Opinion for the information and assistance
of the Special Committee and the Board in connection with its consideration of
the Stock Splits. The Fairness Opinion is not a recommendation as to how you
should vote with respect to the Stock Splits.
The Board believes that the Stock Splits are in Color Imaging's and its
stockholders best interests and are substantively and procedurally fair to both
the affiliated and unaffiliated holders of the Common Shares, including both
those holders whose Common Shares will be completely cashed out pursuant to the
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Stock Splits ("Cashed Out Holders") and those who will continue to hold Common
Shares after the Stock Splits ("Continuing Holders").
The Board has reviewed and considered the analyses and conclusions of CVG
contained in the Fairness Opinion, received the recommendation of the Special
Committee, and unanimously approved the Stock Splits.
Please see the sections of this Proxy Statement entitled "Special Factors -
Fairness of the Stock Splits," "Opinion of CBIZ Valuation Group, LLC," "Proposal
No. 1 - Stock Splits Proposal - Background of the Stock Splits" and "Proposal
No. 1 - Stock Splits Proposal - Recommendation of the Board" for a more detailed
discussion of the foregoing.
POSITION OF THE WANGS AS TO FAIRNESS OF THE TRANSACTION
The rules of the SEC require Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and
Jui-Chi Wang (collectively the "Wangs") to express their belief as to the
fairness of the Stock Splits Proposal to our stockholders. The Wangs are listed
as filing persons in Color Imaging's Schedule 13E-3 filed in connection with the
going private transaction. Each of the Wangs is a Director of Color Imaging.
Biographical information for them is included at "Proposal No. 2- Election of
Directors." The Wangs are brothers. As a group, they control Color Imaging by
virtue of their collective beneficial ownership of approximately 63% of the
voting stock, and their position as Directors of the Company. Their primary
business address is that of the Company.
The Wangs were not part of, and did not participate in the deliberations of, the
Special Committee. Based on their belief regarding the reasonableness of the
conclusions and analyses of the Special Committee and the Board of Directors,
the Wangs adopted the conclusions and analyses of the Special Committee and the
Board of Directors described above and believe that the $1.10 per share
consideration is fair to Color Imaging's stockholders owning fewer than 1500,
2500 or 5000 shares of our common stock and is fair, from a financial point of
view, to the other stockholders, including the unaffiliated stockholders. For a
discussion of the factors considered by the Wangs, see "Special Factors -
Position of the Wangs as to the Fairness of the Transaction."
VOTING INFORMATION
Approval of each of the Stock Split ratios requires the approval of a majority
of the outstanding Common Shares entitled to vote at the Annual Meeting. As of
the close of business on July 29, 2005 (the "Record Date"), there were
12,697,805 Common Shares outstanding and entitled to vote at the Annual Meeting,
of which 6,348,903 are required to approve the Stock Splits. Since the members
of the Board have indicated their intention to vote their shares for the
approval of such proposal, and such members hold or control a majority of the
votes that may be cast at the Annual Meeting, approval of the stock splits
proposal is assured.
Please see the section of the Proxy Statement entitled "Meeting and Voting
Information" for a more detailed discussion of the foregoing.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Color Imaging will not recognize any gain, loss or deduction for federal income
tax purposes as a result of the Stock Splits.
Color Imaging's stockholders will generally recognize a gain or loss for federal
income tax purposes equal to the difference between the amount of cash received
and the stockholder's tax basis in the Common Shares that are exchanged for the
repurchase price in lieu of issuing fractional shares.
Please see the section of this Proxy Statement entitled "Proposal No. 1 - Stock
Splits Proposal - Material Federal Income Tax Consequences" for a more detailed
discussion of the foregoing.
UNAVAILABILITY OF APPRAISAL OR DISSENTERS' RIGHTS
A holder of Common Shares does not have the right under Delaware law or Color
Imaging's Certificate of Incorporation or Code of Regulations (the
"Regulations") to demand the appraised value of such Common Shares or any other
dissenters' rights if the holder votes against the Stock Splits.
Please see the section of this Proxy Statement entitled "Proposal No. 1 - Stock
Splits Proposal - Unavailability of Appraisal or Dissenters' Rights" for a more
detailed discussion of the foregoing.
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ESCHEAT LAWS
All unclaimed cash amounts payable to stockholders in lieu of issuing fractional
shares will be subject to applicable state laws regarding abandoned property.
Please see the section of this Proxy Statement entitled "Proposal No. 1 - Stock
Splits Proposal - Escheat Laws" for a more detailed discussion of the foregoing.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
When used in this Proxy Statement the words or phrases "intend," "plan," "will
likely result," "are expected to," "will continue," "anticipate," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements." Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from results presently
anticipated or projected. Forward-looking statements in this report are not
based on historical facts, but rather reflect the current expectations of our
management concerning future results and events. It should be noted that the
protections provided by Section 27A of the Securities Act of 1933, and Section
21E of the Securities Exchange Act of 1934, do not apply to the discussions in
this Proxy Statement related to the "going private" transaction being submitted
to the stockholders at the annual meeting. We have attempted to qualify our
forward-looking statements with appropriate cautionary language to take
advantage of the judicially created doctrine of "bespeaks caution" and other
protections. Color Imaging cautions you not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Color Imaging
advises readers that Color Imaging's actual results may differ materially from
any opinions or statements expressed with respect to future periods in any
current statements in this Proxy Statement or in our other filings with the SEC.
Color Imaging does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Please see the section of this Proxy Statement entitled "Available Information."
5
SPECIAL FACTORS
PURPOSE OF THE STOCK SPLITS
The primary purpose of the Stock Splits is to terminate Color Imaging's status
as a public reporting company with the SEC. As a result of the reverse stock
split and the repurchase of the resulting fractional shares from holders of
fewer than 1500, 2500 or 5000 shares, depending upon which of the foregoing
ratios is used for the reverse stock split, Color Imaging expects to have fewer
than 150 holders of record of the Common Shares, which would enable Color
Imaging to terminate the registration of the Common Shares under the Exchange
Act. If the Stock Splits are completed, Color Imaging intends to file with the
SEC to terminate the registration of the Common Shares. Upon deregistration, the
Common Shares would no longer be quoted on the Nasdaq over the counter bulletin
board and trades in the Common Shares would only be possible through privately
negotiated transactions or provided there is support from market makers in the
Pink Sheets(R) Electronic Quotation Service, a centralized quotation service
described below.
The purpose of the forward stock split, which will occur immediately after the
reverse stock split and the repurchase of fractional shares resulting from the
reverse split, is to prevent the Common Shares from having an unusually high per
share value that would otherwise result from the reverse stock split, which
would tend to further decrease the liquidity of the Common Shares. Additionally,
those stockholders by virtue of their not holding shares in even multiples of
the reverse stock split ratio will have one or more whole shares and fractional
shares of Color Imaging. By effecting a forward stock split at the same ratio as
that of the reverse stock split, no stockholders will have any fractional shares
of Color Imaging's Common Stock.
WHAT IS THE REVERSE STOCK SPLIT?
We are proposing that our stockholders approve an amendment to Color Imaging's
Certificate of Incorporation to effect a reverse stock split of our common stock
using the Reverse Split Ratio selected by the Board from among the ratios
approved by the stockholders. As a result of the reverse stock split, each 1500,
2500 or 5000 shares of outstanding common stock would be converted and
reclassified into one share of common stock (depending upon which Reverse Split
Ratio is selected by the Board), thereby reducing the number of issued and
outstanding shares of common stock and the number of shares of common stock
issuable upon conversion of outstanding shares of common stock or upon exercise
of outstanding options and warrants to purchase common stock. Each stockholder
owning less than one whole share after the reverse stock split of our common
stock will have its shares converted into the right to receive a cash payment
equal to $1.10 per pre-reverse split share.
WHAT IS THE FORWARD STOCK SPLIT?
We are proposing that our stockholders approve an amendment to Color Imaging's
Certificate of Incorporation to effect a forward stock split of our common stock
using the inverse of the Reverse Split Ratio selected by the Board to effect the
reverse stock split. As a result of the reverse stock split, each 1500, 2500 or
5000 shares of outstanding common stock would be converted and reclassified into
one share of common stock (depending upon which Reverse Split Ratio is selected
by the Board), thereby increasing the number of issued and outstanding shares of
common stock and the number of shares of common stock issuable upon conversion
of outstanding shares of common stock or upon exercise of outstanding options
and warrants to purchase common stock. Each stockholder owning one or more
shares of our common stock after the reverse stock split has been effected will,
by virtue of the forward stock split at the same ratio as that used to effect
the reverse stock split, have the same number of Common Shares of Color
Imaging's Common Stock as the stockholder held prior to the reverse stock split.
WHAT IS THE PINK SHEETS ELECTRONIC QUOTATION SERVICE?
Pink Sheets(R) LLC is a privately owned company that operates the Pink Sheets
Electronic Quotation Service, an Internet-based, real-time quotation service for
OTC equities and bonds for market makers and brokers. Issuers are not required
to register securities with the Securities and Exchange Commission (SEC) under
the Securities Exchange Act of 1934, or be current in their reporting
requirements to be quoted on the Pink Sheets. Nor are issuers required to file
financial or other company information with the Pink Sheets. However, SEC Rule
15c2-11 requires brokers to have available current business and financial
information about an issuer if the broker will actively trade the securities of
that issuer. In addition, SEC Rule 10b-17 requires all issuers of publicly
traded securities, including Pink Sheets securities, to notify the NASD at least
10 calendar days prior to the record date of any dividend or other distribution,
stock split, reverse split, or rights or subscription offering. Whether our
shares are actually traded in the Pink Sheets depends entirely on the
participation of brokers making a market in our stock. Brokers may or may not
participate, and a Pink Sheets Market may and may not materialize or continue.
Without such brokers, we will not be quoted in the Pink Sheets. To that extent,
the availability of a market for our stock in the Pink Sheets is beyond our
control. More information regarding the Pink Sheets may be found on the web at
www.pinksheets.com.
6
REASONS FOR THE STOCK SPLITS
Reduced Costs and Expenses. We incur both direct and indirect costs to comply
with the filing and reporting requirements imposed on us as a public reporting
company. As described below, these costs include, among other things,
management's time spent preparing and reviewing our public filings and legal and
accounting fees associated with the preparation and review of such filings. Our
compliance costs have increased significantly with the adoption and
implementation of the Sarbanes-Oxley Act and related SEC and Nasdaq rules, and
we expect these costs to increase further in the future. For smaller publicly
traded companies, such as Color Imaging, those costs represent a larger portion
of our revenues than for larger public companies.
The Board believes that by deregistering the Common Shares and suspending Color
Imaging's periodic reporting obligations under the Exchange Act, we will realize
recurring annual cost savings of approximately $115,000 in fees and expenses
that we have historically incurred, including fees and expenses for compliance
with the Sarbanes-Oxley Act. Furthermore, fees for SOX 404 internal controls
compliance testing by our independent auditors are estimated to be about
$25,000, and those that Color Imaging was going to incur for internal audit
services from another were estimated to be $20,000 and those fees would have
been in addition to the $115,000 had compliance for non-accelerated filers not
been extended until December 31, 2006 by the SEC. These estimated historically
incurred fees and expenses and estimated costs avoided, are described in greater
detail below.
Estimated Cost Savings:
-----------------------
Legal fees $ 40,000
Printing and mailing costs $ 15,000
Audit fees (1) $ 50,000
Internal controls consulting fees (2) $ 10,000
---------
Total $115,000
=========
Estimated Costs Avoided:
Audit fees avoided for SOX 404 testing $ 25,000
Internal controls consulting fees $ 20,000
---------
Total $ 45,000
=========
----------------------
(1) The estimated savings are derived from the elimination of substantially all
of the auditor's quarterly review fees and expenses as well as from lower
annual audit fees.
(2) Excludes any internal personnel costs, since these costs are expected to
continue.
These estimated historical cost savings reflect, among other things: (i) a
reduction in audit and related fees; (ii) a reduction in legal fees related to
securities law compliance and compliance with Nasdaq requirements; (iii) the
elimination of filing costs and expenses associated with electronically filing
periodic reports and other documents (such as proxy statements) with the SEC on
its Edgar database; (iv) the lower printing and mailing costs attributable to
the reduction in the number of stockholders and the less complicated and
extensive disclosure required by our private status; (v) the cost savings due to
Color Imaging not being subject to the public company provisions of the
Sarbanes-Oxley Act; and (vi) the savings in fees charged by American Stock
Transfer & Trust Company, Color Imaging's transfer agent (the "Transfer Agent"),
that are expected because of the reduction in the number of stockholder accounts
to be handled by the Transfer Agent.
The costs described above do not include potential additional savings which are
difficult to estimate, including: (i) a reduction in management time spent on
compliance and disclosure matters attributable to our Exchange Act filings; (ii)
the lower risk of liability that is associated with non-reporting company status
and the expected decrease in premiums for directors' and officers' liability
insurance; and (iii) a reduction in direct miscellaneous clerical and other
expenses.
7
In addition to the foregoing annual estimated cost savings, the consummation of
the Stock Splits and the subsequent deregistration of the Common Shares would
also result in a significant ongoing cost savings of approximately $45,000 in
fees and expenses (auditor testing of internal controls and engagement fees for
internal audit services) because we would not be subject to the new internal
control audit requirements imposed by Section 404 of the Sarbanes-Oxley Act.
The historical and non-recurring cost savings figures set forth above are only
estimates. The actual savings we realize from going private may be higher or
lower than these estimates. The estimates are based upon the (i) actual costs to
us of the services and disbursements in each of the categories listed above that
were reflected in our recent financial statements and (ii) allocation to each
category of management's estimates of the portion of the expenses and
disbursements believed to be solely or primarily attributable to our public
reporting company status.
In some instances, these cost savings expectations were based on verifiable
assumptions. For example, our auditing fees will be reduced if we cease to be a
public reporting company due to the elimination of fees for interim quarterly
review services. In addition, the costs associated with retaining legal counsel
to assist us with complying with the Exchange Act reporting requirements will be
eliminated if we no longer file reports with the SEC.
Operational Flexibility. Another reason for the Stock Splits is the operational
flexibility that completion of the Stock Splits and subsequent deregistration
would provide. The Board believes that ceasing to be a public reporting company
would enable management to focus more on Color Imaging's long-term growth
without the distraction of SEC reporting requirements and other aspects of being
a public company, and that Color Imaging will benefit if business decisions can
be made with this added focus on long-term growth. The Board also believes that
the Company will benefit from the ability to control the dissemination of
important business information, which is currently required to be disclosed in
periodic reports and accordingly made available to its competitors, vendors,
customers and other interested parties, potentially to Color Imaging's
detriment.
Benefits Normally Associated with Public Reporting Company Status Have Not Been
Realized. A further reason for the Stock Splits is that Color Imaging does not
realize many of the benefits normally associated with being a public reporting
company. A typical advantage of being a public company comes from the ability to
use company stock, as opposed to cash or other consideration, to effect
acquisitions. Color Imaging has found that the opportunities for companies our
size to acquire other businesses using stock are severely limited. We have not
previously completed an acquisition using stock and, given the limited
opportunities for such acquisitions, it is not likely that would be able to do
so in the future. In addition, public companies can obtain financing by issuing
securities in public offerings. Color Imaging historically has not been able to
avail itself of traditional financing by public offering and instead completed a
private placement and its offering on SEC Form SB-2 through a subscription of
its foreign affiliate.
Deterrent to Mergers and Acquisitions. Being a small public company, we have
found, is a deterrent to the acquisition of and merger with private companies,
those who are most likely to complete a transaction with us. In order for us to
remain public, the target company(ies) would be required to provide three years
of audited statements and be prepared to comply with Section 404 of the
Sarbanes-Oxley Act. These requirements are too burdensome for most private
companies to meet at any reasonable cost. Further, any such transaction would be
more costly and more time consuming as a result of our reporting status and the
related proxy and SEC requirements. The Board also believes that the Company
will benefit from the ability to control the dissemination of important business
information, which is currently required to be disclosed in periodic reports and
accordingly made available to its competitors, vendors, customers and other
interested parties, potentially to Color Imaging's detriment.
The Reasons for the Reverse Stock Split Ratios. Given that the Form 8-K
announcing the decision of the Board was filed on April 19 and that the
Company's proxy statement was subject to SEC review, the Board realized that
there could be trading in the Company's shares for up to several months before
the effective date of the Reverse Stock Split. This trading was expected to
result in an increase of the number of street name or holders of record and the
number of common shares to be repurchased at each of the reverse stock split
ratios, thereby increasing the costs in connection with the repurchase of the
Company's common shares. At the 5000 to 1 ratio more holders would be cashed out
than at 1500 to 1, better achieving the goal of reducing the number of holders
of the Company's common stock but increasing the funds necessary to complete the
transaction. The Board recognized that the announcement of the Company's
intention to go private at a substantial premium to the then current market
price would result in some stockholders selling for a gain, while others who did
not wish to be part of a private company and who held more than 1500 shares
would sell shares to reduce their holdings below 1500 (holdings below this
figure would assure that a stockholder would be cashed out if the transaction
were completed). Based on its expectation that these activities would increase
the number of holders and the number of shares that would be required to be
repurchased upon the completion of the reverse stock split, the Board approved
and recommended the 1500, 2500 and 5000 to 1 reverse stock split ratios to the
stockholders. The factors considered by the Board when deciding upon the reverse
stock split ratios of either 1500, 2500 or 5000 to 1 will include:
8
(1) The existing number of holders at the time of the split, both
beneficial and of record.
(2) The number of shares held by each holder following post announcement
trading.
(3) The effect of any increase in the number of shares at each of the
three reverse stock split ratios, and the resulting increase, if any,
in the cost of the transaction.
(4) Our overall budgetary goal of $1.0 million or less for the costs of
the transaction including payment of fractional of the common shares
in order to retain, in the judgment of the Board, adequate working
capital and liquidity after the transaction.
(5) The most efficient and cost-effective ratio to reduce the number of
holders, both beneficial in brokerage accounts or street name and of
record, to approximately 200 such that as shares are certificated or
otherwise traded after the transaction, creating additional holders of
record, the Company would not involuntarily again become a reporting
company in the foreseeable future.
The Board also considered that small stockholders will have sufficient time
between the announcement on Form 8-K of the reverse split ratio to be used in
the going private transaction and the effective date of the reverse stock split
to buy additional shares to remain stockholders, if so desired.
The reasons for the forward stock split, which will occur immediately after the
reverse stock split and the repurchase of fractional shares resulting from the
reverse split, is to prevent the Common Shares from having an unusually high per
share value that would otherwise result from the reverse stock split, which
would tend to further decrease the liquidity of the Common Shares. Additionally,
those stockholders by virtue of their not holding shares in even multiples of
the reverse stock split ratio will have one or more whole shares and fractional
shares of Color Imaging. By effecting a forward stock split at the inverse of
the ratio used in the reverse stock split, no stockholders will have any
fractional shares of Color Imaging's Common Stock.
Opportunity for Stockholders to Sell Repurchased Common Shares at a Premium and
Without Broker Fees or Commissions. The Repurchase Price of $1.10 per Common
Share represents (i) a premium of 124% over the average closing price of the
Common Shares over the 30 trading days prior to and including April 14, 2005
(the date the Board approved the Stock Splits), which was $0.49 per share, and
(ii) a premium of 100% over the closing price for the Common Shares on April 14,
2005 (the date the Board approved the Stock Splits), which was $0.55 per share.
The Board reviewed the proposal made by the Special Committee of the Board of
Directors of Color Imaging that $1.10 per share be established as the Repurchase
Price for the Common Shares. The Board, in the exercise of its business
judgment, adopted such recommendation since the Repurchase Price for the Common
Shares represented fair consideration at a premium to the current and historical
market prices of the Common Shares while also being consistent with the
valuation analysis of CVG. The Board believes that the Repurchase Price is fair
to Color Imaging's stockholders. The Board determined that the Stock Splits are
fair in part because they provide Cashed Out Holders with an opportunity to
liquidate all of their Common Shares without transaction fees, and for
Continuing Holders to benefit from the savings resulting from Color Imaging's
being non-reporting and its future operations.
While the Board was aware that stockholders who were cashed out would not have
"appraisal" or "dissenter's rights" as a result of the reverse splits, this was
not a consideration in the Special Committees or the board's decision, and was
not a reason why this method of going private was chosen.
In light of the foregoing, the Board believes the benefits Color Imaging
receives from maintaining its status as a public reporting company and
maintaining its small stockholder accounts are substantially outweighed by the
associated costs. The Board believes that it is in Color Imaging's best
interests to eliminate the administrative burden and costs associated with
maintaining its status as a public reporting company and its small stockholder
accounts.
DID THE BOARD CONSIDER ANY DISADVANTAGES OF GOING PRIVATE?
Yes. The Board of Directors and the Special Committee have considered the
disadvantages of going private, including the following:
o There will be no public market for our common stock, and continuing
stockholders will likely experience reduced liquidity for their
shares;
9
o Stockholders will not be entitled to the same level of information
concerning Color Imaging's financial condition and results of
operation;
o Certain stockholders will be cashed out in the reverse stock split who
may prefer to remain stockholders in Color Imaging, and will not be
able to participate in any future growth or profits that Color Imaging
may experience; and
o Certain stockholders will remain stockholders of Color Imaging who may
prefer to be cashed out.
Substantial or Complete Reduction of the Market for Common Shares. After the
completion of the Stock Splits and deregistration of the Common Shares, we
anticipate that the public market for the Common Shares will be substantially
reduced or altogether eliminated. The Board, however, considered that potential
trades in the Common Shares could be facilitated by a market maker in the Pink
Sheets(R) following deregistration. Please see the section entitled "Special
Factors - Effects of the Stock Splits."
Termination of Publicly Available Information About Color Imaging. Upon
termination of the registration of the Common Shares under the Exchange Act, our
duty to file periodic reports with the SEC will be suspended. Information
regarding our operations and financial results that is currently available to
the general public and our investors will not be readily available after
deregistration, and investors seeking information about us will have to contact
us directly to receive such information. We may or may not provide investors
with requested information that we are not required by law to provide. The Stock
Splits will not affect the right of Continuing Holders to obtain certain
information from Color Imaging under Delaware law. Under Delaware law, a
stockholder has the right to make a written request to inspect a company's books
and records (including, without limitation, annual financial statements) and
make copies thereof for any purpose reasonably related to such person's interest
as a stockholder.
While the Board realizes and acknowledges that the termination of publicly
available information may be disadvantageous to our stockholders, the Board
believes that the overall benefits to Color Imaging of no longer being a public
reporting company substantially outweigh the disadvantages associated with a
lack of publicly available information about Color Imaging. We currently intend
to continue to make available upon request financial statements to our
stockholders; however, these documents may not be as detailed or extensive as
the information we currently file with the SEC. Although we currently intend to
continue to provide these documents, there is no SEC requirement that we do so
or that we maintain the present level of disclosure contained in such documents.
Please see the section entitled "Special Factors - Effects of the Stock Splits."
Possible Decline in Price of the Common Shares. After the completion of the
Stock Splits, the liquidity of the Common Shares will be significantly reduced
or eliminated. In addition, the lack of publicly available financial and other
information about Color Imaging and the diminished opportunity for Color
Imaging's stockholders to monitor the management of Color Imaging due to the
lack of such public information may cause the Continuing Holders to experience a
decrease in the price at which they may sell their Common Shares.
Please see "--Termination of Publicly Available Information about Color
Imaging" in this section above.
Inability to Participate in Future Increases in Value of the Common Shares or
Payments of Dividends. Following the Stock Splits, Cashed Out Holders will have
no further financial interest in Color Imaging and will not have the opportunity
to participate in the potential appreciation in the value of, or the payment of
dividends on, the Common Shares.
After careful consideration, the Board of Directors and the Special Committee
believe that the advantages of terminating Color Imaging's status as a public
reporting company outweigh the disadvantages. However, the Board of Directors
will have the discretion to determine if and when to effect the reverse stock
split and reserves the right to abandon the transaction even if it is approved
by the stockholders. For instance, if the cost of payments to stockholders
owning less than one share after the reverse stock split substantially exceeds
$300,000, the Board of Directors may not complete the reverse stock split. Given
that the Form 8-K announcing the decision of the Board was filed on April 19,
2005 and that the Company's proxy statement was subject to SEC review, the Board
realized that there would likely be trading in the Company's shares for several
months and an increase of the number of street name or holders of record and the
number of common shares to be repurchased at each of the reverse stock split
ratios. This increase could increase the funds needed to pay for fractional
shares. Since the number of shares to be cashed out cannot be determined until
the effective date of the reverse stock split, the Board cannot be certain what
the aggregate costs will be to pay for fractional shares in the transaction.
Therefore, the cost of cashing out the fractional shares may vary from our
original estimates because the number of stockholders holding small numbers of
shares may change over time as the stock continues to trade. The Board currently
expects that the costs will remain within the acceptable range and plans to
complete the transaction, if it is approved by the stockholders.
10
WHAT DOES "GOING PRIVATE" MEAN?
"Going private" means that Color Imaging will no longer be a public reporting
company under the federal securities laws. As there will be fewer than 300
stockholders of record (or held by institutional depositories) remaining
following the reverse stock split, registration of Color Imaging's common stock
under the Exchange Act will be terminated, and Color Imaging common stock will
no longer be traded on the OTC Bulletin Board. If the reverse stock split is
approved and implemented, Color Imaging will no longer be required to file
annual, quarterly and other reports that it currently files with the SEC, and
there will no longer be a public trading market for its common stock.
WHY IS THE BOARD SEEKING STOCKHOLDER APPROVAL FOR THREE DIFFERENT REVERSE SPLIT
RATIOS?
The Board is seeking the authority to effect the reverse stock split using a
Reverse Split Ratio of either 1500-to-1, 2500-to-1 or 5000-to-1. The Board
believes it needs to have the flexibility to select one of these ratios so that
the Company may effect the Stock Splits at the lowest possible cost, and at the
same time, have assurance that the Stock Splits will be effective in allowing
the Company to terminate its Exchange Act registration and realize the benefits
of a going private transaction. Based upon an initial analysis of the size and
composition of the stockholder base, provided by management to the Board, the
Board concluded that a 1500-to-1 ratio would reduce the number of stockholders
to a sufficiently low number that the Company could go private, and reasonably
expect to remain private. However, in the period between the date of the Board's
approval of the Stock Splits Proposal and the Effective Date, the number or
composition of the Company's stockholders could change significantly. The Board
desires to have the ability to complete the Stock Splits without having the
Company incur the additional expense of resoliciting proxies and calling an
additional stockholders meeting.
HOW WILL THE BOARD SELECT THE REVERSE SPLIT RATIO?
The stockholders will vote on all three proposed ratios. If the stockholders
approve all three ratios, this would give the Board the authority to effect the
reverse stock split using a Reverse Split Ratio of either 1500-to-1, 2500-to-1
or 5000-to-1. Since the Directors control a sufficient number of the outstanding
shares, approval of all ratios is assured. In close proximity to the date of the
stockholder meeting, the Board will obtain an updated analysis of the Company's
stockholder base. The Board currently intends to use 1500-to-1 as the Reverse
Split Ratio and to reduce the number of stockholders to approximately 200 at a
cost of $300,000, or less, for the aggregate Cash-Out Price for all the
fractional shares to be cancelled. This will enable the Company to effect a
going private transaction while keeping the cost as low as possible. However,
the Board reserves the right to select any of the three ratios approved by the
stockholders and exceed the target cost and its budgetary guideline based on its
judgmental assessment of the Company's financial condition and business
situation as of the fiscal period immediately preceding the Effective Date.
If the Stock Splits Proposal is approved by the stockholders, which appears to
be assured based on the percentage of our common shares that are owned or
controlled by our Directors, then the Board at its discretion may elect to
either abandon the going private transaction or effect a reverse stock split at
one of three ratios: either 1500, 2500 or 5000 to 1. If the Board elects to
abandon the going private transaction, then no funds would be paid and the total
transaction costs would consist solely of the expenses incurred to that date in
connection with it. These expenses are estimated at $187,500.
Should the Board determine it is in the best interest of the Company and the
stockholders to proceed with the going private transaction, then the Board will
select one of the three reverse stock split ratios approved by the stockholders
of the Company. Depending on the ratio selected, either 1500, 2500 or 5000 to
one, stockholders having fewer than 1499, 2499 or 4999 shares on the Effective
Date will then hold less than one full share of our common stock and will be
cashed out at the price of $1.10 per pre-split common share. It is the objective
of the Board to complete the transaction for as little money as possible, while
reducing the number of holders of record after the transaction is completed to
approximately 200.
The table below, based upon information as of May 13, 2005, shows the number of
holders, both beneficially in brokerage accounts and of record, the shares that
would remain outstanding and the total estimated transaction costs, under
several scenarios, including if the transaction were abandoned or if the
transaction were completed with each of the reverse stock split ratios. As of
May 13, 2005, we had outstanding 12,690,305 shares.
11
Holders (1) Shares Outstanding Estimated Transaction Costs
As of May 13, 2005 -------------------------------------------------------- ------------------------------------------------
To be cashed To be cashed Cost of
Share Range Information out After (2) out After (2) Shares (3) Expenses Total
----------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Total, if Abandoned - 635 - 12,690,305 $ - $ 187,500 $ 187,500
1500 to 1 408 227 143,155 12,547,150 $ 157,471 $ 187,500 $ 344,971
2500 to 1 479 156 257,837 12,432,468 $ 283,621 $ 187,500 $ 471,121
5000 to 1 513 122 357,761 12,332,544 $ 393,537 $ 187,500 $ 581,037
Notes:
(1) Holders include certificates of record and the number of brokerage account
holders.
(2) "After" is either the number of holders or the number of shares remaining
after the transaction is completed at each of the share ranges.
(3) The total amount paid at $1.10 per common share to repurchase the common
shares at each of the share ranges, corresponding to the reverse stock
split ratios available at the discretion of the Board of the Company.
At the annual meeting of the Board, immediately following the annual meeting of
the stockholders, the Board intends to decide to either abandon the going
private transaction or to select the reverse stock split ratio upon with the
Company will effect the transaction. The Company intends to file a Form 8-K
report with the SEC thereafter, announcing to the stockholders of the Company
the decision of the Board in this regard. Thereafter, the Form 8-K will be
posted on the Company's website at www.colorimaging.com under "News."
Additionally, if the Company does not abandon the going private transaction, we
expect that management, at the direction of the Board, will effect the reverse
stock split within approximately a week of the annual meeting by filing an
amendment to the Company's certificate of incorporation with the Secretary of
State of the State of Delaware. As reasonably soon as is practicable thereafter,
stockholders of the Company will receive a letter from the Company.
IS THERE A POSSIBILITY THAT THE BOARD WILL NOT COMPLETE THE STOCK SPLITS EVEN IF
THE STOCKHOLDERS APPROVE THE PROPOSAL?
Yes. The Board reserves the right to forego the completion of the Stock Splits
after stockholder approval. The Board currently intends to complete the Stock
Splits as outlined above, but in its discretion it may choose not to. The Board
will consider the following factors immediately after the meeting date to
determine whether to go forward with the transaction:
o Changes in the number and composition of the stockholder base, and the
expected number of stockholders remaining if the transaction is
completed.
o The total cost to complete the transaction.
o The Company's financial condition immediately prior to, and expected
financial condition after, the completion of the transaction.
o Changes in economic, industry and regulatory conditions prior to the
expected Effective Date.
o Advice from the Company's management, legal counsel and financial
advisors regarding possible risks of completing the transaction.
o Whether or not the Company will remain in compliance with the
covenants of its credit arrangement with its lender.
The Company expects covenants with its bank upon renewal on or after June 30,
2005, to provide for a minimum tangible net worth of $9.0 million, a fixed
charge coverage ratio of not less than 1.25 to 1 and a traditional leverage
ratio of not greater than 2 to 1. As of the quarter ended June 30, 2005, the
Company's tangible net worth was $12.2 million, its fixed charge coverage was
3.87:1, and its traditional leverage ratio was .45:1, all of which comply with
the covenants. Based upon the Company's current financial condition,
12
profitability, net working capital and its projections for calendar year 2005,
it is the Company's best judgment that it will remain in compliance with these
covenants upon the completion of the transaction.
In addition, unforeseen circumstances may prevent the Company from completing
the going private transaction.
WHAT WILL I RECEIVE IN THE STOCK SPLITS IF THE PROPOSAL IS APPROVED AND
IMPLEMENTED?
If the Stock Splits Proposal is approved and implemented:
o Stockholders who hold at least 1500, 2500, or 5000 shares (depending
upon the Reverse Split Ratio selected by the Board) of Color Imaging
common stock immediately before the effective time of the reverse
stock split will have their shares automatically converted into a few
number of shares based on the Reverse Split Ratio. However, those
shares will be subject to a forward stock split immediately following
the reverse stock split. The forward split will be completed using the
inverse of the Reverse Split Ratio, i.e., 1500-to-1, 2500-to-1 or
5000-to-1, as the case may be. These stockholders will continue to
hold the same number of shares as they held prior to the reverse
split.
o Stockholders who hold fewer than 1500, 2500, or 5000 shares (depending
upon the Reverse Split Ratio selected by the Board) of Color Imaging
common stock immediately before the effective time of the reverse
stock split will, instead of receiving a fractional share of common
stock as a result of the reverse stock split, have the right to
receive $1.10 per share on a pre-split basis.
o The procedure for the payment of cash in lieu of fractional shares is
described below under the caption "Proposal No. 1 - Stock Splits
Proposal - Share Certificates."
WHAT IF I HOLD SHARES IN "STREET NAME"?
If your shares are held in a stock brokerage account or by a bank or other
nominee, you are considered the "beneficial owner" of shares held "in street
name," and these proxy materials have been forwarded to you by your broker or
nominee which is considered, with respect to those shares, the stockholder of
record. As the beneficial owner, you have the right to direct your broker how to
vote and are also invited to attend the annual meeting. However, as a beneficial
owner, you are not the stockholder of record, and you may not vote these shares
in person at the meeting unless you obtain a signed proxy from the stockholder
of record giving you the right to vote the shares. Your broker or nominee has
enclosed or provided a voting instruction card for you to use in directing the
broker or nominee how to vote your shares. If you hold fewer than the applicable
number of our shares in street name (1500, 2500 or 5000, depending on the
Reverse Split Ratio selected by the Board), each of your shares will be
converted to the right to receive $1.10 in cash. The exchange will be handled
through your broker, bank or other nominee.
MAY I BUY ADDITIONAL SHARES IN ORDER TO REMAIN A STOCKHOLDER OF COLOR IMAGING?
Yes. The key date is the effective date of the Stock Splits because owners of
fewer than 1500, 2500 or 5000 shares will be cashed out on that date. If you
will be a cashed-out stockholder as a result of the Stock Splits and you want to
continue to hold our common stock after the Stock Splits, you may do so by
taking either of the following actions far enough in advance so that it is
complete by 5 p.m. on the last business day immediately preceding the effective
date of the Stock Splits, which we expect to occur shortly after the
stockholders meeting upon the filing of the Certificate of Amendment with the
Secretary of State of Delaware:
o Purchase a sufficient number of our shares on the open market and have
them registered in your name and consolidated with your current record
account, if you are a record holder, or have them entered in your
account with a nominee (such as your broker or bank) in which you hold
your existing common shares so that you hold at least 1500 shares of
our common stock (2500 or 5000 shares if the terms of the Stock Splits
are changed by our Board of Directors) in your account by 5 p.m. on
the last business day before the effective date of the Stock Splits;
or
o If applicable, consolidate your record accounts or accounts with
nominees so that you hold at least 1500 shares of our common stock
(2500 or 5000 shares if the terms of the Stock Splits are changed by
our Board of Directors) in one record or nominee account by 5 p.m. on
the date immediately prior to the effective date of the Stock Splits.
You will have to act far enough in advance so that the purchase of our common
shares or consolidation of your accounts containing our common stock is complete
by 5 p.m. on the last business day immediately prior to the effective date of
the Stock Splits.
13
HOW DID THE BOARD DETERMINE THE FAIRNESS OF THE REVERSE STOCK SPLIT?
The Board of Directors and the Special Committee believe that the reverse stock
split is in the best interests of Color Imaging and its stockholders and is
substantively and procedurally fair to the affiliated and unaffiliated
stockholders, including both those stockholders who will be cashed out as a
result of the transaction and those who will remain stockholders after the
reverse stock split.
The Board of Directors appointed a Special Committee consisting of Mr. Eiswirth,
the independent and disinterested director serving on the board, to evaluate
strategic alternatives for Color Imaging, including possible mergers or
acquisitions, other transactions, and engaging in a "going private" transaction.
The Special Committee, upon determining a going private transaction was in the
best interest of the Company and its stockholders, then evaluated methods of
going private, including whether or not to effect the reverse stock split, and
if so, on what terms, including a fair price to be paid to stockholders in lieu
of fractional shares less than one whole share.
The Special Committee engaged an independent financial advisor to assist the
Special Committee in its evaluation of strategic alternatives, including going
private, and to render a written fairness opinion regarding the price to be paid
the stockholders who would be cashed out. CBIZ Valuation Group, LLC, the
independent financial advisory engaged by the Special Committee, has rendered a
fairness opinion stating that the pre-split price to be paid in the reverse
stock split transaction is fair, from a financial point of view, to Color
Imaging stockholders who would not retain their interest in Color Imaging after
completion of the transaction, and stockholders who would retain their interest
in Color Imaging after completion of the transaction, in each case other than
stockholders who are directors or executive officers of Color Imaging or
affiliates of directors or executive officers of Color Imaging.
The $1.10 cash consideration to be paid in lieu of fractional shares less than
one whole share represents (i) a premium of 124% over the average closing price
of the Common Shares over the 30 trading days prior to and including April 14,
2005 (the date the Board approved the Stock Splits), which was $0.49 per share,
and (ii) a premium of 100% over the closing price for the Common Shares on April
14, 2005 (the date the Board approved the Stock Splits), which was $0.55 per
share.
The budgetary guideline of $1.0 million was not considered by the Special
Committee, the Board or CVG when determining the price per share to be paid for
the common stock of the Company.
The Board of Directors and the Special Committee have each expressly adopted the
analyses and conclusions of the financial advisor contained in its fairness
opinion.
WHAT ARE THE INTERESTS OF AFFILIATES OF COLOR IMAGING IN THE REVERSE STOCK
SPLIT?
Both affiliated and unaffiliated stockholders will be treated the same in the
reverse stock split. However, affiliated stockholders generally own more than
the applicable number for any of the Reverse Split Ratios of shares of common
stock, and thus will all be continuing stockholders in Color Imaging following
the reverse stock split and going private. Accordingly, they will continue to
have an interest in Color Imaging and will be able to participate in any future
growth or profits that Color Imaging may experience, including as a result of
reduced costs from not being a public reporting company. The wife of Sueling
Wang, our President and director, owns 1,000 shares in a brokerage account which
is expected to be cashed out in the Reverse Stock Split. Richard S. Eiswirth, as
the sole member of the Special Committee of the Board of Directors to
investigate strategic alternatives to increase stockholder value, has been paid
to date director's fees aggregating $20,000, and will likely receive an
additional $5,000 to $10,000 in fees, in connection with those duties and
responsibilities. Otherwise, none of our executive officers, directors or our
affiliates will receive any proceeds from the transaction. We expect that, as a
result of the reverse stock split, the percentage of ownership of our common
stock beneficially held by our current officers and directors as a group
(including shares subject to currently exercisable options) will increase from
66.2% to approximately 67.5%.
WILL I HAVE APPRAISAL OR DISSENTERS' RIGHTS?
Under Delaware law, which governs Proposal No. 1 - Stock Splits Proposal, you do
not have the right to demand the appraised value of your shares or any other
dissenters' rights if you vote against Proposal No. 1 - Stock Splits Proposal.
WHAT ARE THE TAX IMPLICATIONS OF THE STOCK SPLITS?
In general, based upon existing federal income tax law, stockholders who receive
cash in lieu of fractional shares will be treated as receiving cash as payment
in exchange for their fractional shares, and they will recognize a capital gain
or loss in an amount equal to the difference between the amount of cash received
and the adjusted basis of the fractional shares surrendered for cash. Whether
gains or losses from the sale of capital assets are short-term or long-term
capital gains or losses depends on the period the capital asset was held.
14
o Stockholders who remain stockholders of Color Imaging after the
reverse stock split will not incur any tax liability as a result of
the reverse stock split and will in general incur a capital gain or
loss upon the ultimate disposition of their stock.
o This summary does not purport to address all aspects of the range of
possible federal income tax consequences of the reverse/forward stock
split and is not intended as tax advice to any person. In particular,
and without limiting the foregoing, this summary does not account for
or consider the federal income tax consequences to Color Imaging's
stockholders in light of their individual investment circumstances or
to holders subject to special treatment under the federal income tax
laws.
We strongly recommend that stockholders consult their own tax advisors as to the
federal, state, local and foreign tax effects of the reverse/forward stock split
in light of their individual circumstances.
WHAT ARE THE APPROVAL REQUIREMENTS FOR THE STOCK SPLITS PROPOSAL?
The affirmative vote of holders of a majority of the outstanding shares of
common stock of Color Imaging entitled to vote and present in person or by proxy
at the annual meeting is required for the approval of the Stock Splits. It is
expected that shares beneficially owned by current executive officers, directors
and affiliates of Color Imaging, which in the aggregate represent approximately
63.7% of the outstanding shares of common stock, will be voted in favor of the
Stock Splits. Since members of the Board have indicated their intention to vote
their shares for the approval of such proposal, and such members hold or control
a majority of the votes that may be cast at the Annual Meeting, approval of the
stock splits proposal is assured.
EFFECTS OF THE STOCK SPLITS
The Stock Splits are expected to significantly reduce the number of holders of
record of the Common Shares from approximately 525, including those in street
names, to approximately 150. Upon the completion of the Stock Splits, we intend
to apply with the SEC to deregister the Common Shares under the Exchange Act as
soon as practicable. After deregistration, the Common Shares will no longer be
quoted on the Nasdaq OTC Bulletin Board. The completion of the Stock Splits and
the termination of our reporting obligations under the Exchange Act will cause
the existing limited trading market for the Common Shares to be further reduced
or eliminated.
Effects on the Common Shares. There will be no differences with respect to
dividend, voting, liquidation or other rights associated with the Common Shares
before and after the Stock Splits. The Common Shares acquired by Color Imaging
for cash will be retired. Our common stock is currently registered under Section
12(g) of the Exchange Act and is traded in the over-the-counter market, with
last sales prices reported on the OTC Bulletin Board. OTC Bulletin Board is a
regulated quotation service that displays real time quotes, last sales prices
and volume information in over-the-counter equity securities. As soon as
possible after the effective time of the reverse stock split, we will file for
deregistration of the common stock under the Exchange Act and will become a
"private" company. Our common stock will be ineligible for quotation on the OTC
Bulletin Board, which may reduce the liquidity of our common stock.
Effects on All Color Imaging Stockholders. All Color Imaging stockholders:
o Will not have the opportunity to liquidate, at a time and for a price
of their choosing, the Common Shares that are exchanged for cash in
lieu of issuing fractional shares;
o Will not receive a fractional Common Share as a result of the Stock
Splits, but will instead receive cash, in a taxable transaction, equal
to $1.10 for each Common Share held immediately before the Stock
Splits that is exchanged for cash in accordance with the procedures
described in this Proxy Statement;
o Will not have to pay any brokerage commissions or other transaction
fees in connection with the exchange of Common Shares for cash in lieu
of issuing fractional shares; and
o Will not receive any interest on cash payments owed as a result of the
Stock Splits.
If you hold fewer Common Shares than the number upon which the Reverse Stock
Split is effected, your Common Shares will be exchanged for cash. You will
receive a letter of transmittal as soon as practicable after the Stock Splits
are completed. The letter of transmittal will contain instructions on how to
15
surrender your existing share certificate(s) to the Transfer Agent to receive
your cash payment after the reverse stock split. You will not receive your cash
payment until you surrender your outstanding share certificate(s) to the
Transfer Agent, along with a completed and executed copy of the letter of
transmittal. Do not send your share certificate(s) in with your Proxy. Please
wait until you receive your letter of transmittal to surrender your share
certificate(s) to the Transfer Agent.
For a discussion of the federal income tax consequences of the Stock Splits,
please see the section of this Proxy Statement entitled "Proposal No. 1 - Stock
Splits Proposal - Material Federal Income Tax Consequences."
Effects on Cashed Out Holders. Cashed Out Holders (i.e., holders of fewer than
1500, 2500 or 5000 Common Shares, depending upon the Reverse Split Ratio,
immediately before the consummation of the Stock Splits) will have no further
ownership interest in Color Imaging and will not be able to participate in
future earnings or growth of Color Imaging.
If you hold fewer than 1500, 2500, or 5000 Common Shares, whichever number is
applicable depending upon the Reverse Split Ratio, but you would rather continue
to hold Common Shares after the Stock Splits and not be completely cashed out,
you may do so by taking either of the following actions far enough in advance so
that it is complete by the Effective Date:
o Purchase a sufficient number of additional Common Shares, to the
extent available, on the open market and have them registered in your
name and consolidated with your current record account, if you are a
record holder, or have them entered in your account with a nominee
(such as your broker or bank) in which you hold your current shares so
that you hold at least 1500, 2500 or 5000 Common Shares, depending
upon the Reverse Split Ratio, in your record account immediately
before the Effective Date. Due to the limited market in the Common
Shares, there is no assurance that you will be able to purchase enough
Common Shares to remain a stockholder of Color Imaging.
o If applicable, consolidate your accounts so that you hold at least
1500, 2500 or 5000 Common Shares, depending upon the ratio used to
effect the reverse stock split, in one record account immediately
before the Effective Date.
Effects on Continuing Holders. If the Stock Splits are consummated, Continuing
Holders (i.e., holders of either 1500, 2500 or 5000 or more Common Shares
immediately before the Stock Splits):
o Will hold the same number of Common Shares after the Stock Splits as
they held before the Stock Splits;
o Will likely experience an increase in their ownership percentage of
Color Imaging after completion of the Stock Splits;
o Will likely experience a substantial reduction in liquidity of the
Common Shares; and
o Will have less publicly available information about Color Imaging.
Upon the termination of the registration of the Common Shares under the Exchange
Act, the Common Shares will no longer be eligible for trading or quotation on
any securities market or quotation system, except possibly on the Pink
Sheets(R). In order for the Common Shares to be quoted on the Pink Sheets, one
or more broker-dealers would need to act as market maker and sponsor the Common
Shares on the Pink Sheets. This is beyond the Company's control. There can be no
assurance that any broker-dealer will be willing to act as a market maker in
Common Shares after the Stock Splits. There is also no assurance that you will
be able to sell your Common Shares or purchase additional Common Shares after
the Stock Splits.
If you hold 1500, 2500 or 5000 or more Common Shares, depending upon the ratio
used to effect the reverse stock split, but you would rather be completely
cashed out in connection with the Stock Splits and not remain a stockholder of
Color Imaging, you may do so by selling a sufficient number of Common Shares in
the open market so that you hold fewer than either 1500, 2500 or 5000 Common
Shares, depending upon the ratio used to effect the reverse stock split, as of
the Effective Date. Any such sales should be made far enough in advance so they
are complete by the Effective Date. Due to the limited market in the Common
Shares, there is no assurance that you will be able to sell enough Common Shares
to reduce your holdings to fewer than either 1500, 2500 or 5000 Common Shares.
Effect on Common Shares Held in Street Name. If your shares are held in a stock
brokerage account or by a bank or other nominee, you are considered the
"beneficial owner" of shares held "in street name." If you hold Common Shares in
"street name," your nominee (such as your broker or bank) may have required
procedures you must follow and you should contact your nominee to determine how
the Stock Splits will affect you. We intend to have shares in brokerage accounts
with less than 1500, 2500 or 5000 shares cashed out in similar fashion as those
16
held by record holders. We will instruct brokers to aggregate accounts that have
the same name on multiple accounts for purposes of determining whether accounts
are eligible to be cashed out in the reverse stock split. However, Color Imaging
and its transfer agent will not have the necessary information to compare the
record holdings of any stockholder with the "street name" holdings in a
brokerage account. In addition, we will lack the information to compare holdings
across multiple brokerage firms. As a result, a stockholder holding more than
the minimum number of shares may nevertheless have the shares cashed out if he
stockholder holds a combination of broker-held shares and "street name" shares
or shares in several brokerage firms. If you are in this situation and desire to
remain a stockholder after the transaction, we recommend that you consolidate
your holdings into one brokerage account or record holder position prior to the
effective date. You should be able to determine whether your shares will be
cashed out by examining your brokerage account statements to see if you hold
more than the minimum number of shares in any one account.
Effects on Option Holders. Upon completion of the Stock Splits, outstanding
options to purchase Common Shares under Color Imaging's 2003 Stock Incentive
Plan (the "Option Plan") will have the same number and exercise prices after the
Stock Splits.
Effects on Color Imaging. If our number of stockholders, including those in
street name that may be certificated, falls below 300, we intend to apply to the
SEC to deregister the Common Shares as soon as practicable after completion of
the Stock Splits. Upon deregistration of the Common Shares, our duty to file
periodic reports with the SEC will be suspended and we will no longer be
classified as a public reporting company. In addition, we will be relieved of
the obligation to comply with the requirements of the proxy rules under Section
14 of the Exchange Act. We will continue to be subject to the general anti-fraud
provisions of federal and applicable state securities laws and we will also
continue to be subject to laws of the State of Delaware.
Although we will no longer be required to file periodic reports with the SEC, we
currently intend to continue to have internally prepared quarterly financial
statements and have our financial statements audited annually and provide
financial information to our stockholders upon request. Although we intend to
continue to provide these documents to our stockholders upon request and may
provide them to one or more broker dealers for the purposes of facilitating
trading on the Pink Sheets(R), there is no SEC requirement that we do so, and
there is no requirement that the level of our disclosure in such financial
statements, or in the proxy statement should we prepare it, remain at the level
required by our current status as a public reporting company. These documents
may not be as detailed or extensive as the information we currently file with
the SEC and deliver to stockholders and our financial statements may not be
accompanied by management's discussion and analysis in the same detail. It will
be more difficult for our stockholders to obtain information about us.
We estimate that we will save approximately $115,000 in annual costs associated
with being a public company as well as additional cost savings in time spent by
management and employees associated with our SEC reporting activities. We
anticipate not incurring costs of approximately $45,000 annually in connection
with management's assessment and our auditor's testing of internal controls in
compliance with the internal controls audit requirements of Section 404 of the
Sarbanes-Oxley Act. These anticipated savings are discussed under the heading
entitled "Reasons for the Stock Splits - Reduced Costs and Expenses" above.
The termination of our reporting obligations under the Exchange Act will render
the Common Shares ineligible for listing or quotation on any stock exchange or
other automated quotation system, except the Pink Sheets. As a result, the
Common Shares will no longer be listed on the Nasdaq OTC Bulletin Board and the
existing limited trading market for the Common Shares will likely be further
reduced or eliminated. This reduction or elimination may result in Color Imaging
having less flexibility in attracting and retaining executives and other
employees since equity-based incentives (such as stock options) tend to be
viewed as having less value in a non-publicly traded company.
We have no current plans to issue Common Shares after the Stock Splits other
than pursuant to the Option Plan, but we reserve the right to do so at any time
and from time to time at such prices and on such terms as the Board determines
to be in Color Imaging's best interests. If in the future the Board determines
that the adoption of a new option plan would be beneficial to Color Imaging, it
may, in its discretion, adopt such a plan. The exercise of options granted under
any newly adopted plan would reduce the ownership percentage of Color Imaging's
stockholders at the time. Holders of Common Shares do not currently have, and
will not have, any preemptive or other preferential rights to purchase any of
our equity securities that we may issue in the future, unless such rights are
specifically granted to such holders.
After the Stock Splits have been consummated, Color Imaging may, from time to
time, repurchase Common Shares pursuant to privately negotiated sales or other
transactions. Whether or not we purchase shares in the future will depend on a
number of factors, including Color Imaging's financial condition, operating
results and available capital at the time.
17
We expect our business and operations to continue as they are presently
conducted. The executive officers and directors of Color Imaging will not change
due to the Stock Splits. Color Imaging expects to realize time and cost savings
as a result of terminating its public company status, and intends to invest
those savings in other areas of its operations. Other than as described in this
Proxy Statement, Color Imaging's management has no current plans or proposals to
effect any extraordinary corporate transaction (such as a merger, reorganization
or liquidation); to sell or transfer any material amount of Color Imaging's
assets; to change the composition of the Board or management of Color Imaging;
to change materially Color Imaging's indebtedness or capitalization; to change
Color Imaging's dividend policy; or otherwise to effect any material change in
Color Imaging's corporate structure or business.
Effects on Color Imaging's Executive Officers, Directors and Affiliates. Our
affiliates, comprised of our executive officers, directors, General Plastic
Industrial Co Ltd and its wholly owned investment company Chi Fu Investment Co
Ltd and any stockholders who own more than 10% of the Common Shares, will be
relieved from complying with the stock ownership reporting requirements and
"short swing profit" trading restrictions under Section 16 of the Exchange Act,
as well as many of the provisions of the Sarbanes-Oxley Act. Our affiliates will
lose the ability to dispose of their Common Shares pursuant to Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act").
As is more thoroughly set forth under the heading entitled "Information About
Color Imaging - Interests of Certain Persons in Matters to be Acted Upon," we
expect that upon the completion of the Stock Splits, the Common Shares
beneficially owned by our executive officers, directors and their affiliates
will comprise approximately 67.5% of the then outstanding Common Shares, as
compared to approximately 66.2% of the Common Shares outstanding immediately
prior to the Stock Splits.
ALTERNATIVES TO THE STOCK SPLITS
Prior to deciding to engage in a going private transaction, management pursued
and the Board considered alternative transactions which may have achieved Color
Imaging's strategic objectives, including a sale of the business or merger and
acquisition transactions. Several specific sale, merger or acquisition
transactions were explored and are discussed at "Proposal No. 1 - Stock Splits
Proposal - Background of the Reverse Stock Split." Ultimately, a number of the
transactions were abandoned prior to any specific negotiations regarding price,
terms, strategic or management matters, when either or both parties lost
interest in pursing the matter further. Management, the Special Committee and
the Board deemed those few prospective transactions that have not been ruled out
entirely as transactions unlikely to be completed, since either their completion
is so distant in the future, or so unspecific as to what would be satisfactory
or agreeable terms, or both.
After determining that a sale of the Company or a merger or acquisition of
another company was not likely in the foreseeable future, and that neither the
liquidation of the Company nor its remaining a reporting company would, in their
opinion, maximize stockholder value, the Special Committee and the Board made
the determination to go private and proceed with the Stock Splits. In making
this determination, they considered the potential feasibility of the alternative
going private transactions described below:
Issuer Tender Offer. The Board considered the feasibility of an issuer tender
offer to repurchase Common Shares. The primary disadvantage of this type of
transaction is that, due to its voluntary nature, Color Imaging would have no
assurance that a sufficient number of Common Shares would be tendered to
sufficiently reduce the number of Color Imaging's stockholders, including those
in street names that could be certificated and become holders of record, to
reasonably assure itself that the Company would remain a non-reporting company
after the transaction was completed. In addition, the rules governing tender
offers require equal treatment of all stockholders, including pro rata
acceptance of offers from stockholders. These requirements make it difficult to
ensure that Color Imaging would be able to reduce the number of holders of
record of the Common Shares enough to permit Color Imaging to remain
non-reporting after it deregistered the Common Shares. Further, Color Imaging
could be required to repurchase many more Common Shares at a greater expense
than desired by the Board, adversely impacting Color Imaging's financial
condition, working capital and potentially placing it in violation of its
covenants with its lender, with no guarantee that it could deregister or remain
deregistered. A tender offer would likely take longer to complete than the Stock
Splits. As a result of these disadvantages, the Board determined not to pursue
this alternative.
Stock Repurchase Program. The Board also considered a plan whereby Color Imaging
would periodically repurchase Common Shares on the open market at then-current
market prices. The Board rejected this type of transaction since repurchasing
enough shares in this manner to enable Color Imaging to deregister, and
reasonably assure itself it would remain non-reporting after shares in street
names were certificated, would, based upon Color Imaging's experience with its
current stock repurchase program, likely take an extended period of time, have
no assurance of success and be of undeterminable cost.
ESOP or Insider Merger. The Board considered the plans whereby another entity
would acquire all of Color Imaging's Common Stock held by unaffiliated
stockholders, and determined that Color Imaging did not have the financial
18
condition and operating results to permit the high levels of borrowing necessary
to effect such a plan. Additionally, the Board believed it not to be in the best
interest of Color Imaging or its stockholders to burden Color Imaging with
significant debt and debt repayment obligations.
Maintaining the Status Quo. The Board considered maintaining the status quo. In
that case, Color Imaging would continue to incur the expenses of being a public
reporting company without enjoying the benefits traditionally associated with
public company status. The Board believes that maintaining the status quo is not
in the best interests of Color Imaging and its stockholders and rejected this
alternative.
In considering the reverse stock split and above methods to go private, the
Special Committee and the Board considered which of the methods was both most
within its control to effect and could be achieved within its budgetary
guideline of $1.0 million or less. Based upon those factors, the Special
Committee recommended, and the Board adopted, the reverse stock split method as
being the most viable method and in the best interest of the Company and its
stockholders, though as a consequence, and not a factor in the decision, was the
lack of "appraisal" or "dissenters' rights" for those stockholders who would be
cashed out (see "Will I have appraisal or dissenters' rights?" at page 14).
BACKGROUND OF THE STOCK SPLITS
The purpose of our merger in 2000 was to combine Color Image, Inc.'s (now Color
Imaging's) toner and consumable expertise and manufacturing plant with Logical
Imaging Solutions, Inc.'s advanced printing system capabilities to offer a wider
product range and ensure product supply for Logical Imaging Solutions' print
system. This would allow Color Imaging to become an OEM with our own high speed
color printer, toner and supplies and we expected significantly higher sales and
profitability in the future as a result. We believed that becoming a public
company would increase stockholder value by affording us the opportunity to
raise capital in the equity markets, to finance significant planned growth, and
allow us to use our public stock in lieu of cash to acquire other companies.
From 2000 through the year 2002, we expanded cartridge manufacturing capacity
four-fold, improved production efficiency and raised capital in a private
placement. We also pursued an acquisition that was ultimately unsuccessful. Over
time we determined that Logical Imaging Solutions' technology was not fully
developed or accepted in the marketplace, and that the company would continue to
incur operational losses and use an undetermined amount of capital to complete
this development. We therefore entered into a share exchange agreement on
September 11, 2002, with Digital Color Print, Inc. and four of our directors to
divest Logical Imaging Solutions. We completed the share exchange transaction on
September 30, 2002. As the result, we no longer offer printing systems to
commercial printers or the support services and consumables related thereto. We
were also unable to realize our goal in the transaction that led to our becoming
a public company, namely to increase stockholder value by becoming a successful
OEM.
In March 2003, we completed a public offering of 4,500,000 shares of Color
Imaging's common stock, raising approximately $6.1 million from an affiliate. In
July 2003, management continued to consider ways in which stockholder value
could be increased. The President and Chief Financial Officer considered (a)
growing the Company and eventually pursuing a listing on the American Stock
Exchange, (b) the sale of part or all of the Company, (c) going private through
a buyout or (d) spinning off the factory and operations leaving the public
company to be marketed to another. Management decided at that time to continue
to work to grow the business while seeking out and continuing to entertain
offers from others.
In July 2003, management was contacted by a merger and acquisition firm that
indicated it had a client interested in possibly investing in or buying Color
Imaging. Though Color Imaging would have considered any offers or proposals, the
investment banker never presented any to the Company and never disclosed its
client, and there has been no further contact between this firm and Color
Imaging.
In July 2003, Management was contacted by an investment banker who specialized
in assisting small cap companies in evaluating strategic alternatives. On July
30, 2003, the investment banker indicated a desire to discuss the feasibility of
Color Imaging's going private and of a leveraged buyout by management. At that
time, the Company was not considering going private though generally the Board
and management had been disappointed that the benefits of being a public company
had not been realized when it divested itself of its subsidiary in September
2002 and raised money, not from the public but from an affiliate, in its
offering on Form SB-2 in March 2003. Because of this history management was
interested in learning more about the going private process and the services and
the fees and costs that could be expected from an investment banker should the
Company pursue such a transaction in the future. Management met with the
investment banker primarily for informational purposes and thereafter there was
no further contact between the parties. Management concluded, based on the lack
of contact from this firm, that it had no further interest in assisting it.
During October 2003, management was contacted by three different investment
banking firms who indicated an initial interest in discussing a possible
investment in or acquisition of the Company. In each case, management of Color
Imaging indicated an interest in hearing any proposals. However, no proposals
19
were ever made by any of the firms and no reasons were given to the Company by
any of the investment banking firms. These firms did not further contact the
Company. Management concluded from this that these firms had no interest in
pursuing an interest in investing in or acquiring Color Imaging.
In November 2003, management met with and received a presentation from
representatives of an investment banking firm who provided an overview of its
experience, capabilities and global and national resources, as well as a current
overview of the U.S. stock market. They presented several strategic liquidity
alternatives designed to create stockholder value, including mergers,
acquisitions and going private. We discussed reasons that a public company goes
private, factors to consider, and the steps involved in the process, as well as
the pros and cons of a number of different methods to effect a going private
transaction. We also discussed a public company peer review. In December 2003,
the parties exchanged a non-disclosure agreement and agreed to stay in touch
should the Company have a transaction it wanted to pursue with this firm. Having
met with the investment banking firm for information purposes, since December
2003 there has been no further contact with this firm. Management concluded,
based on the lack of contact from this firm, that it had no further interest in
investing in or acquiring Color Imaging.
In a management meeting on November 11, 2003, the Chairman asked management
about the requirements to move the Company's stock to the American Stock
Exchange in order to increase liquidity for the stockholders. In addition to the
exchange's operational, stock price and specialist requirements, it was noted
that the board needed to be comprised of a majority of independent directors and
that the Company would need an audit committee comprised of a minimum of three
independent directors. The Chairman and management believed that the Board of
Directors could be restructured to meet the requirements of the American Stock
Exchange if the Company's operational results increased to the point where
listing on the American Stock Exchange would be feasible.
In late 2003, the president of Color Imaging felt that an internet marketer of
inkjet cartridges with whom he was familiar might be a merger candidate for
Color Imaging. He arranged for Color Imaging's chief financial officer to meet
with the owner of this company at a trade show in Las Vegas in January 2004. The
company's owner previously had access to Color Imaging's public information.
Upon signing a mutual confidentiality agreement in January 2004, the internet
marketer shared his company's internally prepared financial statements with
Color Imaging. This party was interested in the potential of being public and
having liquidity for his ownership interest in his private company. During the
meeting the Color Imaging's chief financial officer shared with this party that
a merger which resulted in an entity that was public would require three years
of audited financial statements from the internet marketer. The internet
marketer indicated that they had no audited statements at the time, and any
merger of the companies that would result in a public entity would, of
necessity, have to occur in the future. Later in the month Color Imaging's
Chairman/CEO visited the internet marketer en route to Taiwan and toured their
facilities. Subsequent management meetings at Color Imaging following the return
of the Chairman/CEO from Taiwan resulted in the conclusion that it was unlikely
that a transaction could be completed in the foreseeable future, if ever, since
the internet marketer was interested in being part of a public company but was
not then interested in obtaining audited financial statements.
In February 2004, management met with a former laser and inkjet cartridge
re-manufacturer that had begun sourcing and reselling like branded product under
its own label over the internet and to dealers, wholesalers, retailers,
corporate accounts and others. This company was a customer of Color Imaging
until it discontinued remanufacturing, and was considering a product offered by
Color Imaging's affiliates. Management also discussed a potential merger with
this company's president. Although Color Imaging indicated an interest in future
merger discussions, none occurred. Later management learned that this company's
president was no longer with the company, and although our chief financial
officer sought to contact the company's owner in March 2004, after leaving
messages for the company's owner and chairman about mutual strategic
opportunities, this company's owner and chairman did not respond. Management
concluded from this lack of contact that this firm had no further interest.
In April 2004, Color Imaging's President met a retailer of inkjet and toner
cartridges which also was in the process of completing an acquisition of another
company which provided imaging supplies and services to Fortune 500 companies.
Representatives met at Color Image's offices. The retailer indicated an interest
in further discussions, but that it had to complete its current acquisition and
integrate that acquisition into its operations before it would be in a position
to consider additional transactions. Later the chief financial officer of Color
Imaging followed up with the president of this company, spoke briefly about the
status of their existing merger, and then followed up again later. The follow-up
inquiry went unanswered by the president of this company. Based on this lack of
response, we concluded the other party no longer had any interest in exploring a
merger or other transaction with Color Imaging and we decided not to pursue
further contacts.
In April 2004, management met with a remanufacturer and wholesaler of laser
toner and inkjet cartridges to introduce its new all-in-one products for resale.
Management of this company noted at the conclusion of the meeting that Color
Imaging was interested in potential merger or acquisition candidates. This
wholesaler indicated that it was in a position to assist Color Imaging in
improving its new all-in-one product. Management offered to enter into a
non-disclosure agreement, but one was never completed. Subsequent meetings took
20
place between the parties in the ordinary course of business, but no further
discussions regarding a potential merger took place. Management concluded that
the merger discussions were not serious and that only the exclusive distributor
arrangement for certain of the Company's products was of interest to them. No
exclusive arrangement was offered by Color Imaging, and neither party initiated
any further discussions regarding a possible transaction thereafter.
At the annual meeting of the Board of Color Imaging on May 18, 2004, management
presented the board members with a summary of the steps that would be involved
should the Company find a suitable acquisition or merger candidate. The Board
discussed the overall criteria for any such candidate and the time and dollar
commitment involved should any such prospect be actively pursued.
In May 2004, management was contacted by an investment banker who had past
employment experience at the executive level with an OEM in the toner/imaging
products industry. On June 3, this investment banker expressed an interest in
assisting Color Imaging to increase its revenue and profits and to formulate a
plan to list its stock on either the American Stock Exchange or the Nasdaq small
cap market. The plan would include both internal growth as well as a merger and
acquisition strategy. A follow-up conversation took place on June 29, wherein
the banker requested a retainer for its services as well as equity in the
Company. After management informed the investment banker that the Company would
not meet the investment banker's compensation requirements, these discussions
ceased.
On June 24, 2004, management received a telephone call from an entity which
invested in small cap companies and had something less than $100.0 million under
management for that purpose. They indicated that their fund invested in health
and technology companies with a market cap of less than $250.0 million.
Management summarized the public operating information about Color Imaging and
this entity indicated that they would review the public filings and make a
presentation to their investment committee; and, if there was further interest
in investing in Color Imaging they would, again, contact the Company. No further
contact occurred, and Management concluded there was no interest.
On August 9, 2004, Jui-Hung Wang made a trip from Taiwan to Georgia for personal
reasons, including visiting with his daughter Yi-Jen Wang, another member of
Color Imaging's Board. While in Georgia, Jui-Hung Wang met with his brother and
Color Imaging's Chairman/CEO Jui-Kung Wang and his daughter, Yi-Jen Wang, to
discuss matters in connection with the Company's possibly de-listing or going
private. Thereafter Jui-Hung Wang visited the offices of Color Imaging and met
with the Chairman/CEO and other management of Color Imaging who were also
directors: Sueling Wang, Morris Van Asperen and Yi-Jen Wang. Jui-Hung Wang
pointed out at that meeting that the Company had gone public by merging with
Logical Imaging Solutions in order to become an original equipment manufacturer
with its own proprietary high-speed full-color printer. As a result of being
public, the Company had expected to be able to raise money in the public
markets, use its stock to purchase other companies, and afford its stockholders
a higher level of liquidity for their investments. It was also pointed out that
at the time of the merger that the then Chairman/CEO, Michael Brennan, had
indicated that an additional $5.0 million investment was expected to be made in
the Company, led by an investment banker, but this investment was never made and
the subsequent private placement completed by Color Imaging in 2001 was
subscribed to largely by insiders. Further, the Company's public offering on
Form SB-2 was subscribed to, again, by only an affiliate of the Company and not
by the public. It was recognized, based on prior failed attempts to find
suitable merger or acquisition candidates and the lack of success raising
substantial capital from anyone other than insiders, that it was not likely that
Color Imaging would be able to take advantage of any of the benefits that being
public was supposed to offer and that no realistic merger or acquisition
prospects then existed. De-listing and going private was discussed, including
the impact on large and small stockholders, what it meant to option holders,
what was needed to comply with Delaware law, and what filings were required with
the SEC. To be certain that the information was factually and legally correct,
however, the chief financial officer of Color Imaging suggested and arranged a
meeting with the Company's counsel. Management, the Company's Chairman/CEO, Vice
Chairman/President, CFO/Director and Board members Jui-Hung Wang and Yi-Jen Wang
met with the Company's counsel on August 12, 2004 to further explore and
understand the various methods of, and costs associated with, de-listing or
going private.
On August 30, 2004, management met with the management of another toner products
wholesaler whose strategic direction included toner manufacturing. This company
is both a customer of and a toner supplier to Color Imaging. The CEO of this
company had previous toner cartridge re-manufacturing experience and founded his
current company some fifteen years ago. In February 2005, the wholesaler's
representative visited Color Imaging's facility in Norcross, Georgia and met
with management to discuss ordinary business matters and to ascertain whether
there was any continuing interest in the possibility of a merger. During that
meeting Color Imaging's interest in pursuing a number of strategic alternatives,
including the possibility of going private as disclosed in our Form 10-Q for the
period ended September 30, 2004, and filed with the SEC on October 28, 2004, was
mentioned. The wholesaler indicated a willingness to further consider a merger,
but indicated that it would not be any position to effect any such transaction
before the end of 2006 or early 2007. The parties agreed that to pursue the
discussions in greater detail or more definitively, non-public information about
both parties would likely need to be divulged and it would be appropriate if
that were the case that a mutual confidentiality and non-disclosure agreement be
exchanged. Color Imaging provided this document in February 2005. Management
continues to have ordinary course of business exchanges with the party, and
21
after Form 8-K was filed on April 19, 2005, by the Company with the SEC,
management informed this party of the Company's intention to go private. While
neither party has ruled out the possibility of a merger at some time in the
future, to date, the confidentiality and non-disclosure agreement has not been
completed or returned to Color Imaging, and no discussions have taken place and
no related agreements or understandings have been reached.
In September 2004 management contacted an investment banking firm to inquire if
a portfolio company of that firm had any current interest in acquiring Color
Imaging or merging it with another. This firm indicated that the portfolio
company had been sold, and that Color Imaging on a standalone basis was too
small for their firm to consider. This firm then referred management to another
investment banking firm that had acquired a possible merger candidate for Color
Imaging. This firm represented that it would only be interested in Color Imaging
if it had earnings before interest, taxes, depreciation and amortization of
$20.0 million or more.
Management approached a customer, which was a remanufacturer, about its selling
the new all-in-one imaging cartridges manufactured by our foreign affiliate on
October 13, 2004, and regarding its interest in a merger. Discussions held over
several days included Color Imaging's prior fund raising, the price for its
common shares, the impact of the price of sales by our former subsidiary and
other information, including strategy described in previous SEC filings, as well
as the merger process. The customer met at Color Imaging's headquarters on
October 20, 2004, together with an investment banker invited to the meeting, and
executed confidentiality agreements. The parties exchanged financial
information, provided each with background information on itself, discussed the
goals of a merger and the potential benefits that the combined entity may
realize and heard from the investment banker what financing may be available.
At the end of October 2004, this remanufacturer met with Color Imaging's
president and another of its directors in China. The meeting including ordinary
business, the potential of jointly manufacturing new and remanufactured product
in China and the potential merger. The president of Color Imaging met with the
same member of Color Imaging's board on October 30, 2004, and further discussed
the potential merger. Management of Color Imaging prepared some pro forma
analyses shared them with the customer, who in turn on November 1 introduced
management of Color Imaging to another investment banker.
After conversations on the 16th, 17th and 19th of November with the first
investment banker, that investment banker provided a presentation dated November
19, 2004. The presentation covered the potential funding, expected structure and
cost should the parties engage the investment banker's services. Management met
with the customer on November 22nd and with the investment banker on November
23rd. Also on November 23rd, Color Imaging reviewed the transaction with its
bank, and on the 1st of December reviewed it with another bank. Both banks had
capital market groups, in addition to traditional commercial lending groups,
that could potentially assist with the transaction.
At a meeting of the Board on November 15, 2004, management reviewed Color
Imaging's efforts to identify potential merger or acquisition candidates,
indicating that since 2001 the Company had been seeking out potential
candidates, incurring at one time more than $200,000 of due diligence expenses.
Ten different companies were approached by management and at that time two
others were being considered for contact. Management reported that the Company
typically included a risk factor for the Company's merger and acquisition
strategy in its public filings with the SEC. At this meeting the Company's chief
executive officer and chief financial officer reviewed all of the merger
discussions described above with business brokers, investment banking firms,
potential investors, suppliers and customers, including all possible sales and
acquisitions.
Discussions continued with the remanufacturer described above with whom the
Company had ongoing merger discussions through early December, and in late
December Color Imaging's management sought and obtained legal advice in
connection with the potential structures, tax issues, proxy matters and other
related matters. During the latter part of December further discussions were
held with the two banks contacted by Color Imaging. The president and chief
financial officer of Color Imaging met with the remanufacturer on the 4th and
5th of January 2005. The discussions concluded to that time included the
following items (1) the other party proposed to take over control of Color
Imaging with its chairman and chief executive officer becoming chairman and
chief executive officer of the combined companies, (2) additional financing
would be needed in the estimated amount of from $10.0 million to $20.0 million
to acquire shares for cash of non-affiliated Color Imaging stockholders and
provide the principal owner of the other party a like amount of cash as well,
(3) the price last discussed, was $1.25 per common share, although the other
party indicated that price was too high and did not agree to it (4) the relative
values, which was also still not definitive, of the two companies would be 3 to
2, meaning that the other was worth $3 for each $2 of Color Imaging's value, (5)
the resulting entity would be private and not a pass-through subchapter S or
limited liability company due to potential income tax consequences if Color
Imaging was sold at a price above its book value, and (6) the companies would
benefit from complementary warehouse locations. Though both parties showed some
interest in a transaction, significant issues were still unresolved. Additional
legal advice was obtained in January and further discussions were held with the
banks. The parties continued to discuss a merger, but turned their attention,
primarily, to completing their year-end financial statements and operational
matters. On January 19th Color Imaging's chief financial officer spoke with the
22
president and principal stockholder of this party regarding ordinary course of
business matters, and in that conversation the other party revealed that he
would be focusing on his business for the first half of 2005, including his
seeking out a private investor to acquire a substantial interest in his company.
Though he indicated that he was not going to be focusing on any merger
transaction with Color Imaging, both agreed to stay in touch.
At a meeting of the Board on January 27, 2005, the Board again reviewed the
history of the Company's efforts to find a suitable merger or acquisition
candidate. It reviewed the list of those that had been approached, together with
investment banker contacts that had been made. Of the two companies who had an
interest in merging, one would only consider a merger offer after it had gone
public in late 2006 or early 2007. The other company that had expressed an
interest in a merger, had substantial obstacles to overcome, including
differences over valuation, management issues and the lack of audited financial
statements, which would require the merger to be a going private transaction.
Management believed that changes were coming in the industry and already being
experienced by the Company's largest customer, including the rapid loss of the
Company's black text analog copier business and the increasing popularity of
digital and business color multifunctional machines with increasing
technological complexity and intellectual property rights. The Board concluded
as a result of this review that the Company should consider the possibility of
going private. The board noted that its previous experience after the merger
with Logical Imaging Solutions was not good. Since there were no prospective
merger or acquisition transactions likely, the Board then discussed the
Company's going private, considering:
o the fact that the Company's stock was undervalued.
o the increasing cost and burden of regulatory compliance.
o the competitive impact of the Company's public disclosure
requirements.
o that the company did not have access to public capital as a small
company with marginal profitability that was not listed on a major
stock exchange , and
o that most realistic merger or acquisition candidates were not likely
to have the required three years of audited financial statements or
meet the SOX 404 compliance deadlines for internal controls.
The Board then reviewed process, time line, cost and annual savings information
prepared by management in connection with going private. Management indicated
that Color Imaging could minimize proxy and meeting costs by going private as
part of its 2005 annual meeting. Upon further review of the material and
discussions, management discussed the desirability of going private for
out-of-pocket costs of less than $1.0 million, including the amount needed to
cancel the Company's 2003 Stock Incentive Plan if that was found to be
necessary. The Board indicated that if total going private expenditures exceeded
$1.0 million, or if conditions changed such that going private was no longer in
the best interest of Color Imaging, the Board would need to revisit the
advisability of going private. No strict maximum dollar amount was placed on the
costs of the going private transaction. The chief financial officer indicated
that he would request that the Company's lender agree that as much as $1.5
million could be expended for this purpose. The purpose of this higher limit was
to give the Board flexibility at the time the decision was made, if conditions
were such that going private remained in the best interest of the Company and
its stockholders, to do so should the cost exceed $1.0 million. Generally, to
preserve working capital and not incur debt, the Board is desirous of completing
the transaction for the least amount of money consistent with achieving
stockholders of record, including those in street name, of about 200.
The Board then passed a resolution establishing a Special Committee of the Board
of Directors, naming Richard Eiswirth, who was present at the meeting, as its
sole member. It gave the Special Committee the responsibility to formulate,
review, approve and recommend for approval by the Board of Directors strategic
and financial alternatives intended to maximize stockholder value, including
without limitation potential strategic merger transactions and/or a going
private transaction, and compensating the sole member of the Special Committee
at the rate of $5,000 per month in connection with these additional duties. The
Special Committee was also given the authority to negotiate and to direct the
negotiation of the terms of any such transaction, and the authority to retain
(and terminate) any professional advisors (including investment bankers,
attorneys and accountants) as it may determine necessary, appropriate or
desirable in carrying out its responsibilities, including the sole authority to
approve the fees and other retention terms of such outside consultants. It was
generally anticipated by the members of the Board, based on the lack of success
of management to enter into or conclude a strategic merger or acquisition over
the last several years and for other reasons, that the outcome of the work of
the Special Committee would be a recommendation that Color Imaging go private.
The Board suggested no price per share that the Special Committee was to
consider in the event that a going private transaction was to be the Special
Committee's recommendation to the Board. The Board, including Richard Eiswirth,
was aware of the price per share ($1.25) being discussed in the recent merger
negotiations with another, as well as an enterprise values per share routinely
calculated by Color Imaging's chief financial officer based upon multiples of
(1) 10 times earnings before interest and taxes, (2) 6.5 times earnings before
interest, taxes, depreciation and amortization, (3) per share value using a
23
price to earnings multiple of 15, (4) Color Imaging's book value per share and
(5) the then market price of Color Imaging's common stock.
The Board appointed Richard Eiswirth as the sole member of the Special
Committee, because the Board considered him to be independent and because of his
financial expertise. Mr. Eiswirth had joined the Board in April 2003, in part
because the Board believed it desirable to have a "financial expert" (as
described in Regulation S-X) to serve on the audit committee and act as its
chairman. Mr. Eiswirth owns no Color Imaging common stock, so the Board
considered that he would not have a direct stake in the outcome of the going
private transaction. Mr. Eiswirth holds stock options to purchase up to 25,000
shares at $0.45 per share, of which 10,000 are exercisable. These options are
now issued and outstanding and will remain issued and outstanding both before
and after the implementation of the stock splits.
At a meeting of the Special Committee on January 28, 2005 the Special Committee
met with Color Imaging's chief financial officer and counsel to discuss the
Company's history of merger activity, and the process of evaluating potential
transactions including the engagement of an investment banker. On January 31,
2005, the Special Committee completed, with the assistance of the chief
financial officer, a brief investment banker solicitation document, seeking to
obtain the experience, fees, costs and completion time frames of solicited
investment bankers in connection with their delivering to the Special Committee
a fairness opinion regarding the Company's going private in a reverse stock
split of 2500 to 1 at a per share price of $1.25. That document provided a very
brief statement regarding the Company's disappointing three-way public merger
and various enterprises values of the Company, as calculated by the chief
financial officer of the Company. After the solicitation was delivered to four
investment banking firms, the Special Committee verbally changed the scope of
the engagement to include strategic alternatives, including the possibility of a
going private transaction.
On February 7, 2005, during a trip to China and Taiwan by Color Imaging's
President, Sueling Wang, he met with Director Jui-Chi Wang, president of General
Plastic Industrial Co Ltd ("GPI") and discussed the strategic status of Color
Imaging. During that conversation Jui-Chi Wang stated that Color Imaging, to be
a good investment in the view of Taiwanese investors, needed to either have an
attractive stock price as a public company or pay dividends if it were private.
The discussion continued regarding the consequences to Color Imaging's
affiliate, GPI, should Color Imaging be sold or merged with another and control
of Color Imaging were changed. Jui-Chi Wang expressed the belief that such a
change in control would be accommodated if key Color Imaging management were
retained, since it was expected that Color Imaging would still be a large
customer of GPI and GPI would likely still retain its large ownership position,
4.5 million shares of our common stock, in Color Imaging. Jui-Chi Wang further
expressed the belief that whether or not Color Imaging was merged with or sold
to another, either way it would be agreeable to GPI, if it was in the interest
of Color Imaging and its stockholders.
During a meeting of the Special Committee on February 17, 2005, the Special
Committee reviewed the proposals of the investment banking firms and the
comparison chart that it requested management prepare, comparing the proposals
of each of the investment bankers whose proposals for services were solicited,
and chose CVG as the best candidate based on reputation, the completeness of its
proposal, the cost and the description of services to be provided. CVG proposed
an extensive pricing analysis for the Company and reviewed its strategic
alternatives, including contacting potential merger and acquisition candidates.
On March 22, 2005, the chief financial officer of Color Imaging again followed
up with the chief financial officer of the remanufacturer with whom the Company
had ongoing merger discussions, and in that conversation he was told that the
other party was still interested in the possibility of a transaction in the
future, but that other business matters still needed to settle down first.
On March 28, 2005, CBIZ Valuation Group, LLC ("CVG"), the Financial Advisor to
the Special Committee, made a preliminary presentation to the Special Committee
regarding the various analyses performed in evaluating strategic alternatives to
enhance stockholder value. Various metrics were discussed for measuring stock
value including current public market trading value, discounted cash flow
valuations, comparable public company valuations, comparable acquisition values,
estimated liquidation value, book value, and premiums paid by other companies in
other going private transactions. They also discussed alternatives to going
private including a merger or acquisition, a potential investment from a private
equity group, liquidation, and various methods of going private. CVG and the
Special Committee agreed that a reverse split going private transaction was
currently the most viable transaction available to the Company at a reasonable
price and within a reasonable time frame. They also reviewed previous merger
discussion the Company had engaged in, including preliminary transaction pricing
of $1.25 per share discussed with a potential merger candidate. CVG and the
Special Committee agreed this price was not necessarily indicative of the
Company's value since no transaction had or was likely to occur at that price,
and $1.25 per share represented a substantially higher premium to market value
than other companies had recently paid in similar going private transactions.
Preliminary pricing discussions included potential per share prices from $1.00
to $1.25 based on CVG's initial analysis.
24
At the conclusion or immediately after the March 28 meeting, Mr. Eiswirth
requested that CVG provide additional analyses related to the potential reverse
stock split transaction, which CVG provided to Mr. Eiswirth over the course of
the next several days from March 30 to April 1, 2005. These included analyses on
the potential per share values using different weighted average costs of
capital, comparative reverse split transactions conducted by other companies,
and multiples used in public company merger and acquisition transactions.
At another meeting of the Special Committee on April 6, 2005, the Special
Committee again met to review various alternatives, including the feasibility of
going private and to develop a preliminary recommendation that, when final,
would be made to the Board. The Special Committee reviewed CVG's assessment of
strategic alternatives including remaining public, merging with another company,
selling the Company to a strategic or financial buyer, liquidation or going
private. The Special Committee noted that CVG contacted a few potential
acquisition and merger candidates in the Company's industry, or private equity
funds investing in the company's industry, which CVG was able to identify, and
CVG was not able to identify any viable candidates to acquire or merge with the
Company. Based on the inquiries of CVG and those previously made by the Company,
the Special Committee concluded that a sale or merger of the Company was not a
viable alternative at that time. The Special Committee, after reviewing the
liquidation analysis of CVG and information obtained from the Company,
determined that an orderly liquidation of the company was unlikely to provide
proceeds to stockholders in an amount that exceeds the Company's value as a
going concern. The Special Committee also noted that CVG did conclude that going
private was a viable alternative to increase stockholder value and to increase
the attractiveness of the Company to potential buyers and merger candidates,
most of which were privately held, and the Special Committee concurred with this
conclusion. The Special Committee then reviewed the merits of a per share value
of $1.00 for a going private transaction, comparing this valuation to the
Company's current trading price, estimated liquidation value, book value and
discounted cash flow valuations based on the Company's projections and CVG's
valuation analysis.
On April 7, 2005, the chief financial officer of Color Imaging received a
telephone call from the president and principal owner of the remanufacturer with
whom the Company had ongoing merger discussions commencing in October 2004,
discussing ordinary course of business matters and the outcome of their audit of
their 2004 financial statements and industry news. On April 11, 2005, Color
Imaging's director Jui-Chi Wang reported that in a meeting the president and
principal stockholder of the remanufacturer on ordinary course of business
matters, the other party once again indicated that "no one could justify" the
$1.25 price previously discussed with management of Color Imaging. Director
Jui-Chi Wang concluded that the other party was losing interest in a potential
merger with Color Imaging.
At a meeting of the Special Committee on April 11, 2005, the Special Committee
met again with CVG to discuss its evaluation of the Company's strategic
alternatives, including going private. They also discussed the impact on CVG's
valuation analysis of the Company's book value and prior merger discussions with
third parties. The Special Committee suggested that it was considering a
pre-split price per share of $1.00, and CVG responded that such a price was
close to the book value of the Company and did not reflect much of a premium to
account for the value of the color toner business opportunity of Color Imaging,
even though the Company is in transition and much of the sales growth was based
upon products yet to be perfected or developed. CVG compared a per share
valuation of $1.00 to the Company's current book value of $0.94, and
management's projected book value at the time of the going private transaction
of $0.98 cents per share. CVG estimated that the Company's color toner
opportunity was worth approximately $1.3 million, or approximately $0.10 per
share. The Special Committee believed, and CVG agreed, that $1.10 per share
would represent a reasonable premium over the Company's current book value which
would reflect the projected value of the Company's color toner opportunity. They
also agreed that it would provide a reasonable premium to the Company's current
market value, liquidation value, and comparable acquisition method values, and
was within the range of CVG's analysis of the Company's value in comparison to
other public companies and discounted cash flow projections. Regarding
third-party merger discussions, the Special Committee indicated that it was of
the opinion that these discussions and indications of per share value could not
be relied upon due to their not being agreed to or otherwise made definitive.
CVG noted that, based upon its discussions with management, there was no
definitive agreement upon a price of $1.25 arising from any third party merger
negotiations, and that the $1.25 per share amount was derived from informal
discussions between the parties and that there was no formal analysis prepared
by either party supporting that per share amount.
On April 13, 2005 CVG provided to the Special Committee a preliminary version of
its presentation to be made to the Board on April 14. Mr. Eiswirth requested
that CVG provide additional analyses related to the potential reverse stock
split transaction, which CVG provided to Mr. Eiswirth on April 13, 2005, for
inclusion in the presentation being prepared for the Board. These included
analyses on the potential private equity group values, and the fairness of the
transaction to non-cashed out stockholders. Prior to presentation to the Board
on April 14, the preliminary version of the presentation was updated to include
these additional items.
In evaluating the Company's strategic options, the Special Committee conducted
extensive due diligence, thoroughly reviewed and discussed the research,
analysis, and opinions of CVG, and reviewed and analyzed the Company's strategic
options applying its best business judgment. On April 14, 2005, the Special
25
Committee adopted resolutions documenting its opinion that it would be in the
best interest of the Company and its stockholders to go private by means of a
reverse stock split, and recommended that the Board consider and approve such a
transaction. This recommendation was subject to receipt of a fairness opinion
from CVG for the pre-split purchase price per fractional share of $1.10.
On April 14, 2005, the Board met and received a report from CVG as the
investment banker engaged by the Special Committee to consider strategic
alternatives of Color Imaging, including a merger or going private transaction.
The strategic alternatives considered included (1) the Company continuing as is,
maintaining its public status, (2) a merger or acquisition with either a public
or private company, (3) the liquidation of the Company and (4) a going private
transaction. With regard to the latter, CVG presented an analysis with respect
to each of the following methods: (a) a management buyout, (b) sale to a private
equity investor, (c) a stock buy back program or (d) a reverse stock split.
After reviewing the report, asking and receiving clarifications from CVG and the
Special Committee where needed, the Board concurred with the conclusion of both
the Special Committee and CVG that enhancing stockholder value could best be
achieved by going private and that the method best to achieve that goal and
maintain the to the greatest extent possible the Company's working capital was
by reverse stock split. The Special Committee then made its recommendation to
the Board that Color Imaging go private in a reverse split transaction at a
ratio of either 1500 to 1, 2500 to 1 or 5000 to 1 at a pre-split price of $1.10
per share. The Board then discussed the recommendation of the Committee and
asked CVG if such a price was fair to the stockholders who would receive cash in
the transaction as well as those who remained stockholders of Color Imaging. CVG
reported to the Board that $1.10 was within the range of values it had
determined to be fair to the stockholders of Color Imaging who would be cashed
out as well as to those who would retain their shares in Color Imaging. Having
determined, with the advice of counsel, that the Board did not have to make a
tender off to those holding options in the Company's stock to avoid the
possibility that in the future an exercise of an option(s) would require that
the Company begin reporting with the SEC, the Board passed a resolution
indicating that such a tender offer to all of the issued and outstanding options
under the Company's 2003 Stock Incentive Program would not be made. The chief
financial officer also noted that the valuation assigned by CVG to the tax loss
carryforward of the Company was too low, offering his justification for this
conclusion. The Board authorized a reverse split going private transaction on
the terms and the $1.10 pre-split price per common share recommended by the
Special Committee, subject to the Special Committee's receipt of a fairness
opinion from CVG, incorporating the changes to the assumptions for the Company's
not paying to cancel its 2003 Incentive Stock Option Plan and correcting the
value of the Company's tax loss carryforward. The Board also authorized and
directed the Company's officers to announce the Company's intentions to go
private in a Form 8-K or other filing to be made with the SEC. The Board also
determined to abandon its open market stock purchase program, under which it
ceased repurchasing the Company's shares in the market in December 2004, when it
appeared that either a merger transaction, that would include the Company's
going private, was a possibility. The Board reserved for itself the right in its
sole discretion to determine the final ratio of the reverse split, and the right
to abandon the transaction at any time if it determined it were no longer in the
best interest of the Company or its stockholders. Mr. Eiswirth later requested
that CVG include in its opinion analysis the results developed using the 17% and
21% weighted average cost of capital. On May 2, at a meeting of the Special
Committee, the Special Committee met with CVG, with the chief financial officer
of the Company as a guest at that meeting, to receive CVG's final written
opinion regarding the fairness of a reverse stock split transaction, at the
pre-split price of $1.10 per share as recommended by the Special Committee and
authorized by the Board.
On May 2, 2005, Color Imaging's president reported a conversation with the
president of the remanufacturer with whom the Company had ongoing merger
discussions, wherein the other party disclosed that he was going to accept a
significant investment for a substantial ownership interest in his company from
a high net worth, foreign, private party. On June 8, 2005, the president and
chief financial officer of Color Imaging learned that the remanufacturer had
acquired another company.
FAIRNESS OF THE STOCK SPLITS
The Stock Splits are not structured so that approval of at least a majority of
unaffiliated stockholders is required. The Board based its decision not to seek
such approval due to the equal treatment of affiliated and unaffiliated
stockholders in the Stock Splits. In determining not to seek such approval, the
Board was aware that the executive officers, directors and their affiliates of
Color Imaging, who together own approximately 63.7% of the voting power of the
Common Shares outstanding and entitled to vote at the Annual Meeting, have
indicated that they will vote in favor of the Stock Splits, making the approval
of the Stock Splits Proposal virtually assured.
An independent committee of the Board has reviewed the fairness of the Stock
Splits; however, no unaffiliated representative acting solely on behalf of the
stockholders for the purpose of negotiating the terms of the transaction
proposal or preparing a report covering the fairness of the Stock Splits was
retained by Color Imaging or by a majority of directors who are not employees of
Color Imaging. The Board views (i) the Fairness Opinion, (ii) the appointment of
a Special Committee consisting of an independent director, (iii) the need to
obtain the affirmative vote of the holders of at least a majority of the Common
Shares, and (iv) the other matters discussed in this Proxy Statement as
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affording adequate procedural safeguards to unaffiliated stockholders without
the extraordinary expense of multiple financial or legal advisors.
Color Imaging has not made any provision in connection with the Stock Splits to
grant unaffiliated stockholders access to Color Imaging's corporate files or to
obtain counsel or appraisal services at Color Imaging's expense. With respect to
unaffiliated stockholders' access to Color Imaging's corporate files, the Board
determined that this proxy statement, together with Color Imaging's other
filings with the SEC, provide adequate information for unaffiliated stockholders
to make an informed decision with respect to the Stock Splits. The Board also
considered the fact that under Delaware law, subject to certain conditions,
stockholders have the right to review Color Imaging's relevant books and
records.
The Board believes that the transaction is substantively and procedurally fair
to unaffiliated stockholders, both those receiving cash and retaining their
stock in Color Imaging, notwithstanding the absence of an unaffiliated
stockholder approval requirement or unaffiliated representative. After
consideration of all aspects of the proposed transaction as described above, all
of the directors, including the directors who are not employees of Color
Imaging, approved the Stock Splits.
The Board considered the factors in support of and in opposition to the Stock
Splits discussed below in reaching its conclusion as to the substantive fairness
of the Stock Splits. The Board did not assign specific weight to the following
factors in a formulaic fashion, but did place special emphasis on the
opportunity for unaffiliated holders of Common Shares who will have fractional
shares of less than one whole share exchanged for cash to sell such Common
Shares at a premium and without brokerage fees or commissions, as well as the
significant cost and time savings Color Imaging is expected to realize from
deregistration of the Common Shares.
While performing its analysis for the Fairness Opinion, CVG selected the
valuation analyses it deemed most relevant. Please see the section entitled
"Special Factors - Opinion of CBIZ Valuation Group, LLC" for a discussion of
these analyses.
Neither CVG nor the Board deemed either Color Imaging's liquidation value or the
market price for its Common shares as quoted as OTCBB material or relevant in
the context of the Stock Splits. CVG and the Board believes that the liquidation
and market value of Color Imaging's Common Stock on a per share basis
represented arbitrarily low valuations. Using liquidation or the market value to
help set the Repurchase Price would have supported a price lower than the price
the Board believed would be appropriate in light of its desire to ensure that
stockholders who receive cash receive a fair price for their Common Shares that
are exchanged for cash in connection with the Stock Splits.
The Special Committee and the Board believe that Color Imaging's net book value
per share does not properly reflect Color Imaging's business color sales and
gross profit opportunity and resultant earnings stream and cash flow, two
factors it considers critical for a meaningful valuation of the Common Shares.
Net book value is based upon the historical cost of a company's assets and
ignores the value of a company as a going concern. The value of items such as
proprietary products and intellectual property, an in-place factory, positive
business reputation, a trained workforce and established customer accounts are
ignored in computing net book value. Regarding the liquidation value of Color
Imaging, CVG presented what it deemed to be an optimistic value of $0.78 per
share, even lower than the net book value of the Color Imaging, noting that
major assets, such as accounts receivable and inventory often do not realize
their book value during liquidation. This inability to realize the book value is
due in part to factors such as customers who negotiate discounts on their
receivables and additional product (inventory) purchases for the loss of
warranty protection, raw material restocking charges, used equipment that often
loses value in relation to the costs to dismantle, remove and transport it to
another and settlement costs negotiated to cancel unexpired leases obligations,
including the remaining term of the non-cancelable lease for the Company's
factory that does not expire until 2009 and has annual rental expense
commitments of approximately $550,000 per year. The Special Committee and the
Board believe that the proper valuation of Color Imaging should be based on
Color Imaging's historical and prospective operating performance as reflected in
the discounted cash flow analysis and its net book value adjusted upward for the
estimated value of its color toner products business opportunity, even though
the opportunity was dependent upon products yet to be perfected or developed.
CVG's analysis and conclusions were consistent with that judgment. As shown in
greater detail in the section of this Proxy Statement entitled "Financial
Information--Summary Financial Information," Color Imaging's book value per
Common Share as of December 31, 2004 was $0.92. The Board believes that the
$1.10 pre-split valuation of the Common Shares, as concluded by the Special
Committee of the Board of Directors and supported by the Fairness Opinion of
CVG, is significantly greater than the liquidation, market and the book values
per Common Share and within the range of the values indicated by the discounted
cash flows, which also reflect in part, the color toner business opportunity of
Color Imaging.
In arriving at its conclusion and recommendation, the Special Committee
considered and reviewed with the Board the following data:
o The market price per share based upon the average closing price of the
Common Shares over the 30 trading days prior to and including April
14, 2005 (the date the Board approved the Stock Splits) was $0.49. CVG
and the Special Committee agreed that the trading value of the
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Company's stock was artificially low due to low liquidity, low trading
volume, no institutional holders, high insider ownership and few
active market makers.
o The optimistic liquidation value presented by CVG was $0.78 per share.
CVG and the Special Committee noted that this value was lower than the
Company's current book value.
o The book value per share calculated by CVG was $0.92.
o The Special Committee on April 6, 2005 made an initial assessment of
the value per share at which to cash out fractional stockholders
resulting from a reverse stock split of $1.00 per pre-split share.
o On April 6, 2005, in comparing a price of $1.00 per share to analyses
or ranges developed by the investment banker, current market prices,
and similar recent transactions, the Special Committee noted the
following:
- $1.00 per share represents a premium of 113% over the market
price of $0.47 per share as of April 5, 2005, and a premium of
25% over the 52 week high of $0.80 per share. The premiums were
in excess of or comparable to the majority of comparable
transactions provided by CVG.
- CVG determined a valuation of $0.72 per share based on an
analysis of comparable acquisitions. $1.00 per share represented
a premium of 39% to this valuation.
- CVG determined a valuation of $0.80 to $1.05 per share in
comparison to other public companies. $1.00 per share was within
that range.
- CVG determined a liquidation value of $0.78 per share. $1.00 per
share represents a premium of 28% to this liquidation value.
- CVG determined a valuation of $0.87 to $1.59 per share using a
discounted cash flow analysis of management's budget. $1.00 per
share was within that range. Additionally, the Special Committee
and the Board noted that management's budget assumptions were
highly dependent upon the Company's ability to perfect and
develop new product lines. As such, the Special Committee
believes that the lower end of the range of values determined in
the discounted cash flow analysis, based on a higher weighted
average cost of capital due to the inherent risk in management's
projections, was appropriate.
o The Special Committee did not attribute any weight in determining the
amount to be paid for the Common Shares to any of the strategic merger
or acquisition discussions between management and others, nor any of
the prices discussed (including a transaction value of $1.25 discussed
preliminarily with a potential merger candidate), since no price was
agreed upon and no discussion resulted in a definitive agreement or
transaction. CVG concurred in this analysis.
o Upon further study, the Special Committee on April 11, 2005,
determined the then book value of Color Imaging as of March 31, 2005,
was $0.94 and that it was reasonably expected to be approximately
$0.98 by the time the going private transaction would be completed. A
per share price of $1.00 for the Common Shares would then represent a
2% premium over the expected book value on the date of the
transaction. The Special Committee felt the Company's color imaging
opportunities merited a higher premium to book value, and as a result
increased its preliminary valuation to $1.10 per share.
o The Company's substantial reliance on the sales and profit
contributions of color products, though adversely impacted by quality
issues, was generally supported by its historical sales of some 2%, 9%
18% and 28% of sales for the twelve month periods ended December 31,
2002, 2003, 2004 and for the quarter ended March 31, 2005,
respectively. While the Company projects higher margin color products
to represent some 38% to 40% of total sales for the year ended
December 31, 2005, management has not achieved its budget goals for
the last few years.
o The Company's past history of not meeting its budgets or projections
meant, in the Special Committee's judgment, that the higher per share
valuations derived by the discounted cash flow analysis completed by
CVG did not represent an appropriate price to be paid for the Common
Shares.
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o The increasing profitability of the Company and its offsetting lower
margin business from the loss of the sales of its historically two
largest customers with the sales of higher margin products,
particularly copier color toner products, to others.
Based on the foregoing, the Special Committee determined in its best judgment
that $1.10 per pre-split share was a fair price to be paid for the Common
Shares, since (1) it was within the range of the discounted cash flow analyses
and (2) provided a 10% premium for the intangible value of the Company's color
toner business opportunity over its net book value, even though that opportunity
was highly dependent upon products yet to be perfected or developed. After
realizing that a sale of the Company, its liquidation or its merger with or
acquisition by another were not viable strategic alternatives at this time, and
because of the variety of factors considered, many of which are not precisely
quantifiable and are instead dependent upon qualitative judgment, the Special
Committee did not find it practicable to quantify or otherwise assign relative
weights to, and did not make specific assessments of, the specific factors
considered in reaching its determination.
Equal Treatment of Affiliated and Unaffiliated Holders of Common Shares. The
Stock Splits will not impact affiliated holders of Common Shares differently
than unaffiliated holders of Common Shares on the basis of affiliate status. The
sole determining factor as to whether a holder of Common Shares will remain a
stockholder of Color Imaging and how many Common Shares will be repurchased by
Color Imaging in lieu of issuing fractional shares as a result of the Stock
Splits is the number of Common Shares held by such holder immediately prior to
the Stock Splits. Please see the section entitled "Proposal No. 1 - Stock Splits
Proposal - Summary and Structure" for a more detailed discussion.
Minimum Effect on Voting Power. The Stock Splits will have minimum effect on the
voting power of Color Imaging's stockholders. The Common Shares are Color
Imaging's only voting shares and will continue to be Color Imaging's only voting
shares after the Stock Splits. The voting and other rights currently held by the
Common Shares will not be affected by the Stock Splits. The only effect of the
Stock Splits on Color Imaging's voting power will be a change in the overall
percentage of ownership of the Continuing Holders.
No Material Change in Percentage Ownership of Executive Officers and Directors.
Since only an estimated 272,244 out of 12,697,805 outstanding Common Shares will
be eliminated as a result of the Stock Splits, the percentage ownership of the
Continuing Holders will be approximately the same as it was prior to the Stock
Splits. For example, the executive officers, directors and their affiliates of
Color Imaging currently beneficially own approximately 66.2% of the outstanding
Common Shares, and will beneficially own approximately 67.5% of the outstanding
Common Shares following completion of the Stock Splits. All of the directors and
executive officers currently have over 1500, 2500, or 5000 shares, except the
spouse of Sueling Wang who has a brokerage account within which she has 1,000
shares, and will remain stockholders of Color Imaging after completion of the
Stock Splits. Please see the section entitled "Information About Color Imaging -
Interest of Certain Persons in Matters to be Acted Upon."
Potential Ability to Control Decision to Remain a Holder of or Liquidate Common
Shares. Another factor considered by the Board in determining the fairness of
the Stock Splits to the holders of the Common Shares is that current holders of
fewer than 1500, 2500 or 5000 Common Shares, depending upon the ratio used to
effect the reverse split, can seek to remain stockholders of Color Imaging
following the Stock Splits by acquiring additional shares so that they own at
least 1500, 2500 or 5000 Common Shares, depending upon the ratio used to effect
the reverse stock split, immediately before the Stock Splits. Conversely,
stockholders that own 1500, 2500 or 5000 or more Common Shares, depending on the
ratio used to effect the reverse stock split, who desire to liquidate their
shares in connection with the Stock Splits at the premium price offered can seek
to reduce their holdings to fewer than 1500, 2500 or 5000 Common Shares,
depending upon the ratio used to effect the reverse stock split, by selling
shares prior to the Stock Splits. The Board did not place undue emphasis on this
factor due to the limited trading market for the Common Shares. Please see the
section entitled "Special Factors - Effects of the Stock Splits."
OTHER FACTORS
The Board concluded the factors set forth below to be either inapplicable or not
material to its assessment of the fairness of the Stock Splits.
o Firm Offers. We are not aware of any firm offers to purchase Color
Imaging that have been made during the past two calendar years or
during the current calendar year.
o Prior Public Offerings. We have not made any underwritten public
offering of the Common Shares or any other securities since the
current control of Color Imaging was effected in June of 2000,
although we did complete an offering on form SB-2 of 4.5 million
shares in March 2003 with our foreign affiliate.
29
o Merger, Consolidation or Other Extraordinary Transaction. We have not
engaged in a merger or consolidation with another company or in any
other extraordinary transaction, such as the sale or other transfer of
all, or a substantial part, of our assets, during the past two
calendar years or during the current calendar year.
o Securities Purchases. There have not been any purchases of our Common
Shares that would enable the holder to exercise control of Color
Imaging, excepting our offering completed in March 2003 on form SB-2
of 4.5 million of our common shares with our foreign affiliate.
The stock purchases under the Company's stock repurchase program and by certain
affiliates, as described at "Information About Color Imaging - Common Share
Purchase Information" were not considered relevant because they were purchased
at the then market prices. As discussed above, the market value was deemed to be
not indicative of the fair value of the Company's common stock.
CONCLUSION
Since the Company's three-way merger in June 2000, the Company has disclosed its
continuing interest in mergers or acquisitions with extensive disclosures being
made in its Form 10-Q filed with the SEC on October 28, 2004 for the period
ended September 30, 2004. Having made these disclosures and having pursued a
number of such strategic alternatives, both initiated by the Company and
responding to those of others, management, the Special Committee and the Board
concluded that a sale of the Company, its liquidation or its merger with or
acquisition by another were not viable strategic alternatives at this time and
that the advantages of going private outweighed the disadvantages. After
considering all of the above factors, the Special Committee concluded, and the
Board concurred, that the positive factors relating to the Stock Splits
outweighed the negative factors as a means by which to go private. Because of
the variety of factors considered, the Special Committee and the Board did not
find it practicable to quantify or otherwise assign relative weights to, and did
not make specific assessments of, the specific factors considered in reaching
its pre-split price per common share of $1.10 determination.
The Special Committee and the Board did not consider the market value or
liquidation value of Color Imaging to be material to their conclusions regarding
the fairness of the Stock Splits, because it is their view that neither market
value nor liquidation value accurately reflects the value of Color Imaging in
light of its business and assets.
The Special Committee and the Board believe that Color Imaging's net book value
per share does not fully reflect Color Imaging's business color sales and gross
profit opportunity and resultant earnings stream and cash flow, two factors it
considers critical for a meaningful valuation of the Common Shares. Net book
value is based upon the historical cost of a company's assets and ignores the
value of a company as a going concern. The value of items such as proprietary
products and intellectual property, an in-place factory, positive business
reputation, a trained workforce and established customer accounts are ignored in
computing net book value. As set forth in greater detail in the section of this
Proxy Statement entitled "Financial Information--Summary Financial Information,"
Color Imaging's book value per Common Share as of December 31, 2004 was $0.92.
Regarding the liquidation value of Color Imaging, CVG presented what it deemed
to be an optimistic value of $0.78 per share, even lower than the net book value
of the Color Imaging, realizing that major assets such as accounts receivable
and inventory often do not realize their book value during liquidation. This
inability to realize the book value is due in part to factors such as customers
who negotiate discounts on their receivables and additional product (inventory)
purchases for the loss of warranty protection, raw material restocking charges,
used equipment that often loses value in relation to the costs to dismantle,
remove and transport it to another and settlement costs negotiated to cancel
unexpired leases obligations, including the remaining term of the non-cancelable
lease for the Company's factory that does not expire until 2009 and has annual
rental expense commitments of approximately $550,000 per year. The Special
Committee and the Board considered the analysis performed by CVG to be an
appropriate indication of the going concern value of Color Imaging, and relied
upon the fairness opinion of CVG in making its determinations regarding the
Stock Splits Proposal. The Special Committee recommended to the Board that the
Stock Splits Proposal be adopted and approved at the pre-split Common Share
price of $1.10 and the recommendation was adopted by the Board.
Pursuant to Section 141 of the Delaware General Corporation Law, the Special
Committee relied on the projections and representations of management, the
historical financial statements of the Company and the fairness opinion of CVG,
and the Board relied on the recommendation of the Special Committee and the
fairness opinion of CVG.
The Board believes that all of the factors mentioned above, both favorable and
unfavorable, when viewed together support a conclusion that the Stock Splits are
substantively fair to Color Imaging's stockholders, including the Cashed Out
Holders and Continuing Holders, other than executive officers, directors and
their affiliates.
30
POSITION OF THE WANGS AS TO FAIRNESS OF THE TRANSACTION
The rules of the SEC require the Wangs to express their belief as to the
fairness of the Stock Splits Proposal to our stockholders. The Wangs were not
part of, and did not participate in the deliberations of, the Special Committee.
Based on its belief regarding the reasonableness of the conclusions and analyses
of the Special Committee and the Board of Directors, the Wangs adopted the
conclusions and analyses of the Special Committee and the Board of Directors
described above and believe that the $1.10 per share consideration is fair to
Color Imaging's stockholders owning fewer than 1500, 2500 or 5000 shares of our
common stock and is fair, from a financial point of view, to the other
stockholders, including the unaffiliated stockholders. In making this
determination, the Board and the Wangs considered the following factors:
o The deliberation process conducted by the Special Committee which led
to the unanimous approval of the proposal by the Special Committee and
the Board of Directors.
o The analysis and fairness opinion provided by CVG.
o The relationship between the $1.10 price per share to be paid in the
reverse stock split and the recent and historical market prices of
Color Imaging's common stock. The transaction price of $1.10 per share
to be paid to cashed out stockholders represents approximately a 100%
premium to the closing price of Color Imaging's common stock on April
18, 2005, the last trading day before the public announcement on April
19, 2005 of the transaction, and exceeds the market prices of Color
Imaging's common stock for more than 12 months prior to that date.
In reaching their determination as to fairness, the Wangs did not rank or assign
specific weight to particular factors, but rather considered all of the
foregoing factors as a whole to support their belief that the transaction is
fair to the unaffiliated stockholders of Color Imaging. This belief, however,
should not be construed as a recommendation to stockholders as to how they
should vote on the proposal.
The Wangs did not consider the then current market value of the common stock or
the liquidation value of Color Imaging to be material to their conclusion
regarding the fairness of the transaction because it is their view the market
value nor liquidation value accurately reflects the value of Color Imaging in
light of the nature of its business and assets. The Special Committee, the Board
and the Wangs did, however, consider the net book value of Color Imaging as
representative of the in place and going concern value of the tangible assets of
Color Imaging, but each are of the belief that there was value in connection
with the color toner business opportunity of Color Imaging that was not
reflected in the book value. While no mathematical formula was used by the
Special Committee, the Special Committee concluded that $1.10 represents a fair
price per pre-split share of Color Imaging's common stock, including the value
attributable to the color toner opportunity, as of the time the transaction is
expected to be completed.
The Wangs also have reviewed, relied upon and adopted the position of the Board
of Directors, as described in this proxy statement, with respect to the reasons
for, advantages of, disadvantages of, and purpose of the Stock Splits Proposal.
SPECIAL FACTORS - OPINION OF CBIZ VALUATION GROUP, LLC
The Special Committee of the Board retained CBIZ Valuation Group, LLC ("CVG") to
provide the Fairness Opinion. On May 2, 2005, CVG delivered the Fairness Opinion
to the Special Committee of the Board. The Fairness Opinion states that, based
upon and subject to the factors and assumptions set forth therein, the
Repurchase Price to be paid to Cashed Out Holders pursuant to the Stock Splits
is fair from a financial point of view as of May 2, 2005. CVG also presented to
the Special Committee of the Board a summary of the analyses described below.
The Fairness Opinion was prepared for the use and benefit of the Special
Committee and the Board, and was directed only to the fairness from a financial
point of view, as of the date thereof, to stockholders who would not retain
their interest in the Company after completion of the Transaction, and
stockholders who would retain their interest in the Company after completion of
the Transaction, in each case other than stockholders who are directors, or
executive officers of the Company or affiliates of directors or executive
officers of the Company. CVG expressed no view as to, and its opinion does not
address, any other terms of the proposed transaction or the merits of the
underlying decision of the Company to engage in the proposed transaction. The
Fairness Opinion does not constitute a recommendation to the Board as to how it
should vote on the Stock Splits or to any stockholder as to how such stockholder
should vote at the Annual Meeting. In furnishing the Fairness Opinion, CVG did
not admit that it is an expert within the meaning of the term "expert" as used
in the Securities Act of nor did it admit that its opinion serves as a report or
valuation within the meaning of the Securities Act.
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The full text of the Fairness Opinion is attached as Exhibit A to this Proxy
Statement and is incorporated herein by reference. The summary of the Fairness
Opinion set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of the Fairness Opinion. Stockholders are urged to
read the Fairness Opinion carefully and in its entirety for a discussion of the
procedures followed, assumptions made, other matters considered and limits of
the review by CVG in connection with the Fairness Opinion. A copy of the
fairness opinion, as well as each of the other exhibits to the Schedule 13E-3
filed with this Proxy Statement, will be made available for inspection and
copying at Color Imaging's executive offices during regular business hours by
any Color Imaging stockholder or a representative of a stockholder as so
designated in writing.
The Special Committee of the Board selected CVG as its financial advisor because
it is a recognized valuation consulting firm that has substantial experience in
business valuations and is knowledgeable and familiar with the industry and
operations of Color Imaging and its business. As part of its business, CVG is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuation for corporate and other
purposes.
In rendering the Fairness Opinion, CVG reviewed the terms of the Stock Splits
and also reviewed financial and other information that was publicly available,
or furnished to CVG by Color Imaging's management. CVG also reviewed certain
publicly available operational, financial and stock market data relating to
selected public companies and conducted other financial studies, analyses and
investigations as CVG deemed necessary or appropriate for purposes of rendering
the Fairness Opinion, as more fully set forth therein. No limitations were
imposed by the Board or the Special Committee of Color Imaging upon CVG with
respect to the investigations made or procedures followed by it in rendering its
opinion.
CVG assumed and relied upon, without independent verification, the accuracy and
completeness of all financial and other information that was publicly available,
supplied or otherwise communicated to it by or on behalf of Color Imaging. CVG
further relied upon the assurances of Color Imaging's management that they are
unaware of any facts that would make the information provided to it incomplete
or misleading. With respect to projections provided to or discussed with CVG by
the Company's management, CVG assumed that such projections were reasonably
prepared and reflected the best currently available estimates and judgments of
the future financial performance of the Company.
CVG was not requested to make, and did not make, an independent evaluation or
appraisal of the assets, properties, facilities or liabilities (contingent or
otherwise) of Color Imaging, and was not furnished with any such appraisals or
evaluations, excepting an equipment appraisal of then existing machinery and
equipment of Color Imaging as of August 24, 2001. CVG's opinion is necessarily
based upon financial, economic, market and other conditions and circumstances
existing and disclosed to CVG on the date of the Fairness Opinion. The Fairness
Opinion did not predict or take into account any possible economic, monetary or
other changes that might occur, or information that might become available,
after the date of its written opinion. Subsequent developments may affect the
conclusions reached in the Fairness Opinion and CVG has no obligation to update,
revise or reaffirm the Fairness Opinion.
In preparing the Fairness Opinion, CVG conducted the following two principal
analyses: (i) valuations based upon discounted cash flow analyses of the future
cash flows of Color Imaging, and (ii) a comparison of Color Imaging with certain
publicly traded companies deemed comparable to Color Imaging. No company used in
any analysis as a comparison is identical to Color Imaging, and they all differ
in various ways. As a result, CVG applied its experience and professional
judgment in making such analyses. Accordingly, an analysis of the results is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial characteristics, performance characteristics and
trading value of the comparable companies to which Color Imaging is being
compared. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analyses or summary description. In arriving
at the Fairness Opinion, CVG considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it, though it did deem certain analysis and results to be more
representative than others in determining the value of Color Imaging's common
stock. CVG believes that the summary provided and the analyses described above
must be considered as a whole and that selecting portions of these analyses,
without considering all of them, would create an incomplete view of the process
underlying its analyses and opinion. In addition, CVG may have given various
analyses and factors more or less weight than other analyses and factors and may
have deemed various assumptions more or less probable than other assumptions,
therefore the range of valuations resulting from any particular analysis
described above should not be taken to be CVG's view of the actual value of
Color Imaging.
The following is a summary of the material financial analyses performed by CVG
in connection with the preparation of the Fairness Opinion. These summaries of
financial analyses alone do not constitute a complete description of the
financial analyses CVG employed in reaching its conclusions. The order of
analyses described does not represent relative importance or weight given to
those analyses by CVG. Some of the summaries of the financial analyses include
information presented in tabular format. The tables must be read together with
the full text of each summary and are alone not a complete description of CVG's
financial analyses. Except as otherwise noted, the following quantitative
32
information, to the extent that it is based on market data, is based on market
data as it existed on or before February 1, 2005 and is not necessarily
indicative of current market conditions.
PURPOSE AND CONTENT OF THE FAIRNESS OPINION
On March 28, 2005, CBIZ Valuation Group, LLC ("CVG"), the Financial Advisor to
the Special Committee, made a preliminary presentation to the Special Committee
regarding the various analyses performed in evaluating strategic alternatives to
enhance stockholder value. Various metrics were discussed for measuring stock
value including current public market trading value, discounted cash flow
valuations, comparable public company valuations, comparable acquisition values,
estimated liquidation value, book value, and premiums paid by other companies in
other going private transactions. They also discussed alternatives to going
private including a merger or acquisitions, a potential investment from a
private equity group, liquidation, and various methods of going private. CVG and
the Special Committee agreed that a reverse split going private transaction was
the most viable transaction available to the Company at a reasonable price and
within a reasonable time frame. They also reviewed previous merger discussion
the Company had engaged in, including preliminary transaction pricing of $1.25
per share discussed with a potential merger candidate. CVG and the Special
Committee agreed this price was not necessarily indicative of the Company's
value since no transaction had or was likely to occur at that price, and the
price of $1.25 per share represented a substantially higher premium to market
value than other companies had recently paid in similar going private
transactions.
The Special Committee requested that CVG supplement its analysis by developing
values using the discounted cash flow method using cost of equity estimates of
20% and 25%, cost of equity and return on equity like that sought by a private
equity group when making an investment which resulted in weighted average cost
of capital estimates of 17% and 21%.
On April 6 2005, the Special Committee met to review the merits of a per share
value of $1.00, comparing this valuation to the Company's current trading price,
estimated liquidation value, book value and discounted cash flow valuations
based on the Company's projections and CVG's valuation analysis. On April 11,
2005, the Special Committee met again with CVG to discuss valuation of the
Company's shares for the purpose of completing a reverse split going private
transaction. They compared a preliminary valuation of the Company's stock of
$1.00 to the Company's current book value of $0.94, and management's projected
book value at the time of the going private transaction of $0.98 per share. CVG
estimated that the Company's color toner opportunity was worth approximately
$1.3 million, or approximately $0.10 per share. The Special Committee believed,
and CVG agreed, that $1.10 per share would represent a reasonable premium over
the Company's current book value, taking into account the projected value of the
color toner opportunity. It also provided a reasonable premium to the Company's
current market value, liquidation value, and comparable acquisition method
values, and was within the range of CVG's analysis of the Company's value in
comparison to other public companies and discounted cash flow projections.
On April 14, 2005, the Special Committee made a recommendation to the Board,
after evaluating strategic alternatives, that Color Imaging go private in a
reverse stock split at the pre-split price of $1.10 per common share, and CVG's
presentation to the Board, which also outlined strategic alternatives and
provided data and analyses, supported the recommendation of the Special
Committee. The CVG presentation included the impact of a contemplated plan to
buy out options, a plan that the Board elected not to adopt, and further assumed
that Color Imaging would not realize the full value of its net operating loss
carryforward. At that meeting the Board of Directors approved a plan recommended
by the Special Committee to proceed with a going private transaction in a
reverse stock split without the buy out of all issued and outstanding options.
The Board conditioned its approval on the receipt of CVG's fairness opinion,
reflecting the Company's not paying to cancel issued and outstanding stock
options and allowing for the full realization of the benefit of the Company's
tax loss carryforward, consistent with and supportive of the Special Committee's
recommendation to the Board. CVG subsequently revised its analysis to reflect
the Board's decision not to implement the option buy out plan and also made
adjustments to reflect the revised estimate of the tax loss carryforward
predicated on the Company's current profitability, as concurred by its auditors.
The Board approved the going private transaction at the pre-split price per
share recommended by the Special Committee, subject to the Special Committee
receiving a fairness opinion from CVG after making the aforementioned changes to
the assumptions, that was consistent with the $1.10 per share pre-split price,
and the Board did not require and the Special Committee did not ask CVG to
deliver an updated presentation.
On May 2, 2005, after adjusting its analysis to reflect the Board's decision not
to offer certain option holders the right to receive cash for certain in the
money options and after updating its analysis for the expected realizable value
of certain tax loss carry forwards discussed at the April 14th Board Meeting,
CVG provided to the Special Committee a written opinion (the "Fairness Opinion")
that, as of the date of such opinion, the reverse stock split, as described in
this Proxy Statement, is fair from a financial point of view to:
o stockholders who would not retain their interest in the Company after
completion of the Reverse Stock Split, and
33
o stockholders who would retain their interest in the Company after
completion of the Reverse Stock Split.
In each case, the Fairness Opinion applied to stockholders who are not directors
or executive officers of the Company or affiliates of directors or executive
officers of the Company.
The Fairness Opinion addressed only the fairness, from a financial point of view
as of the date of the opinion, of the consideration to be paid to cashed out
stockholders in lieu of issuing any fractional shares resulting from a Reverse
Stock Split, and the fairness, from a financial point of view of the effect of
the transaction on nonaffiliated stockholders who will remain. The Fairness
Opinion did not address any other aspect of the Reverse Stock Split or
constitute a recommendation to any holder of common stock as to how to vote at
the Annual Meeting. In addition, the Fairness Opinion did not address the
relative merits of the Reverse Stock Split or the other business strategies that
the Special Committee or the Board of Directors considered, nor did it address
the decisions of the Special Committee and the Board of Directors to recommend
or proceed with the Reverse Stock Split.
The descriptions of the Valuation and the Fairness Opinion are only summaries
and are qualified in their entirety by the full text of such documents. Holders
of common stock are urged to and should read the Valuation and the Fairness
Opinion in their entirety.
In connection with preparing the Fairness Opinion and the related Valuation, CVG
conducted such reviews, analyses and inquiries as it deemed necessary and
appropriate under the circumstances. Among other things, CVG relied on the
following sources of information in performing its analysis:
o The Company's Annual Reports on Form 10-K for the five fiscal years
ended December 31, 2000 through December 31, 2004 and the Company's
Quarterly Reports on Form 10-Q for the quarters ended September 30,
2003, September 30, 2004, June 30, 2003, June 30, 2004, March 31,
2003, and March 31, 2004.
o Company-prepared financial projections for the fiscal years ended
December 31, 2005, through December 31, 2009.
o Interviews of certain members of senior management of the Company to
discuss the Company's history, operations, financial condition,
industry and future prospects.
o A visit to the Company's headquarters in Norcross, Georgia.
o A review of the historical market prices and trading volume of the
common stock, an analysis of the stockholder profile of the Company
and the number of stockholders, and a review of publicly available
news, articles and press releases relating to the Company.
o A review of publicly available financial data of certain
publicly-traded companies that CVG deemed comparable to the Company.
o A review of publicly available financial data of certain merger and
acquisition transactions involving companies that CVG deemed
comparable to the Company.
o Other studies, analyses and inquiries that CVG deemed appropriate.
In addition, with the Special Committee's authorization, CVG initiated contact
with a few strategic and financial parties, none of whom expressed interest in
exploring a possible transaction with the Company.
The Fairness Opinion and underlying financial analyses were among the many
factors considered by the Special Committee in its evaluation of the Reverse
Stock Split and should not be viewed as determinative of the view of the Special
Committee with respect to the Reverse Stock Split or the cash consideration
payable to holders of Common Stock who will hold fractional shares immediately
following the Reverse Stock Split.
The preparation of a fairness opinion involves complex considerations and
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of these methods to the particular
circumstances and, therefore, an opinion is not readily susceptible to summary
description. Each of the analyses conducted by CVG was carried out in order to
provide a different perspective on the Reverse Stock Split and to add to the
total mix of information available. CVG did not form a conclusion as to whether
any individual analysis, considered in isolation, supported or failed to support
an opinion as to the fairness of the Reverse Stock Split. Rather, in reaching
34
its conclusion, CVG relied upon the results of the analyses taken as a whole and
also on application of its own experience and judgment.
Accordingly, notwithstanding the separate factors summarized below, CVG has
indicated to the Special Committee that it believes that consideration of some
of the relevant analyses and factors, without considering all analyses and
factors, could create an incomplete or inaccurate view of the evaluation process
underlying CVG's opinion.
With respect to the analyses of comparable publicly traded companies and
comparable merger and acquisition transactions summarized below, such analyses
reflect selected companies, but not necessarily all companies that may be
considered relevant in evaluating the Company or the Reverse Stock Split. In
addition, no company used as a comparison is either identical or directly
comparable to the Company. These analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the public trading or acquisition values of the companies
concerned.
The estimates of the Company's future financial performance provided by
management included in or underlying CVG's analyses are not necessarily
indicative of future results or values that might be significantly more or less
favorable than those estimates. In performing its analyses, CVG considered
industry performance, general business and economic conditions and other
matters, many of which are beyond the Company's control. Estimates of the
financial value of companies do not purport to reflect the prices at which
companies actually may be sold.
The actual cash consideration to be paid to cashed-out stockholders in lieu of
fractional shares is to be determined by the Company's Special Committee and its
Board of Directors. CVG's Valuation and Fairness Opinion are only one of many
factors that will be considered by the Special Committee and the Board of
Directors in their evaluation of the Reverse Stock Split and should not be
viewed as determinative of the views of the Special Committee or the Board of
Directors with respect to the Reverse Stock Split or the consideration to be
paid to cashed-out stockholders in lieu of their fractional shares.
REVIEW OF COLOR IMAGING CURRENT AND HISTORICAL MARKET PERFORMANCE
In order to develop a conceptual framework for developing its Fairness Opinion
CVG conducted an analysis of the trading history of the Company's common stock.
CVG took into account the following factors, which it thought would be most
applicable in assessing the fair value of Color Imaging's common stock:
o Current and three-month average daily trading volume
o Percentage of Company shares owned by institutions
o Percentage of Company shares owned by insiders
o Float as a percentage of Company shares
o Exchange on which the stock is trading
o Book value of equity
HISTORICAL PRICE ANALYSIS
STOCK PRICE HISTORY AS OF 12/31/2002 AS OF 12/31/2003 AS OF 12/31/2004
------------------- ---------------- ---------------- ----------------
52-Week High $3.35 $1.60 $0.80
52-Week Low 0.80 0.30 0.41
Close price: 1.20 0.70 0.52
Earnings per share $0.05 $0.03 $0.04
Book value per share 0.62 0.88 0.92
P/E ratio 23.51 20.58 14.21
Price/Book ratio 1.93 0.79 0.57
Average daily trading volume (1-year
average) 4,222 12,520 3,897
Average daily trading volume (3-month
average) 2,627 7,194 2,231
35
-----------------------------------------------------------------------------------------------------------------------------
CURRENT PRICE ANALYSIS
-----------------------------------------------------------------------------------------------------------------------------
STOCK PRICE HISTORY AS OF 12/31/2004 AS OF 2/1/2005 AS OF 3/31/2005 AS OF 4/14/2005
------------------- ---------------- -------------- --------------- ---------------
52-Week High $0.80 $0.80 $0.80 $0.80
52-Week Low 0.41 0.41 0.41 0.41
Close price: 0.52 0.56 0.47 0.55
Earnings per share $0.04 N/A $0.02 N/A
Book value per share 0.92 0.94 0.94 0.94
P/E ratio 14.21 N/A 26.99 N/A
Price/Book ratio 0.57 0.60 0.50 0.59
Average daily trading volume (1-year
average) 3,897 3,200 3,340 3,254
Average daily trading volume (3-month
average) 2,231 2,069 2,670 2,892
-----------------------------------------------------------------------------------------------------------------------------
CVG noted that the Company's common stock is characterized by limited trading
volume, limited institutional ownership, a high percentage of common stock held
by insiders and a trading price over the last three months at prices that are
below the book value of the Company's common stock. From this analysis CVG noted
that the market price of Color Imaging's common stock might not be indicative of
its fair value.
GOING CONCERN FAIR VALUE ESTIMATES
In conducting its valuation of the Company and arriving at an estimate to the
fair value of the Company's common stock on a going concern basis, CVG employed
methods based on the following valuation analyses:
o Discounted cash flow method
o Publicly-traded company method
o Merger and acquisition method
CVG also considered, but did not rely on the liquidation value of the Company.
CVG noted that the Company is profitable, and according to management's forecast
it is expected to generate profits in the future. Based on discussions with
management and the results indicated by the going concern fair value estimates
it is unlikely that the liquidation value would exceed the going concern value
estimates.
Adjustments For Certain Non Operating Assets. In arriving at the indicated value
using the discounted cash flow method, publicly-traded company method, and the
mergers and acquisition method adjustments have been made to account for cash
balances in excess of normal operating needs; the anticipated cash proceeds
attributable to a related party receivable under the Company's IRB Bond and the
anticipated benefit of the Company's net operating loss carry forward. These
adjustments are necessary to take into consideration assets whose value is not
incorporated in either historical or prospective earnings or cash flows
estimates used in the discounted cash flow method, public company method or the
36
mergers and acquisition method. In aggregate these adjustment result in an
incremental addition to the value indicated by each approach totaling $2,097,428
or $0.17, per share
DISCOUNTED CASH FLOW METHOD
CVG performed a discounted cash flow method to estimate the fair value of Color
Imaging's common stock based on estimates of future distributable cash flows of
the Company. CVG's discounted cash flow analysis included, among other
assumptions, estimates of discount rates, market based terminal value multiples
of EBITDA and Estimates of revenue, expense and cash flow assuming a stand alone
basis and after giving effect to the reverse stock split.
CVG used Discount rates ranging from 14% to 21% to adjust the projected future
cash flows to their present value equivalents based on an estimated weighted
average cost of developed using the capital asset pricing model. This model is
based on the theory that a company's cost of capital is a function of the
required rates of return demanded by debt and equity investors in proportion to
an estimate of the market based capital structure. The estimated market based
cost of equity capital is based on (1)a risk free rate as represented by the
return of U.S. Treasury Bonds; (2) an estimate of the company's Beta which
measures the volatility of the Company's returns relative to equity markets in
general;(3) an estimate of the market risk premium which is the incremental
return on equity investments demanded by investors holding a diversified
portfolio of equities, above the risk free rate; and (4) the unsystematic or
company-specific which represents the incremental risk above the market risk..
The cost of debt is estimated by prevailing returns on debt investments in the
market place plus and incremental company specific risk premium.
CVG estimated the Company's market based capital structure was based on a
industry composite data for SIC (Standard Industrial Classification Code) 3577
for establishments primarily engaged in manufacturing computer peripheral
equipment including printers, SIC 3861 establishments primarily engaged in
manufacturing photographic apparatus including sensitized film and paper, and
SIC 7389 establishments engaged in the provision of business services. The
industry composite data is derived from Ibbotson's 2004 Cost of Capital Yearbook
& its September-2004 Quarterly Supplement. The capital structure indicated by
the industry composite data for the three SIC codes ranged from 12% debt to 22%
debt. From this data CVG estimated that the appropriate market based capital
structure is one that consists of 20% debt and 80% equity.
Using an estimated market based capital structure, the weighted average cost of
capital is equal to the estimate cost of equity capital multiplied by the
estimated percentage of equity capital in the market based capital structure
plus the estimated cost of debt capital times the estimated percentage of debt
capital in the market base capital structure. The results were rounded.
CVG used Terminal value EBITDA (earnings before interest, taxes, depreciation
and amortization) multiples ranging from five to seven times projected 2009
EBITDA to capitalize the projected cash flows during the residual period after
the five-year projection period based on EBITDA multiples exhibited by
comparable publicly traded companies, Company cost of capital estimates,
expected revenue and earnings growth rates, and exit multiples assumptions
disclosed in merger and acquisition transactions. CVG noted that capitalization
multiples indicated by taking the inverse of the weighted average cost of
capital range from 5 to 7 times after rounding.
Estimates of revenues, earnings and cash flow on a stand-alone basis and after
giving effect to the proposed reverse stock split including adjustments for
estimated savings totaling $134,500 related to legal fees, accounting services
and internal audit costs based on discussions and a range of cost estimates
supplied by management are presented in the following tables:
ESTIMATES OF REVENUE, EARNINGS, AND CASH FLOW - STAND-ALONE BASIS
------------------------------------------------------------------------------------------------------------------------------------
P r o j e c t e d
--------------------------------------------------------------------------------
12 Months 12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending Ending
12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES $21,834,929 $24,000,039 $26,000,000 $29,500,000 $33,000,000 $36,500,000
EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION (EBITDA) 1,459,224 2,576,034 2,623,150 3,360,083 3,976,912 4,567,232
INCOME AFTER TAXES 518,359 1,193,822 1,213,890 1,656,050 2,026,147 2,380,339
37
AFTER TAX CASH FLOW (1) (90,294) $ 155,968 $ 493,902 $ 721,050 $ 1,091,147 $ 1,445,339
Outstanding shares in each period 12,690,305
(1) Represents Debt Free Net Income
DISCOUNTED CASH FLOW METHOD
ESTIMATES OF REVENUE, EARNINGS, AND CASH FLOW - REVERSE SPLIT BASIS
------------------------------------------------------------------------------------------------------------------------------------
P r o j e c t e d
--------------------------------------------------------------------------------
12 Months 12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending Ending
12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES $21,834,929 $24,000,039 $26,000,000 $29,500,000 $33,000,000 $36,500,000
EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION (EBITDA) 1,459,224 $ 2,576,034 $ 2,757,650 $ 3,494,583 $ 4,111,412 $ 4,701,732
INCOME AFTER TAXES 518,359 $ 1,193,822 $ 1,294,590 $ 1,736,750 $ 2,106,847 $ 2,461,039
AFTER TAX CASH FLOW (1) (90,294) $ 155,968 $ 574,602 $ 801,750 $ 1,171,847 $ 1,526,039
(1) Represents Debt Free Net Income
Outstanding shares in each period assuming reverse splits
Reverse Stock Split 1,500 to 1 12,614,201
Reverse Stock Split 2,500 to 1 12,549,057
Reverse Stock Split 5,000 to 1 12,418,061
38
-------------------------------------------------------------------------------------- ----------------------------------
ESTIMATED WEIGHTED AVERAGE COST OF CAPITAL INDUSTRY COMPOSITE
-------------------------------------------------------------------------------------- ----------------------------------
SIC: 3577 SIC: 3861 SIC: 7389
---------- ---------- ----------
14% 15% 16% 17% 21% 16%-22% 12%-16% 12%-21%
--- --- --- --- ---
WEIGHTED AVERAGE COST OF
CAPITAL
Cost of Equity Capital
Rf1 4.7% 4.7% 4.7% 4.7% 4.7%
Beta (unlevered)2 0.8 0.8 0.8 0.8 0.8 1.2 - 1.8 0.5 - 1.0 0.8 - 1.3
Rmp3 5.0% 5.0% 5.0% 5.0% 5.0%
Ru4 7.5% 8.5% 9.5% 10.5% 15.5%
Ke5 16.2% 17.2% 18.2% 19.2% 24.2%
Weight (%) 80.0% 80.0% 80.0% 80.0% 80.0%
Cost of Debt
Kd6 6.9% 6.9% 6.9% 6.9% 6.9%
Weight (%) 20.0% 20.0% 20.0% 20.0% 20.0% 0%-35% 15%-26% 5%-15%
------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1 Rf = risk-free rate of return (20-year U.S. Treasury Constant Maturities as of
the valuation date).
2 The Company Beta is estimated to reflect the beta of similar companies as
presented in the Ibbotson Associates 2004 Yearbook.
3 Rmp = market risk premium (excess return over Rm) (The Risk Premium selection
is based upon a number of factors such as (i) a study at the University of
Chicago by James H. Lorie and Lawrence Fisher, "Rates of Return on Investments
in Common Stock," 1964, (ii) the work done by Ibbotson Associates, Inc. in the
widely published, "Stocks, Bonds, Bills and Inflation 2004 Yearbook," (iii)
other published studies and (iv) our informed judgment.)
4 Ru = unsystematic (company-specific) risk premium (Unsystematic risk addresses
the business or risk premium associated with the Company. Total unsystematic
risk was calculated based on our informed judgment.
5 Ke = cost of equity capital (calculated based on the CAPM).
6 Kd = cost of debt capital (The cost of debt for the Company was considered
equivalent to the Baa bond rate, as of the valuation date, plus additional
risk premium.)
The Company capital structure was determined to reflect the typical capital
structure for the industry.
The industry composite data are derived from Ibbotson's 2004 Cost of Capital
Yearbook and its September-2004 Quarterly Supplement.
DISCOUNTED CASH FLOW ANALYSIS - STAND-ALONE BASIS
CVG using the Estimates of Revenue Expenses Earnings and Cashflow, calculated
present value of the cash flows expected to occur over the five fiscal years
through 2009 and the present value of the terminal value estimated from the 2009
EBITDA using the estimates of the weighted average cost of capital ranging from
14% to 21% to arrive at an estimated equity value of the Company after deducting
long term debt and making adjustments of non operating assets consisting of a
net tax loss carryforward and cash balances in excess of anticipated corporate
needs.
The table below illustrates how CVG calculated the equity value per share using
the estimated cash flows shown above at "Discounted Cash Flow Method" and the
estimated weighted average cost of capital of 14%. (CVG used a similar
methodology to calculate the equity value per share using estimated weighted
average cost of capital for 15%, 16%, 17% and 21%.)
-----------------------------------------------------------------------------------------------------------------------------------
DISCOUNTED CASH FLOW METHOD - 14% WACC - STAND ALONE
-----------------------------------------------------------------------------------------------------------------------------------
Interim Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW $ 155,968 $ 493,902 $ 721,050 $ 1,091,147 $ 1,445,339
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005 142,294
EBITDA
MVIC/EBITDA Capitalization Multiple
Terminal Value
Discount Rate 14.0%
Years to Discount 0.46 1.41 2.41 3.41 4.41
Discount Factor 0.9415 0.8313 0.7292 0.6397 0.5611
-----------------------------------------------------------------------------------------------------------------------------------
Present Enterprise Value 133,970 410,581 525,790 698,007 810,980
Sum of Present Values of Interim Cash Flows 2,579,327 2,579,327 2,579,327
Present Value of Terminal Value 12,813,370 15,376,044 17,938,718
Plus: Adjustments 2,097,428 2,097,428 2,097,428
-----------------------------------------------------------------------------------------------------------------------------------
Business Values 17,490,125 20,052,799 22,615,473
Minus: Capitalization Financing (Term Debt) 2,804,325 2,804,325 2,804,325
-----------------------------------------------------------------------------------------------------------------------------------
Equity Value 14,685,800 17,248,474 19,811,148
Rounded Equity Value $ 14,700,000 $ 17,200,000 $ 19,800,000
====================================================================================================================================
Assumed Shares Outstanding 12,690,305 12,690,305 12,690,305
Per Share Value $ 1.16 $ 1.36 $ 1.56
Terminal Value
-----------------------------------------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months
Ending Ending Ending
12/31/09 12/31/09 12/31/09
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005
EBITDA $ 4,567,232 $ 4,567,232 $ 4,567,232
MVIC/EBITDA Capitalization Multiple 5.0 6.0 7.0
Terminal Value $ 22,836,161 $ 27,403,393 $ 31,970,625
Discount Rate
Years to Discount 4.41 4.41 4.41
Discount Factor 0.5611 0.5611 0.5611
-----------------------------------------------------------------------------------------------------------------------------------
Present Values 12,813,370 15,376,044 17,938,718
CVG estimated the indicated range of the equity value per share ranging from
$0.89 to $1.56 as shown below:
----------------------- --------------- ---------------- -----------------
STAND-ALONE 5xEBITDA 6xEBITDA 7xEBITDA
----------------------- --------------- ---------------- -----------------
14% WACC $1.16 $1.36 $1.56
15% WACC 1.11 1.31 1.51
16% WACC 1.07 1.26 1.45
17% WACC 1.03 1.21 1.39
21% WACC 0.89 1.05 1.20
--------------------------------------------------------------------------
39
DISCOUNTED CASH FLOW ANALYSIS - REVERSE STOCK SPLIT BASIS
CVG calculated the present value of cash flows for the five fiscal years through
December 31, 2009 with the estimated present value of residual cash flows for
the periods after the projection period based on expected cash flows assuming
that the Company completes the contemplated Reverse Stock Split, to arrive at an
estimated equity value of the company after deducting long term debt and making
adjustments for non operating assets such as the net tax loss carryforward and
cash balances in excess of anticipated corporate needs less the amount expected
to be expended to affect the reverse stock split.
The table below illustrates how CVG calculated the equity value per share using
the estimated cash flows shown above at "Discounted Cash Flow Method" and the
estimated weighted average cost of capital of 14%. (CVG used a similar
methodology to calculate the equity value per share using estimated weighted
average cost of capital for 15%, 16%, 17% and 21%.) This table illustrates the
calculation assumes a reverse split ratio of 1-for-1500. CVG reperformed the
calculations using additional ratios of one for 2500 and 5000, and also using an
upper limit of repurchasing 500,000 shares in the Reverse Stock Split, and
considered all of these results in its evaluation of the equity values.
-----------------------------------------------------------------------------------------------------------------------------------
DISCOUNTED CASH FLOW METHOD - 14% WACC - PRIVATE Reverse Split 1500-1
-----------------------------------------------------------------------------------------------------------------------------------
Interim Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW $ 155,968 $ 574,602 $ 801,750 $ 1,171,847 $ 1,526,039
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005 142,294
EBITDA
MVIC/EBITDA Capitalization Multiple
-----------------------------------------------------------------------------------------------------------------------------------
Terminal Value
Discount Rate 14.0%
Years to Discount 0.46 1.41 2.41 3.41 4.41
Discount Factor 0.9415 0.8313 0.7292 0.6397 0.5611
-----------------------------------------------------------------------------------------------------------------------------------
Present Values 133,970 477,667 584,636 749,631 856,260
Sum of Present Values of Interim Cash Flows 2,802,164 2,802,164 2,802,164
Present Value of Terminal Value 13,190,710 15,828,852 18,466,994
Plus: Adjustments 1,769,350 1,769,350 1,769,350
-----------------------------------------------------------------------------------------------------------------------------------
Business Values 17,762,223 20,400,365 23,038,507
Minus: Capitalization Financing (Term Debt) 2,804,325 2,804,325 2,804,325
-----------------------------------------------------------------------------------------------------------------------------------
Equity Value 14,957,898 17,596,040 20,234,182
Rounded Equity Value $ 15,000,000 $ 17,600,000 $ 20,200,000
====================================================================================================================================
Assumed Shares Outstanding 12,614,201 12,614,201 12,614,201
Per Share Value $ 1.19 $ 1.40 $ 1.60
Terminal Value
-----------------------------------------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months
Ending Ending Ending
12/31/09 12/31/09 12/31/09
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005
EBITDA $ 4,701,732 $ 4,701,732 $ 4,701,732
MVIC/EBITDA Capitalization Multiple 5.0 6.0 7.0
Terminal Value $ 23,508,661 $ 28,210,393 $ 32,912,125
Discount Rate
Years to Discount 4.41 4.41 4.41
Discount Factor 0.5611 0.5611 0.5611
-----------------------------------------------------------------------------------------------------------------------------------
Present Values 13,190,710 15,828,852 18,466,994
In this analysis the indicated range of the equity value ranging from $0.90 to
$1.62 per share on a reverse stock split basis.
---------------------------------------------------------------------------
REVERSE STOCK SPLIT 5xEBITDA 6xEBITDA 7xEBITDA
---------------------------------------------------------------------------
14% WACC $1.19 $1.40 $1.62
15% WACC 1.14 1.35 1.56
16% WACC 1.10 1.30 1.50
17% WACC 1.05 1.25 1.44
21% WACC 0.90 1.07 1.23
---------------------------------------------------------------------------
CVG noted that the proposed $1.10 per share price is within the range indicated
by the discounted cash flow method, both on a stand-alone basis and after giving
effect to the proposed Reverse Stock Split. CVG prepared the resulting range of
values in order to gain insight into the sensitivity of the analysis to
estimates of the market based cost of capital and the estimated terminal value
multiples, and the analysis does not represent a statistical sample of value
estimates. CVG considered a range of cost of capital estimates and exit multiple
estimates in its discounted cash flow analysis as a means of illustrating a
range of possible values. CVG did not consider any single method or result in
reaching its opinion but instead considered many factors and other methods that
when taken together supported its opinion. With respect to the results of the
discounted cash flow approach CVG considered the Company's historic performance
compared to budget/forecast and the risk inherent in management's projections,
particularly the significant reliance on color toner products yet to be
perfected or developed, when considering the results of the discounted cash flow
method. CVG noted that the discounted cash flow method was based on estimates of
future revenues, expenses and cash flows presented in management's forecast
which includes sales, earning and cash flow from products that have not been
developed. The sales earnings and cash flow estimate may or may not be achieved.
PUBLICLY-TRADED COMPANY ANALYSIS
CVG also employed a valuation method whereby the value of Color Imaging was
estimated by comparing it to similar publicly traded companies. Publicly traded
company capitalization multiples were developed by dividing each company's total
market value of invested capital by appropriate measures of operating results
such as EBITDA and each Company's equity value by net after-tax income. After
analyzing the risk and return characteristics of the publicly traded companies
relative to the Color Imaging, appropriate multiples were selected and applied
to the operating results of Color Imaging to arrive at an indicated equity
value.
CVG undertook a review of publicly available information and held discussions
with Company management in order to identify comparable public companies. Many
of Color Imaging's primary competitors include small, privately-held companies
and divisions of large, multi-national conglomerates. As such, CVG found no
public companies directly comparable to Color Imaging in terms of size, products
and markets served. In the absence of directly comparable public companies, CVG
searched for companies operating in the toner industry. Based on this search,
CVG identified seven publicly-traded companies (the "guideline companies") that
it deemed, when considered as a whole, provided a reasonable basis for
comparison to the Color Imaging. The selected companies included:
o Xerox
o Canon
o Hewlett-Packard
o Lexmark
o Nashua
o Media Sciences
o OCE
40
TICKER XRX CAJ HPQ LXK NSH GFX OCENY
---------------------------------------------------------------------
MEDIA
COMPANIES XEROX CANON HP LEXMARK NASHUA SCIENCES OCE Low Median High
-------------------------------------------------------------------------------------------------
Market Capitalization at
Month Ended Jan05 Jan05 Jan05 Jan05 Jan05 Jan05 Jan05
--------- --------- --------- --------- --------- --------- ---------
($in Millions)
Market Value Equity $13,342 $46,218 $ 7,007 $10,635 $ 70 $20 $1,340.5
Long-term Debt 13,466 2,166 7,211 151 32 3 702.0
--------- --------- --------- --------- --------- --------- ---------
MARKET VALUE INVESTED CAPITAL $26,808 $48,384 $64,218 $10,786 $ 102 $23 $2,042
NORMALIZED EARNINGS MEASURES
Reporting Period Trailing
12 Months Sep04 Sep04 Jan05 Dec04 Dec04 Dec04 Nov04
Revenues: $15,688 $31,542 $81,845 $ 5,314 $289 $19 $3,517
EBITDA 2,639 6,795 6,850 881 14 2 361
Net Income $ 813.5 $3,133.0 $3,782.9 $ 631.3 $3.2 $0.7 $103.0
MARKET VALUE
INV. CAP. (MVIC) MULTIPLES:
Revenues:
Adjusted Trailing
12 months 1.7 1.5 0.8 2.0 0.4 1.2 0.6 0.4 1.2 2.0
EBITDA:
Adjusted Trailing
12 months 9.5 7.1 9.3 12.9 7.4 10.2 5.5 5.5 9.3 12.9
----------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
EQUITY (PRICE) MULTIPLES:
Net Income:
Adjusted Trailing
12 months 16.8 14.2 15.3 16.7 23.0 27.9 13 13.2 16.7 27.9
Source: Standard & Poor's Compustat database as of 2/1/05, adjusted to
normalized extraordinary and special items and accounting changes. Where data
items were unavailable or not indicative of the company's sustainable earnings
estimates have been used.
PUBLICLY-TRADED COMPANY ANALYSIS - STAND-ALONE BASIS
Using publicly available information, CVG calculated for each of the guideline
companies: EBITDA multiples, as determined by dividing the guideline company's
total market value of invested capital by the guideline company's EBITDA
trailing; and net income multiples, as determined by dividing each guideline
company's total equity value by each guideline company's net income. In
selecting multiples to apply to the operating results of the Color Imaging, CVG
selected the median of the range of observed multiples of the guideline
companies to reflect differences between the risk and return characteristics of
Color Imaging and the guideline companies, reflecting factors such as size,
growth, cost structures, profitability, return on investment, liquidity and
leverage. Applying the selected EBITDA multiple to the Company's 2004 EBITDA of
$1,459,224, deducting long-term debt totaling $2,804,325 and adjusting for non
operating assets totaling $2,097,428 produced an indicated equity value of $1.02
per share on a stand alone basis . Applying the selected net income multiple to
the Company's 2004 net income of $464,263 and adjusting for non operating
assets, produced an indicated equity value of $0.77 per share on a stand-alone
basis.
--------------------------------------------------------------------
MEDIAN PUBLIC INDICATED EQUITY
STAND-ALONE COMPANY MULTIPLE VALUE PER SHARE
--------------------------------------------------------------------
2004 EBITDA 9.3 $1.02
2004 Net Income 16.7 $0.77
--------------------------------------------------------------------
41
PUBLICLY-TRADED COMPANY ANALYSIS - REVERSE STOCK SPLIT BASIS
CVG also developed an indication of value by applying the selected EBITDA
multiple to Color Imaging's pro forma 2004 EBITDA of $1,593,724 developed by
adjusting the historical results for an estimated $134,500 in cost savings
attributable to the transaction . Deducting long-term debt from the result and
adding the non operating assets produced an indicated reverse split equity value
per share of $1.10 on a reverse split basis. Applying the net income multiple to
the proforma 2004 net income of $544,963 developed by adjusting the historical
results for the tax affected anticipated savings produced an indicated equity
value of $0.85 per share after adjusting for non operating assets.
---------------------------------------------------------------------------
MEDIAN PUBLIC INDICATED EQUITY
REVERSE SPLIT COMPANY MULTIPLE VALUE PER SHARE
---------------------------------------------------------------------------
2004 Pro forma EBITDA 9.3 $1.10
2004 Pro forma Net Income 16.7 $0.85
---------------------------------------------------------------------------
CVG considered the publicly-traded company method to have secondary emphasis in
reaching its Fairness Opinion. CVG noted that the proposed $1.10 per share price
is above the range indicated by the stand-alone basis and equal to the indicated
value based on pro forma 2004 EBITDA after giving effect to the reverse stock
split. CVG noted that all but one of the public companies used in this method
are larger, have more diverse product lines, greater financial resources
relative to the Company. CVG noted that the Company's 2004 fiscal year sales did
not meet the anticipated growth included in Company management's forecast.
MERGER AND ACQUISITION ANALYSIS
CVG employed a valuation method whereby the value of Color Imaging common stock
was estimated by identifying comparable merger and acquisitions transactions,
determining transaction multiples (e.g., enterprise value to EBITDA), then
applying appropriate multiples, based on the observed transactions, to the
corresponding operating results of Color Imaging to produce another indication
of the Company's equity value per share.
CVG reviewed publicly available information in order to identify merger and
acquisition transactions involving target companies similar to Color Imaging.
Based on this search, CVG found more than 100 transactions that met its initial
criteria. Eliminating transactions with insufficient financial disclosure and
those involving companies that were not sufficiently comparable to Color Imaging
to warrant conclusion, CVG selected a group of six transactions involving target
companies in the computer equipment and supplies industry that took place
between 2000 and 2004. These six transactions exhibit multiples of business
enterprise value to EBITDA ranging from 6.09 to 23.03. In selecting the
appropriate multiple for use in the merger and acquisition analysis, CVG
considered the 2004 transaction as the most meaningful transaction because it
involved a company that is more closely comparable to the Company in terms of
line of business, relative to the remaining five and the transaction and is more
indicative of current market conditions for private transactions in the merger
and acquisition market. The remaining five transactions, in the opinion of CVG,
involved companies that are less comparable to the Company and occurred between
2000 and 2002, when the conditions in merger and acquisition market place, in
general, supported higher valuations for technology based companies. Although
CVG found the information related to the remaining five transactions
informative, it did not directly use the transaction in the Mergers and
Acquisitions Method.
MERGERS AND ACQUISITION METHOD
TRANSACTION DATA
--------------------------------------------------------------------------------------------------------------------------
Business
Enterprise BEV /
Date Acquiree Acquirer Value (BEV) EBITDA
-------------------------------------------------------------------------------------- ----------------- ---------------
Richard L. Scott/Media Sciences
6-Jul-04 Media Sciences International, Inc. International, Inc. 14.0 6.79
31-Aug-00 Splash Technology Holdings Inc Electronics for Imaging Inc 147.4 23.03
3-Oct-00 Mesa Ridge Technologies Inc Mobility Electronics Inc 8.0 10.04
22-Oct-00 Miltope Group Inc Vision Technologies Kinetics Inc 36.3 6.09
15-Aug-00 Kontron Mobile Computing, Inc. Kontron Embedded Computers AG 8.2 6.69
31-May-02 E Mergent, Inc. ClearOne Communications Inc 22.7 15.31
42
MERGER AND ACQUISITION ANALYSIS - STAND-ALONE BASIS
CVG analyzed the selected transactions to determine, among other things, the
implied valuation multiples paid in these transactions and calculated the ratio
of the enterprise value to EBITDA. CVG then selected an EBITDA multiple
corresponding to the 2004 transaction and applied this multiple to the Company's
2004 EBITDA of $1,459,224 , to arrive at an indicated value of $0.72 per share
on a stand-alone basis after deducting long-term debt and adjusting for non
operating assets.
-----------------------------------------------------------------------
SELECTED ACQUISITION INDICATED EQUITY
STAND-ALONE MULTIPLE VALUE PER SHARE
-----------------------------------------------------------------------
2004 EBITDA 6.8 $0.72
-----------------------------------------------------------------------
ACQUISITION METHOD - REVERSE STOCK SPLIT BASIS
CVG then developed indications of value after giving effect to the reverse stock
split. CVG determined an equity value of $0.76 per share after giving effect to
the reverse stock split.
-----------------------------------------------------------------------
SELECTED ACQUISITION INDICATED EQUITY
REVERSE SPLIT MULTIPLE VALUE PER SHARE
-----------------------------------------------------------------------
2004 EBITDA 6.8 $0.76
-----------------------------------------------------------------------
CVG did not consider the results of the merger and acquisition method to be
meaningful in forming its Fairness Opinion. CVG noted that the most recent
transaction for which information was available took place in 2004 and, the
Company's 2004 results did not include the anticipated revenue and earnings
growth reflected in management's forecast.
LIQUIDATION ANALYSIS
CVG conducted a limited scope liquidation analysis adjusting the book value of
the net assets to their orderly liquidation value as shown in the following
table:
LIQUIDATION ANALYSIS
BOOK VALUE ORDERLY
AT LIQUIDATION
Assets 12/31/2004 ADJUSTMENTS VALUE
Current Assets $ 9.5 $ 1.4 (1) $ 10.9
Fixed Assets 6.6 (2.1)(2) 4.5
Intangible & Other Assets 0.6 1.7 (3) 2.3
-----------------------------------------
Total Assets 16.7 1.0 17.7
Less:
Current Liabilities 2.1 2.1
Estimated Liabilities in Liquidation 2.9 (4) 2.9
Long-term Liabilities 2.9 (0.2)(5) 2.8
------------
Estimated Equity Value 7.8
------------
$ 9.9
------------
Estimated per share value $ 0.78
(1) To adjust for profit on liquidation of inventory
(2) To adjust for estimated realizable value of fixed assets in liquidation
(3) To adjust for value of intellectual property
(4) To adjust for estimated operating, severance and other cost incurred during
liquidation
(5) To adjust for lease liability net of tax benefits for liquidation
43
PREMIUM ANALYSIS
CVG also utilized an analysis of premiums paid in mergers and acquisitions in
formulating its Fairness Opinion. Based on a survey, compiled and published by
Mergerstat Review 2004, of premiums paid in transactions for industry sectors
that are similar to the Company based on the SIC codes disclosed for the Company
and the comparable companies used in the Public Company analysis, CVG developed
indications of fair value by applying the average premium to the share price of
the Company. The results of this analysis indicated per share values ranging
from $0.67 to $1.08.
------------------------------------------------------------------------------
COLOR IMAGING STOCK PRICE AS OF 2/1/05 $0.56
------------------------------------------------------------------------------
Price with "SIC: 3861 - 3873" average premium @ 20.5% $0.67
Price with "SIC: 3570 - 3579" average premium @ 79.4% $1.00
Price with "SIC: 7370 - 7391" average premium @ 93.4% $1.08
Price with manufacturing sector average premium @ 49.2% $0.84
------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRY CLASSIFICATION MULTIPLES PREMIUM PAID
------------------------------------------------------------------------------------------------------------------------------------
TIC / EBIT TIC / EBITDA 1999 2000 2001 2002 2003
------------------------------------------------------------------------------------------------------------------------------------
SIC: 3570 - 3579 Office Equipment & Computer 12 9.2 30.6% 55.6% 28.7% 24.6% 79.4%
Hardware
------------------------------------------------------------------------------------------------------------------------------------
SIC: 3861 - 3873 Instruments & Photographic 11.3 9.7 56.4% 50.1% 42.0% 43.9% 20.5%
Equipment
------------------------------------------------------------------------------------------------------------------------------------
SIC: 7370 - 7391 Miscellaneous Services 16.6 10.7 44.4% 54.9% 53.5% 68.7% 93.4%
------------------------------------------------------------------------------------------------------------------------------------
Average Premium for the Manufacturing Sector 43.2% 49.2% 51.5% 44.3% 49.2%
------------------------------------------------------------------------------------------------------------------------------------
Note: Total Invested Capital ("TIC") equates to market value of invested capital.
CVG noted that the transaction price of $1.10 per share price is higher than the
range indicated by equity values per share developed based on the transaction
survey data. CVG also noted that the proposed transaction price of $1.10
represents a premium of 96.2% over the closing price as of February 1, 2005, and
a premium of 19.6% over the Company's year end book value per share. CVG further
noted that the $1.10 per share represented an implied EBITDA multiple of 10.2x
is within the range of the EBITDA multiples for transactions included in the
survey.
OTHER CONSIDERATIONS
In its presentation to the Special Committee, CVG noted the following factors
identified by Company management in support of the proposed transaction:
o Savings related to the suspension of SEC reporting requirements.
o Potential trading of CI common stock on Pink Sheets.
o Preservation of the ability to reinstate SEC reporting in the event
that future developments make it advantageous to do so or in the event
that the number of stockholders rises above the 500 stockholder
threshold necessitating a return to reporting company status.
o Immediate liquidity for small unaffiliated stockholders.
o Potential synergistic value to remaining stockholders through enhanced
merger or acquisition prospects as a private company.
CONCLUSION
The indicated values developed using the Discounted cash flow method, the public
company method, and the mergers and acquisition method are summarized below.
44
Per share offer to
Indicated Equity Value unaffiliated
Valuation Method Basis per Share stockholders ($1.10)
------------------------------------------------------------------------------------------------------------------
Discounted Cash Flow Stand Alone $0.89 to $1.56 Within Range
Discounted Cash Flow Reverse Split $0.90 to $1.62 Within Range
Public Company Method Stand Alone $0.72 to $1.02 Premium to range
Public Company Method Reverse Split $0.85 to $1.10 Top of range
Merger and Acquisition Method Stand Alone $0.72 Premium to valuation
Merger and Acquisition Method Reverse Split $0.76 Premium to valuation
Liquidation Analysis Stand Alone $0.78 Premium to valuation
CVG evaluated the fairness of the transaction to the stockholders who will
receive cash in exchange for their fractional shares and those unaffiliated
stockholders who will continue to hold Color Imaging common stock after the
reverse stock split based on the indicated values developed using the discounted
cash flow method and the publicly-traded company method. CVG noted that although
the discounted cash flow analysis results indicated some values that are higher
than the $1.10 per share, when considered in light of the company's historic
market performance, company and industry risk the $1.10 per share value is fair
from a financial point of view, CVG also considered the results of the Premium
analysis to support its opinion.
Based upon the foregoing analyses and the assumptions and limitations set forth
in full in the text of the Fairness Opinion, CVG is of the opinion that, as of
the date of the Fairness Opinion, the Repurchase Price of $1.10 per Common Share
to be paid by Color Imaging for fractional shares of less than one whole share
in connection with the Stock Splits is fair to the Cashed Out Holders and
Continuing Holders from a financial point of view who are unaffiliated with the
directors, executive officers and affiliates of Color Imaging.
ENGAGEMENT OF CBIZ VALUATION GROUP, LLC
The Special Committee of the Board of Directors of Color Imaging has agreed to
pay CBIZ Valuation Group, LLC ("CVG") a fee of $50,000 for strategic advisory
services and a fee of $20,000 in connection with the Fairness Opinion and to
reimburse CVG for its reasonable out-of-pocket expenses related to its
engagement, whether or not the Stock Splits are consummated. No compensation
received or to be received by CVG is based on or is contingent on the results of
CVG's engagement. Color Imaging also agreed to indemnify CVG and certain related
persons and entities for certain liabilities, including liabilities under
securities laws, related to or arising out of its engagement. We note that, in
the opinion of the SEC, indemnification against liabilities under the U.S.
federal securities laws is against public policy expressed in the Securities Act
of 1933, as amended, or the "Securities Act," and, therefore, this
indemnification may be deemed unenforceable. There are no other current
arrangements to compensate CVG, its affiliates or unaffiliated representatives
for any services rendered to Color Imaging, its executive officers, directors or
affiliates. CVG has previously provided valuation consulting services to Color
Imaging in connection with Color Imaging's divestiture of Logical Imaging
Solutions, Inc. in 2002. None of CVG's employees who worked on the engagement
has any known financial interest in the assets or equity of Color Imaging or the
outcome of the engagement.
MEETING AND VOTING INFORMATION
Each properly executed Proxy received prior to the Annual Meeting and not
revoked will be voted as directed by the stockholder or, in the absence of
specific instructions to the contrary, will be voted FOR the approval of the
Stock Splits.
TIME AND PLACE
The Annual Meeting will be held on September 19, 2005, at 10:00 a.m., local
time, at the offices of Color Imaging, 3450 Peachtree Industrial Boulevard,
Suite 100 , Norcross, Georgia 30071.
REVOKING YOUR PROXY
Without affecting any vote previously taken, you may revoke your Proxy by either
(i) submitting a later dated proxy or a written revocation which is received by
Color Imaging before the Proxy is exercised or (ii) by attending the Annual
Meeting and voting in person or giving notice of revocation in open meeting
before the Proxy is exercised. Attending the Annual Meeting will not, by itself,
revoke a Proxy.
45
RECORD DATE
Only Color Imaging stockholders of record at the close of business on July 29,
2005 (the "Record Date") are entitled to vote at the Annual Meeting. Each
stockholder will be entitled to cast one vote for each share then owned.
According to Color Imaging's records, as of the Record Date, there were
12,697,805 votes entitled to be cast at the Annual Meeting.
QUORUM AND REQUIRED VOTE
The presence at the Annual Meeting in person or by proxy of the holders of at
least a majority of the issued and outstanding Common Shares as of the Record
Date is necessary to establish a quorum to conduct business at the Annual
Meeting.
Each Color Imaging stockholder is entitled to cast one vote for each share owned
on the Record Date. Under Delaware law and Color Imaging's Bylaws and
Regulations, the affirmative vote of at least a majority of the issued and
outstanding Common Shares as of the Record Date is necessary to approve the
Stock Splits.
Stockholders holding Common Shares in "street name" should review the
information provided to them by their nominee (such as a broker or bank). This
information will describe the procedures to follow to instruct the nominee how
to vote the street name shares and how to revoke previously given instructions.
The proposal to approve the Stock Splits is a "non-discretionary" item, meaning
that nominees cannot vote Common Shares in their discretion on behalf of a
client if the client has not given them voting instructions. Shares held in
street name that are not voted by brokerage firms or other nominees are referred
to as "broker non-votes."
Broker non-votes and abstentions are counted toward the establishment of a
quorum for the Annual Meeting. However, because the affirmative vote of a
majority of the outstanding Common Shares is necessary to approve the Stock
Splits, broker non-votes and abstentions will have the same effect as a vote
"AGAINST" the proposal to approve the Stock Splits. The Board urges you to
complete, date and sign the enclosed Proxy and to return it promptly in the
enclosed postage prepaid envelope so that a quorum can be assured for the Annual
Meeting and your Common Shares can be voted as you wish.
The enclosed Proxy, when properly signed, also confers discretionary authority
with respect to other matters which may be properly brought before the annual
meeting and of which the management was not aware prior to August 1, 2005, the
last date that the Company considers to be a reasonable time prior to the
mailing date for submitting stockholder proposals under the SEC's shareholder
proposal rules. At the time of printing this proxy statement, management of
Color Imaging is not aware of any other matters to be presented for action at
the annual meeting. If, however, other matters which are not now known to the
management should properly come before the annual meeting, the proxies hereby
solicited will be exercised on such matters in accordance with the best judgment
of the proxy holders.
Shares represented by executed and unrevoked proxies will be voted in accordance
with the instructions contained therein or, in the absence of such instructions,
in accordance with the recommendations of the Board of Directors. As stated
above, abstentions and broker non-votes will be counted for purposes of
determining the presence of a quorum but will have the same effect as a vote
"AGAINST" the proposal to approve the stock splits.
SOLICITATION AND COSTS
The enclosed Proxy is solicited on behalf of the Board. Proxies may be solicited
by the directors, officers and other employees of Color Imaging, in person or by
telephone, telegraph or mail only for use at the Annual Meeting. Color Imaging
will bear the costs of preparing, assembling, printing and mailing this Proxy
Statement and the enclosed Proxy and all other costs of the Board's solicitation
of Proxies for the Annual Meeting. Brokerage houses and other nominees,
fiduciaries, and custodians nominally holding Common Shares as of the Record
Date will be requested to forward proxy soliciting material to the beneficial
owners of such Common Shares, and will be reimbursed by us for their reasonable
expenses.
The repurchase of fractional Common Shares in connection with the Stock Splits
is estimated to cost approximately $300,000. We intend to finance the Stock
Splits and repurchase of fractional shares by using cash on hand. The following
is an estimate of the total costs expected to be incurred by Color Imaging in
connection with the Stock Splits and the solicitation of Proxies for the Annual
Meeting. Final costs may be higher or lower than the estimates shown below.
46
Item Approximate Cost
---- ----------------
Repurchase of fractional shares held
by stockholders with less than one whole share $ 300,000
Legal fees $ 100,000
CBIZ Valuation Group, LLC fees (1) $ 30,000
Accounting fees $ 5,000
Filing fees $ 2,500
Printing, mailing, exchange agent
and other costs $ 25,000
Directors' fees (2) $ 25,000
---------------
Total $ 487,500
===============
-----------------------
Note (1)Excludes Strategic Alternative Advisory fees of $50,000 and should it be
needed includes $10,000 for an updated Fairness Opinion
(2)Excludes $20,000 of director's fees in connection with investigating
strategic alternatives, including the "going private" transaction.
PROPOSAL NO. 1 - STOCK SPLITS PROPOSAL
The Board has authorized and recommends that you approve the Stock Splits
Proposal, as described below:
To approve amendments, as determined by the Board of Directors of Color
Imaging in their discretion, to Color Imaging's Certificate of
Incorporation to effect a reverse stock split of our common stock at one of
the following ratios: 1-for-1500, 1-for-2500 or 1-for-5000 and the
repurchase of the resulting fractional shares held by each stockholder with
less than one share after the reverse stock split, followed immediately by
an amendment of Color Imaging's Certificate of Incorporation to effect a
forward stock split of Color Imaging's common shares upon the inverse of
the ratio used in the reverse stock split was effected (collectively the
"Stock Splits"). As a result of the Stock Splits, (a) each stockholder
owning fewer than 5,000 shares, 2,500 shares or 1,500 shares, as
applicable, of outstanding common stock immediately before the Stock Splits
will receive $1.10 in cash, without interest, for each Color Imaging common
share owned by such stockholder immediately prior to the Stock Splits and
will no longer be a stockholder of Color Imaging; and (b) each stockholder
owning more than the number of common shares upon which the reverse stock
split was effected immediately before the Stock Splits will receive common
shares equal to the number of common shares they held prior to the Stock
Splits. The Stock Splits are proposed for the purpose of taking Color
Imaging private and terminating its reporting obligations under the
Securities Exchange Act of 1934, as amended
SUMMARY AND STRUCTURE
The Board has authorized and recommends that you approve the Stock Splits. The
Stock Splits consist of two steps. First, Color Imaging will conduct a reverse
stock split of the Common Shares, using one of the three ratios, 1-for-1500,
1-for-2500 or 1-for-5000. In the reverse split, (i) each lot of 1500, 2500, or
5000 Common Shares held by a stockholder of Color Imaging prior to the reverse
split will be converted into one whole Common Share after the reverse split; and
(ii) any Common Shares held by a stockholder owning fewer than 1500, 2500, or
5000 shares will not be converted into a whole share and will be cancelled and
exchanged for $1.10 in cash per pre-reverse split share. After the reverse split
is completed, it will be followed immediately by a forward stock split of the
Common Shares, which will convert each whole Common Share issued in connection
with the reverse split into 1500, 2500 or 5000 Common Shares. The Stock Splits
are intended to take effect on the Effective Date (the date the Delaware
Secretary of State accepts for filing Certificates of Amendment to the
47
Certificate of Incorporation). The proposed amendments to the Certificate are
attached to this Proxy Statement as Exhibits B and C and are incorporated herein
by reference. Generally, the effects of the Stock Splits can be illustrated by
the following examples (the examples assume a 1-for-5000 Reverse Split Ratio):
Hypothetical Scenario Result
---------------------------------------------- -----------------------------------------------------------------------------------
Stockholder A holds 200 Common Shares in a Stockholder A's 200 Common Shares will be converted into the right to receive $220
single record account and holds no other in cash (200 x $1.10). If Stockholder A wanted to continue to be a stockholder
Common Shares after the Stock Splits, he could purchase an additional 4800 Common Shares far
enough in advance of the Stock Splits so that the purchase is complete by the
Effective Date.
Stockholder B holds 200 shares in a Color Imaging intends for the Stock Splits to treat stockholders holding Common
brokerage account and holds no other Shares through a nominee the same as those holding shares in a record account.
Common Shares Nominees will be instructed to effect the Stock Splits for their beneficial
owners. If this occurs, Stockholder B will be entitled to receive $220 in cash
(200 x $1.10). However, nominees may have different procedures and stockholders
holding shares in street name should contact their nominee to determine how the
Stock Splits will affect them.
Stockholder C holds 5500 Common Shares After the reverse stock split, Stockholder C would have 1.1 Common Shares in the
in a single record account and holds no record account (5500/5000 = 1.1). Because he owns more than one whole share, he
other shares will not receive any cash for fractional shares. In the forward stock split his
Common Shares will be converted into 5500 Common Shares (1.1 x 5000). After
completion of the Stock Splits, Stockholder C will continue to hold 5500
Common Shares. He will not receive any cash as a result of the Stock Splits.
Stockholder D holds 2600 shares in each of Color Imaging intends for the Stock Splits to treat shares held by the same
two separate record accounts for a total of stockholder in multiple accounts as one combined total. After
5200 Common Shares. Stockholder D holds no the reverse stock split, Stockholder D will hold 1.04 whole Common Shares
other Common Shares. (5200/5000 = 1.04) and will receive no cash. After the completion of the
forward stock split Stockholder D will hold 5200 Common Shares.
Stockholder E holds 10000 Common Shares Color Imaging intends for stockholders holding shares through nominees to be
in a brokerage account. He holds no other treated the same as record holders and expects that Stockholder E would hold
Common Shares. two whole Common Shares after the reverse split (10000/5000 = 2).
Stockholder E's two whole Common Shares would be converted into 10000 Common
Shares in the forward split. After the completion of the Stock Splits,
Stockholder E would hold 10000 Common Shares. Stockholder E would not receive any
cash in the Stock Splits.
Husband and Wife each hold 2500 Common Shares Shares held in joint accounts will not be added to shares held individually in
in separate record accounts and hold 2500 determining whether a stockholder will receive whole shares after the reverse
shares jointly in another record account. split. In this situation, Husband and Wife will each be entitled to receive $2,750
They own no other Common Shares. each for the shares held in their individual record accounts (2500 x $1.10).
Further, they will be entitled to receive $2,750 for the Common Shares
held in their joint account. Husband and Wife will hold no Common Shares
after the Stock Splits. If Husband and Wife wished to continue to be
stockholders after the Stock Splits, they could transfer a sufficient number
of shares from one account into another so that at least 5000 Common Shares (or a
multiple thereof) are held in one account. Note that if the Board elected
to use a 1-for-2500 or 1-for-1500 Reverse Split Ratio, rather than the
1-for-5000 ratio, Husband and Wife instead would remain stockholders with
2500 Common Shares each individually, and another 2500 shares jointly, and
would receive no cash in the Stock Splits.
48
Color Imaging currently estimates that stockholders will receive payment for
their Common Shares that are exchanged for cash in lieu of issuing fractional
shares within approximately four weeks after the Effective Date.
At least a majority of the Common Shares outstanding and entitled to vote at the
Annual Meeting must approve the Stock Splits before they can be completed. The
executive officers, directors and the affiliates of Color Imaging, who together
own approximately 63.7% of the Common Shares outstanding and entitled to vote at
the Annual Meeting, have indicated that they will vote in favor of the Stock
Splits proposal. Therefore, approval of the proposed is assured.
The Stock Splits are considered a "going-private" transaction as defined in Rule
13e-3 promulgated under the Exchange Act because they are intended to terminate
the registration of the Common Shares and suspend Color Imaging's filing and
reporting obligations under the Exchange Act. In connection with the Stock
Splits, we have filed, as required by the Exchange Act, a Rule 13e-3 Transaction
Statement on Schedule 13E-3 (the "Schedule 13E-3") with the SEC. Please see the
section entitled "Available Information."
The Board has retained for itself the absolute authority to not implement the
Stock Splits, even after they are approved, if it subsequently determines that
the Stock Splits for any reason are not then in the best interests of Color
Imaging. Please see the section entitled "Proposal No. 1 - Stock Splits Proposal
- Reservation of Rights."
RECOMMENDATION OF THE BOARD
The Board has unanimously determined that the Stock Splits are in the best
interest of Color Imaging and are fair to Color Imaging's stockholders who would
not retain their interest in Color Imaging, and those who would retain their
interest, after the transaction, in each case excluding executive officers,
directors and the affiliates of the Company. The Board unanimously recommends
that the stockholders vote "FOR" the approval of the Stock Splits.
POTENTIAL DISADVANTAGES OF THE STOCK SPLITS TO STOCKHOLDERS
As is more thoroughly described in the section entitled "Special Factors - Did
the Board consider any disadvantages of going private" above, potential
disadvantages to Color Imaging and Continuing Holders include decreased
availability of information about Color Imaging and decreased liquidity of the
Common Shares. If the Stock Splits are completed, we intend to terminate the
registration of the Common Shares under the Exchange Act. As a result, we will
no longer be subject to the filing and reporting requirements of the Exchange
Act. In addition, the liquidity of the Common Shares will be adversely affected
by the lack of publicly available information about Color Imaging following
deregistration of the Common Shares. Decreased liquidity may have an adverse
effect on the market value of the Common Shares.
SHARE CERTIFICATES
We have appointed the Transfer Agent to act as exchange agent to carry out the
exchange of existing share certificates for cash payments in lieu of issuing
fractional shares of less than one whole share and, if applicable, new share
certificates. On the Effective Date, all share certificates evidencing ownership
of Common Shares held by stockholders who will have fractional shares
repurchased will be deemed cancelled without further action by the stockholders
or Color Imaging. Thereafter, such certificates will represent only the right to
receive cash in the amount of $1.10 per pre-split Common Share for repurchased
fractional shares of those holders who have less than one whole share and, if
applicable, the right to receive a new certificate for Common Shares issued in
the forward stock split. The Common Shares acquired by Color Imaging in
connection with of the Stock Splits will be retired.
The Transfer Agent will furnish Color Imaging's stockholders with the necessary
materials and instructions to surrender their Common Share certificate(s)
promptly following the Effective Date. The letter of transmittal will explain
how the certificates are to be surrendered. Stockholders must complete and sign
the letter of transmittal and return it with their certificate(s) to the
Transfer Agent as instructed before they can receive any cash payments and/or
new share certificates to which they are entitled. Do not send your certificates
to us, and do not send them to the Transfer Agent until you have received a
transmittal letter and followed the instructions therein.
No service charges will be payable by Color Imaging's stockholders in connection
with the exchange of certificates or the payment of cash in lieu of issuing
fractional shares. Color Imaging will pay all expenses of the Stock Splits.
49
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
We have summarized below the material federal income tax consequences to Color
Imaging and to holders of Common Shares resulting from the Stock Splits. This
summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Department Regulations (the "Treasury
Regulations") issued pursuant thereto, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change. This
summary does not take into account possible changes in such laws or
interpretations, including amendments to the Code, applicable statutes, Treasury
Regulations and proposed Treasury Regulations or changes in judicial or
administrative rulings. Some of those changes may have retroactive effect. No
assurance can be given that any such changes will not adversely affect this
summary. This summary is not binding on the Internal Revenue Service.
This summary does not address all aspects of the possible federal income tax
consequences of the Stock Splits and is not intended as tax advice to any person
or entity. In particular, this summary does not consider the individual
investment circumstances of holders of Common Shares, nor does it consider the
particular rules applicable to special categories of holders (such as tax exempt
entities, life insurance companies, regulated investment companies and foreign
taxpayers) or holders who hold, have held, or will hold, Common Shares as part
of a straddle, hedging or conversion transaction. In addition, this summary does
not address any consequences of the Stock Splits under any state, local or
foreign tax laws.
This summary assumes that you are one of the following: (i) a citizen or
resident of the United States, (ii) a domestic corporation, (iii) an estate, the
income of which is subject to United States federal income tax regardless of its
source, or (iv) a trust, if a United States court can exercise primary
supervision over the trust's administration and one or more United States
persons are authorized to control all substantial decisions of the trust. This
summary also assumes that you have held and will continue to hold your Common
Shares as capital assets for federal income tax purposes.
We believe that the Stock Splits will be treated as a tax-free
"recapitalization" for federal income tax purposes. This treatment will result
in no material federal income tax consequences to Color Imaging. However, you
may not qualify for tax free "recapitalization" treatment for federal income tax
purposes, depending on whether you are receiving cash or stock pursuant to the
Stock Splits.
You should consult your tax advisor as to the particular federal, state, local,
foreign, and other tax consequences applicable to your specific circumstances.
Federal Income Tax Consequences to Continuing Holders Not Receiving Cash. If you
(i) continue to hold Common Shares directly immediately after the Stock Splits
and (ii) you receive no cash as a result of the Stock Splits, you will not
recognize any gain or loss in the Stock Splits, and you will have the same
adjusted tax basis and holding period in your Common Shares as you had in such
Common Shares immediately prior to the Stock Splits.
Federal Income Tax Consequences to Holders Receiving Cash. If you receive cash,
do not continue to hold directly any Common Shares and are not related to any
person or entity who or which continues to hold Common Shares, you will
recognize capital gain or loss. The amount of this capital gain or loss will
equal the difference between the cash you receive for your Common Shares and
your aggregate adjusted tax basis in such Common Shares.
If you receive cash and either (a) retain a portion of your Common Shares or (b)
do not continue to hold directly any Common Shares but are related to a person
or entity who or which continues to hold Common Shares (in which case you may be
treated as owning constructively the Common Shares owned by such related person
or entity), your receipt of cash may be treated (i) first, as ordinary taxable
dividend income to the extent of your ratable share of Color Imaging's current
or accumulated earnings and profits (if any), (ii) second, as a tax-free return
of capital to the extent of your aggregate adjusted tax basis in your Common
Shares, and (iii) then, the remainder as capital gain.
If you fall into the category described in the immediately preceding paragraph,
your tax treatment will depend upon whether your receipt of cash either (i) is
"not essentially equivalent to a dividend" or (ii) constitutes a "substantially
disproportionate redemption of stock," as described below. If your receipt of
cash meets either of these two tests, your receipt of cash will result solely in
capital gain or loss. If your receipt of cash cannot meet either of these two
tests, your tax consequences will be those described in the immediately
preceding paragraph.
"Not Essentially Equivalent to a Dividend." You will satisfy the "not
essentially equivalent to a dividend" test if the reduction in your
proportionate interest in Color Imaging resulting from the Stock Splits (taking
into account for this purpose the Common Shares owned by persons or entities
related to you) is considered a "meaningful reduction" given your particular
facts and circumstances. The Internal Revenue Service has ruled that a small
50
reduction by a minority stockholder whose relative stock interest is minimal and
who exercises no control over the affairs of the corporation will satisfy this
test.
"Substantially Disproportionate Redemption of Stock." Your receipt of cash in
the Stock Splits will be a "substantially disproportionate redemption of stock"
for you if the percentage of Common Shares owned by you (and by persons or
entities related to you) immediately after the Stock Splits is (i) less than 50%
of all Common Shares and (b) less than 80% of the percentage of Common Shares
owned by you (and by persons or entities related to you) immediately before the
Stock Splits.
If you or a person or entity related to you will continue to hold Common Shares
after the Stock Splits, you should consult with your own tax advisor to
determine your particular tax consequences.
Capital Gain and Loss. For individuals, net capital gain (defined generally as
your total capital gains in excess of capital losses for the year) recognized
upon the sale of capital assets that have been held for more than 12 months
generally will be subject to tax at a rate not to exceed 15%. Net capital gain
recognized from the sale of capital assets that have been held for 12 months or
less will be subject to tax at ordinary income tax rates. Capital gain
recognized by a corporate taxpayer will be subject to tax at the ordinary income
tax rates applicable to corporations. There are limitations on the deductibility
of capital losses.
Special Rate for Certain Dividends. In general, dividends are taxed at ordinary
income rates. However, you may qualify for a 15% rate of tax on any cash
received in the Stock Splits that is treated as a dividend as described above,
if (i) you are an individual or other non-corporate stockholder; (ii) you have
held the Common Shares of Color Imaging with respect to which the dividend was
received for more than 60 days during the 120-day period beginning 60 days
before the ex-dividend date, as determined under the Code; and (iii) you were
not obligated during such period (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property. You should consult with your tax advisor regarding your eligibility
for such lower tax rates on dividend income. In addition, a corporate
stockholder may be eligible for a dividends received deduction for cash received
in the Stock Splits on up to 90% of the amount of such cash treated as a
dividend to such stockholders.
Backup Withholding. Holders of Common Shares will be required to provide their
social security or other taxpayer identification numbers (or, in some instances,
additional information) to the Transfer Agent in connection with the Stock
Splits to avoid backup withholding requirements that might otherwise apply. The
letter of transmittal will require each holder of Common Shares to deliver such
information when the Common Share certificates are surrendered following the
Effective Date of the Stock Splits. Failure to provide such information may
result in backup withholding.
As explained above, the amounts paid to you as a result of the Stock Splits may
result in dividend income, capital gain income, or some combination of dividend
and capital gain income to you depending on your individual circumstances.
UNAVAILABILITY OF APPRAISAL OR DISSENTERS' RIGHTS
No appraisal or dissenters' rights are available under Delaware law or under
Color Imaging's Certificate of Incorporation or Bylaws to holders of Common
Shares who vote against the Stock Splits. Other rights or actions may exist
under Delaware law or federal and state securities laws for stockholders who can
demonstrate that they have been damaged by the Stock Splits.
RESERVATION OF RIGHTS
Although we are requesting your approval of the Stock Splits, the Board reserves
the right, in its discretion, to abandon the Stock Splits before the Effective
Date even if the stockholders have approved the proposal. Although the Board
presently believes that the Stock Splits are in Color Imaging's best interests
and has recommended a vote for the Stock Splits, the Board nonetheless believes
that it is prudent to recognize that factual circumstances could possibly change
prior to the Effective Date such that it might not be appropriate or desirable
to effect the Stock Splits at that time. Such reasons include any change in the
nature of the stockholdings of Color Imaging prior to the Effective Date which
would result in Color Imaging being unable to reduce the number of holders of
record of Common Shares to below 300, including those in "street name" that
could be certificated, as a result of the Stock Splits. If the Board decides to
abandon the Stock Splits after the Annual Meeting and before the Effective Date,
the Board will promptly file a Form 8-K to announce its decision.
ESCHEAT LAWS
The unclaimed property and escheat laws of each state provide that under
circumstances defined in that state's statutes, holders of unclaimed or
abandoned property must surrender that property to the state. Stockholders who
are entitled to receive cash in lieu of fractional shares in connection with the
51
Stock Splits whose addresses are unknown to Color Imaging or who do not
surrender their share certificates and request payment of the Repurchase Price
generally will have a period of years from the Effective Date in which to claim
the cash payment to which they are entitled. For example, with respect to
stockholders whose last known addresses, as shown by the records of Color
Imaging, are in Delaware the period is five years. Following the expiration of
that five-year period, the relevant provisions of the Delaware Code would likely
cause the cash payments to escheat to the State of Delaware. For stockholders
who reside in other states or whose last known addresses, as shown by the
records of Color Imaging, are in states other than Delaware, such states may
have abandoned property laws which call for such state to obtain either (i)
custodial possession of property that has been unclaimed until the owner
reclaims it or (ii) escheat of such property to the state. Under the laws of
such other jurisdictions, the "holding period" or the time period which must
elapse before the property is deemed to be abandoned may be shorter or longer
than five years. If Color Imaging does not have an address for a stockholder,
then the unclaimed cash payment would be turned over to Color Imaging's state of
incorporation, the State of Delaware, in accordance with its escheat laws.
REGULATORY APPROVALS
Color Imaging is not aware of any material governmental or regulatory approval
required for completion of the Stock Splits, other than compliance with the
relevant federal and state securities laws and Delaware corporate laws.
PROPOSAL 1-A -- APPROVAL OF AMENDMENT OF COLOR IMAGING'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT A ONE-FOR-1500 REVERSE STOCK SPLIT
The Board is requesting stockholder approval for the amendment of our Amended
and Restated Certificate of Incorporation to effect a one-for-1500 reverse stock
split of all outstanding shares of our common stock. The amendment under this
proposal would add the following as the first paragraph in Article V of the
Amended and Restated Certificate of Incorporation:
"Effective at the date and time this amendment to the Certificate of
Incorporation is accepted by the Secretary of State of the State of Delaware
(the "Effective Time"), each fifteen hundred (1,500) of the corporation's
common shares then issued and outstanding shall be automatically converted
into one fully-paid and non-assessable common share (the "Reverse Stock
Split"). In lieu of the issuance of any fractional common shares or scrip of
less than one whole common share that would otherwise result from the
Reverse Stock Split, any holder of common shares who would otherwise be
entitled to receive less than one share in total shall be entitled to
receive the amount of One and 10/100 Dollars ($1.10) in cash for each common
share held immediately prior to the Effective Time. This subsection (B) of
this Certificate of Amendment shall affect only issued and outstanding
shares of the corporation and shall not affect the total authorized number
of shares."
All shares held by owners of less than one share after the Reverse Stock Split
will be cashed at the pre-split price of $1.10 per share. The Reverse Stock
Split will be immediately followed by a forward stock split at the ratio of
1500-for-one. Stockholders who did not have their shares cashed out as a result
of the Reverse Stock Split will continue to hold the same number of shares as
they did prior to the Reverse Stock Split. The full text of the proposed
amendments of our Amended and Restated Certificate of Incorporation, is attached
to this proxy statement as Exhibit B.
The affirmative vote of the holders of a majority of our outstanding common
stock is required to approve this proposal. As a result, abstentions and broker
non-votes will have the same effect as negative votes.
MANAGEMENT AND THE BOARD OF DIRECTORS
RECOMMEND A VOTE IN FAVOR OF PROPOSAL 1-A.
PROPOSAL 1-B -- APPROVAL OF AMENDMENT OF COLOR IMAGING'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT A ONE-FOR-2500 REVERSE STOCK SPLIT
The Board is requesting stockholder approval for the amendment of our Amended
and Restated Certificate of Incorporation to effect a one-for-2500 reverse stock
split of all outstanding shares of our common stock. The amendment under this
proposal would add the following as the first paragraph in Article V of the
Certificate of Incorporation:
"Effective at the date and time this amendment to the Certificate of
Incorporation is accepted by the Secretary of State of the State of Delaware
(the "Effective Time"), each two thousand five hundred (2,500) of the
corporation's common shares then issued and outstanding shall be
automatically converted into one fully-paid and non-assessable common share
(the "Reverse Stock Split"). In lieu of the issuance of any fractional
common shares or scrip of less than one whole common share that would
otherwise result from the Reverse Stock Split, any holder of common shares
52
who would otherwise be entitled to receive less than one share in total
shall be entitled to receive the amount of One and 10/100 Dollars ($1.10) in
cash for each common share held immediately prior to the Effective Time.
This subsection (B) of this Certificate of Amendment shall affect only
issued and outstanding shares of the corporation and shall not affect the
total authorized number of shares."
All shares held by owners of less than one share after the Reverse Stock Split
will be cashed at the pre-split price of $1.10 per share. The Reverse Stock
Split will be immediately followed by a forward stock split at the ratio of
2500-for-one. Stockholders who did not have their shares cashed out as a result
of the Reverse Stock Split will continue to hold the same number of shares as
they did prior to the Reverse Stock Split. The full text of the proposed
amendments of our Certificate of Incorporation, is attached to this proxy
statement as Exhibit B. The affirmative vote of the holders of a majority of our
outstanding common stock is required to approve this proposal. As a result,
abstentions and broker non-votes will have the same effect as negative votes.
MANAGEMENT AND THE BOARD OF DIRECTORS
RECOMMEND A VOTE IN FAVOR OF PROPOSAL 1-B.
PROPOSAL 1-C -- APPROVAL OF AMENDMENT OF COLOR IMAGING'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT A ONE-FOR-5000 REVERSE STOCK SPLIT
The Board is requesting stockholder approval for the amendment of our Amended
and Restated Certificate of Incorporation to effect a one-for-5000 reverse stock
split of all outstanding shares of our common stock. The amendment under this
proposal would add the following as the first paragraph in Article V of the
Certificate of Incorporation:
"Effective at the date and time this amendment to the Certificate of
Incorporation is accepted by the Secretary of State of the State of Delaware
(the "Effective Time"), each five thousand five hundred (5,000) of the
corporation's common shares then issued and outstanding shall be
automatically converted into one fully-paid and non-assessable common share
(the "Reverse Stock Split"). In lieu of the issuance of any fractional
common shares or scrip of less than one whole common share that would
otherwise result from the Reverse Stock Split, any holder of common shares
who would otherwise be entitled to receive less than one share in total
shall be entitled to receive the amount of One and 10/100 Dollars ($1.10) in
cash for each common share held immediately prior to the Effective Time.
This subsection (B) of this Certificate of Amendment shall affect only
issued and outstanding shares of the corporation and shall not affect the
total authorized number of shares."
All shares held by owners of less than one share after the Reverse Stock Split
will be cashed at the pre-split price of $1.10 per share. The Reverse Stock
Split will be immediately followed by a forward stock split at the ratio of
5000-for-one. Stockholders who did not have their shares cashed out as a result
of the Reverse Stock Split will continue to hold the same number of shares as
they did prior to the Reverse Stock Split. The full text of the proposed
amendments of our Certificate of Incorporation, is attached to this proxy
statement as Exhibit B.
The affirmative vote of the holders of a majority of our outstanding common
stock is required to approve this proposal. As a result, abstentions and broker
non-votes will have the same effect as negative votes.
MANAGEMENT AND THE BOARD OF DIRECTORS
RECOMMEND A VOTE IN FAVOR OF PROPOSAL 1-C.
INFORMATION ABOUT COLOR IMAGING
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Information regarding the Common Shares beneficially owned by the executive
officers and directors of Color Imaging is set forth in the table below. The
Stock Splits will not impact affiliated holders of Common Shares differently
from unaffiliated holders of Common Shares on the basis of affiliate status. The
executive officers and directors of Color Imaging will receive no extra or
special benefit not shared on a pro rata basis by all other holders of the
Common Shares. If the Stock Splits are implemented, the executive officers and
directors of Color Imaging and American will not benefit by any material
increase in their percentage ownership of Common Shares. Please see the sections
entitled "Special Factors - Fairness of the Stock Splits" and "Special Factors -
What are the interests of affiliates of Color Imaging in the reverse stock
split?"
53
Share Ownership of Directors and Executive Officers. The following table
provides certain information regarding the number of Common Shares beneficially
owned by Color Imaging's directors and executive officers, and its foreign
affiliate which owns more than 5% of the Common Shares, as of June 10, 2005 and
the anticipated ownership percentage of such persons after the Stock Splits:
Percent of Number of
Number of Shares Before Shares After Percent of
Shares Before Stock Splits Stock Splits Shares After
Name and Address of Beneficial Owner (1) Stock Splits (2) (12) Stock Splits (14)
----------------------------------------------- ----------------- --------------- ---------------- ---------------------
Chi Fu Investment Co Ltd (3) 4,500,000 35.4% 4,500,000 36.2%
Wang, Sueling (4) 1,811,551 13.9% 1,810,551 (13) 14.1%
Van Asperen, Morris E. (5) 505,906 3.9% 505,906 4.0%
Wang, Jui-Chi (Jerry) (6) (7) 5,508,200 43.2% 5,508,200 44.2%
Wang, Jui-Hung (Jack) (6)(8) 5,237,928 41.1% 5,237,928 42.0%
Wang, Jui-Kung (Elmer) (6)(9) 4,844,959 38.2% 4,844,959 38.9%
Wang, Yi-Jen (10) 40,000 0.3% 40,000 0.3%
Eiswirth, Richard S. (11) 10,000 0.1% 10,000 0.1%
Wilson, Patrick J. (12) 52,000 0.4% 52,000 0.4%
All executive officers and directors as a
group (8 persons) 9,010,544 66.2% 9,009,544 67.5%
(1) Excludes exercisable warrants and options of others. Each of the persons
listed in this table may be contacted at Color Imaging's address.
(2) Assumes a total of 12,697,805 common shares outstanding before the Stock
Splits, plus the vested options held by such person or group.
(3) Wholly owned by General Plastic Industrial Co Ltd ("GPI"). GPI is
controlled by Color Imaging directors Jui-Hung Wang and Jui-Chi Wang.
(4) Includes 330,000 shares owned by Sueling Wang's children and 141,204 shares
owned by his spouse, Yik-Li Sih, in which Sueling Wang disclaims ownership.
Also includes exercisable options to purchase 375,000 shares of common
stock.
(5) Includes exercisable options to purchase 375,000 shares of common stock.
(6) Includes 4,500,000 shares held by Chi Fu Investment Co Ltd ("CFI"). CFI is
a wholly owned subsidiary of General Plastic Industrial Co., Ltd ("GPI").
Jui-Hung Wang, Jui-Chi Wang and Jui-Kung Wang own 8.03%, 8.39% and 1.84%,
respectively, of the outstanding common stock of GPI as of December 31,
2004. Each of Messrs. Wang disclaims beneficial ownership of the shares
held by CFI except to the extent of his pecuniary interest.
(7) Includes exercisable options to purchase 43,750 shares of common stock.
(8) Includes exercisable options to purchase 38,750 shares of common stock.
(9) Includes exercisable options to purchase 28,750 shares of common stock.
(10) Includes exercisable options to purchase 10,000 shares of common stock.
(11) Includes exercisable options to purchase 10,000 shares of common stock.
(12) Includes exercisable options to purchase 40,000 shares of common stock.
(13) Assumes 1,000 shares held by Sueling Wang's wife in a brokerage account
will be repurchased by Color Imaging.
(14) Assumes a total of 12,425,561 common shares outstanding after the stock
splits, plus the vested options held by such person or group.
The directors and executive officers of Color Imaging have not engaged in any
transactions involving the Common Shares in the past 60 days.
MARKET PRICE AND DIVIDEND INFORMATION
Our Common Shares are currently traded on the Nasdaq over-the-counter bulletin
board under the symbol "CIMG." The following table sets lists the high and low
prices for the periods indicated. Color Imaging paid neither a stock nor cash
dividend during any of the below listed periods. The last sale of Common Shares
reported on the Nasdaq over-the-counter bulletin board on July 21, 2005 was
$0.71. Prices in the table do not reflect any retail mark-ups or mark-downs or
commissions.
Quarter Ended High Low
---------------------------- ----------------- -----------------
Fiscal 2005
March 31 $ 0.62 $ 0.42
June 30 $ 0.90 $ 0.48
Fiscal 2004
March 31 $ 0.80 $ 0.69
June 30 $ 0.80 $ 0.42
September 30 $ 0.52 $ 0.41
December 31 $ 0.58 $ 0.41
54
Fiscal 2003
March 31 $ 1.58 $ 0.45
June 30 $ 0.82 $ 0.40
September 30 $ 0.70 $ 0.51
December 31 $ 0.78 $ 0.54
Fiscal 2002
March 31 $ 3.35 $ 2.10
June 30 $ 2.56 $ 1.25
September 30 $ 2.35 $ 1.01
December 31 $ 1.60 $ 0.80
Dividends are paid only when declared by the Board, in its sole discretion,
based on Color Imaging's financial condition, results of operation, market
conditions and such other factors as it may deem appropriate, including having
obtained any consent that may be required under Color Imaging's credit
arrangements with its lender. If the Stock Splits are completed and we
deregister the Common Shares, the Common Shares will no longer be quoted on the
Nasdaq over-the-counter bulletin board or be eligible to be traded on any
exchange or automated quotation service operated by a national securities
association, and trades in the Common Shares will only be possible through
privately negotiated transactions or in the Pink Sheets.
55
COMMON SHARE PURCHASE INFORMATION
The following table provides information regarding Color Imaging's Common Share
repurchases in the open market during the periods indicated.
Average
Number Price Per
Quarter Ended Repurchased Share
------------- ----------- ---------
Fiscal 2005 (1) None N/A
Through
Fiscal 2004
December 31, 2004 2,900 $ 0.43
September 30, 2004 5,800 0.46
June 30, 2004 14,000 0.74
March 31, 2004 17,500 0.75
Fiscal 2003
December 31, 2003 14,000 $ 0.64
September 30, 2003 21,000 0.61
June 30, 2003 9,500 0.74
March 31, 2003 None N/A
--------------------
(1) Market purchased halted by Color Imaging in December 2004.
Purchases by Directors and Executive Officers of Color Imaging
The table below sets forth information, by fiscal quarters, regarding purchases
by directors and officers of Color Imaging common stock on the OTC Bulletin
Board since January 1, 2004, including the number of shares purchased, the range
of prices paid and the average purchase price.
Shares
Date Name of Beneficial Owner Purchased Price
-------------- ------------------------- ------------------ ---------------
05/13/03 Morris E. Van Asperen 2,500 $ 0.62
05/13/03 Morris E. Van Asperen 7,500 $ 0.64
05/22/03 Jui-Chi (Jerry) Wang 10,000 $ 0.73
05/23/03 Jui-Chi (Jerry) Wang 5,000 $ 0.73
08/17/04 Patrick S. Wilson 6,000 $ 0.46
In addition, stock options have been granted by Color Imaging to certain
officers and directors, as described in this Proxy Statement at "Executive
Compensation." Except as disclosed above, there have been no other purchases of
Color Imaging stock since January 1, 2004 by any of the directors and executive
officers of Color Imaging, or by Color Imaging.
56
FINANCIAL INFORMATION
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary consolidated financial information was derived from Color
Imaging's audited consolidated financial statements as of and for each of the
years ended December 31, 2002 through 2004 and from unaudited interim financial
statements as of and for the six months ended June 30, 2005 and 2004. The
statement of operations data for the six months ended June 30, 2005 is not
necessarily indicative of results for a full year. This financial information is
only a summary and should be read in conjunction with our historical financial
statements and the accompanying footnotes, which are incorporated herein by
reference into this Proxy Statement. Please see the section entitled
"Incorporation of Certain Documents by Reference."
Six Months Ended Twelve Months Ended
June 30, December 31,
2005 2004 2004 2003 2002
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Sales $ 11,596 $ 11,270 $ 21,835 $ 21,058 $ 28,000
Operating income 1,028 388 636 667 988
Income from continuing operations 662 300 465 433 430
Income (loss) from discontinued operations -- -- -- -- (261)
Net income $ 662 $ 300 $ 465 $ 433 $ 169
PER SHARE DATA
Income from continuing operations per share:
Basic $ 0.05 $ 0.02 $ 0.04 $ 0.04 $ 0.04
Diluted $ 0.05 $ 0.02 $ 0.04 $ 0.04 $ 0.04
Income from discontinued operations per share:
Basic $ -- $ -- $ -- $ -- $ (0.02)
Diluted $ -- $ -- $ -- $ -- $ (0.02)
Net income (loss) per share:
Basic $ 0.05 $ 0.02 $ 0.04 $ 0.04 $ 0.02
Diluted $ 0.05 $ 0.02 $ 0.04 $ 0.04 $ 0.02
Weighted average number of shares of common stock
used in the calculation:
Basic 12,691 12,710 12,704 11,967 9,686
Diluted 12,803 12,710 12,710 11,980 9,686
Dividends per share None None None None None
Book value per share $ 0.97 $ 0.92 $ 0.92 $ 0.94 $ 0.54
FINANCIAL CONDITION
Cash and short-term investments $ 2,233 $ 1,577 $ 2,045 $ 2,214 $ 129
Current assets 11,085 11,261 9,511 9,982 7,987
Working capital 8,593 7,204 7,414 6,455 1,797
Net assets of discontinued operations -- -- -- -- --
Total assets 17,846 18,778 16,696 17,895 16,114
Long term debt 3,032 3,225 2,943 3,149 4,683
Stockholder's equity $ 12,322 $ 11,496 $ 11,656 $ 11,220 $ 5,241
KEY FINANCIAL
Return on stockholders' equity 10.7% 5.2% 4.0% 3.9% 3.2%
Return on assets 7.4% 3.2% 2.8% 2.4% 1.0%
Fixed charge coverage 387% 195% 210% 201% 142%
Color Imaging's book value per share, as set forth above, has been derived from
financial statements prepared by Color Imaging's management relating to the
fiscal periods set forth above. As required by Exchange Act Rule 13a-14(a),
Color Imaging's Chief Executive Officer and Chief Financial Officer have
certified that such financial statements, and the financial information included
57
in the periodic reports in which such financial statements appear, fairly
present in all material respects the financial condition, results of operation
and cash flows of Color Imaging as of, and for, the periods presented in such
periodic reports.
CERTAIN FINANCIAL EFFECTS OF THE STOCK SPLITS
We do not expect the Stock Splits or our use of approximately $487,500 to
complete the Stock Splits (which includes payments to be made to stockholders
who have fractional shares repurchased and professional fees and other expenses
related to the transaction) to have any material adverse effect on our
capitalization, liquidity, results of operations or cash flow. Please see the
section entitled "Meeting and Voting Information - Solicitation and Costs." We
expect to finance the Stock Splits with cash on hand.
If the Stock Splits are completed, stockholders who receive cash in lieu of
fractional shares will receive cash in the amount of $1.10 per Common Share held
immediately prior to the Stock Splits. The repurchase of the fractional Common
Shares resulting from the Stock Splits is estimated to cost approximately
$300,000 and would reduce the number of record holders of Common Shares,
including those held in street names, from approximately 525 to approximately
200.
We expect that, as a result of the Reverse/Forward Stock Splits and the cashing
out of fractional Common Shares held by stockholder after the reverse stock
split:
o Our aggregate stockholders' equity will change from approximately
$11,656,000 (as of December 31, 2004) to approximately $11,168,000;
and
o Book value per Common Share would change from $0.92 (at December 31,
2004) to $0.89, assuming the cash out of fractional Common Shares had
occurred on December 31, 2004.
PRO FORMA FINANCIAL INFORMATION
The following pro forma consolidated information has been derived from Color
Imaging's financial statements. The financial statements for the year ended
December 31, 2004, have been audited by independent certified public
accountants. The financial statements for the six month periods ended June 30,
2005 and 2004 are unaudited. In the opinion of Color Imaging's management, these
quarterly financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of these periods.
The pro forma consolidated financial statements have been prepared based upon
the assumption that the Stock Splits were completed effective the first day of
the period presented for the income statement and as of the date of the balance
sheet, and all fractional Common Shares under one whole share are repurchased.
These pro forma consolidated financial statements are not necessarily indicative
of the results that would have occurred had the Stock Splits actually taken
place at the respective time periods specified nor do they purport to project
the results of operations for any future date or period. Based on information
from various external sources, Color Imaging believes that approximately 272,244
pre-split Common Shares will be repurchased at $1.10 per Common Share for a
total purchase price of approximately $300,000.
The pro forma results are not indicative of future results because Color
Imaging's public reporting costs for the periods presented include only the
historic public costs and do not include anticipated future costs. Further,
these results exclude $115,000 in estimated cost savings due to no longer being
subject to periodic reporting obligations under the Exchange Act.
The unaudited pro forma financial statements should be read in conjunction with
our historical financial statements and the accompanying footnotes, which are
incorporated herein by reference into this Proxy Statement. Please see the
section entitled "Incorporation of Certain Documents by Reference."
58
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2005
(Unaudited)
(Dollars in thousands)
Pro-forma Pro-Forma
ASSETS Historical Adjustments Combined
-------------- -------------- --------------
CURRENT ASSETS
Cash $ 2,233 $ (488)(1) $ 1,745
Accounts receivable, net 2,887 2,887
Inventories 5,784 5,784
Other current assets 181 181
-------------- -------------- --------------
TOTAL CURRENT ASSETS 11,085 (488) 10,597
-------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT- NET 6,650 6,650
-------------- -------------- --------------
OTHER ASSETS 111 111
-------------- -------------- --------------
$ 17,846 $ (488) $ 17,358
============== ============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ - $ -
Accounts payable 2,404 2,404
Current portion of notes payable 6 6
Current portion of bonds payable - -
Other current liabilities 82 82
-------------- -------------- --------------
TOTAL CURRENT LIABILITIES 2,492 - 2,492
-------------- -------------- --------------
LONG TERM LIABILITIES
Notes payable 2 2
Bonds payable 2,075 2,075
Deferred tax liability 955 955
-------------- -------------- --------------
TOTAL LONG TERM LIABILITIES 3,032 - 3,032
-------------- -------------- --------------
TOTAL LIABILITIES 5,524 - 5,524
-------------- -------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, authorized
20,000,000 shares; 12,697,805 shares 127 (3)(2) 124
Additional paid in capital 12,685 (485) 12,200
Accumulated deficit (490) (490)
-------------- -------------- --------------
12,322 (488) 11,834
-------------- -------------- --------------
$ 17,846 $ (488) $ 17,358
============== ============== ==============
----------------------
(1) Assumes 272,244 pre-split common shares are repurchased at a pre-split
price per share of $1.10 and costs of approximately $187,500, for a total
expenditure, excluding $50,000 of advisory services, of approximately
$487,500 (refer to "Solicitation and Costs").
(2) Assumes 272,244 pre-split common shares are repurchased at $0.01 par value.
59
PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 2004
(Dollars in thousands)
Pro-forma Pro-Forma
ASSETS Historical Adjustments Combined
------------- ------------- -------------
CURRENT ASSETS
Cash $ 2,045 $ (488) (1) $ 1,557
Accounts receivable, net 2,412 2,412
Inventories 4,855 4,855
Other current assets 199 199
------------- ------------- -------------
TOTAL CURRENT ASSETS 9,511 (488) 9,023
------------- ------------- -------------
PROPERTY, PLANT AND EQUIPMENT- NET 6,602 6,602
------------- ------------- -------------
OTHER ASSETS 583 583
------------- ------------- -------------
$ 16,696 $ (488) $ 16,208
============= ============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,625 $ 1,625
Current portion of notes payable 6 6
Current portion of notes payable - related parties 68 68
Current portion of bonds payable 390 390
Other current liabilities 8 8
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 2,097 - 2,097
------------- ------------- -------------
LONG TERM LIABILITIES
Notes payable 5 5
Bonds payable 2,335 2,335
Deferred tax liability 603 603
------------- ------------- -------------
TOTAL LONG TERM LIABILITIES 2,943 - 2,943
------------- ------------- -------------
TOTAL LIABILITIES 5,040 - 5,040
------------- ------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, authorized
20,000,000 shares; 12,690,305 shares
issued and outstanding before the Stock Splits 127 (3) (2) 124
Additional paid in capital 12,681 (485) 12,196
Accumulated deficit (1,152) (1,152)
------------- ------------- -------------
11,656 (488) 11,168
------------- ------------- -------------
$ 16,696 $ (488) $ 16,208
============= ============= =============
----------------------
(1) Assumes 272,244 pre-split common shares ($0.01 par value) are
repurchased at a pre-split price per share of $1.10 and costs of
approximately $187,500, for a total expenditure, excluding $50,000 of
advisory services, of approximately $487,500 (refer to "Solicitation
and Costs").
(2) Assumes 272,244 pre-split common shares are repurchased at $0.01 par
value.
60
PRO FORMA CONDENSED INCOME STATEMENT
Six Months Ended June 30, 2005
(Unaudited)
(Dollars in thousands, except per share data)
Pro-forma Pro-Forma
Historical Adjustments Combined
------------- ------------- -------------
SALES $ 11,596 $ - $ 11,596
COST OF SALES 7,765 7,765
------------- ------------- -------------
GROSS PROFIT 3,831 0 3,831
------------- ------------- -------------
OPERATING EXPENSES
Administrative 708 (58)(1) 650
Deferred charge write-off 80 (80)(2) -
Research and development 585 585
Sales and marketing 1,430 1,430
------------- ------------- -------------
2,803 (138) 2,665
INCOME FROM OPERATIONS 1,028 138 1,166
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest and other income 38 (6)(3) 32
Interest and financing costs (51) (51)
------------- ------------- -------------
(13) (6) (19)
------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,015 132 1,147
PROVISION FOR INCOME TAXES 353 53 (4) 406
------------- ------------- -------------
NET INCOME $ 662 $ 79 $ 741
============= ============= =============
INCOME PER COMMON SHARE
Basic $ 0.05 $ 0.06
Diluted $ 0.05 $ 0.06
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 12,691,305 (272,244) 12,419,061
Assumed conversion 111,514 111,514
------------- ------------- -------------
Diluted 12,802,819 (272,244) 12,530,575
============= ============= =============
FIXED CHARGE COVERAGE 387% (5) 406%
-----------------------
(1) Assumes one-half of the $115,000 savings for being non-reporting
(refer to "Estimated Cost Savings").
(2) The one-time charges for merger and strategic advisor services
incurred during the period (refer to "Estimated Cost Savings").
(3) Assumes one-half of the interest forfeited using $487,500 in
short-term investments to fund the transaction (refer to
"Solicitation and Costs").
(4) Assumes 40% effective federal and state income tax rates.
(5) Pro forma assumes the additional $132,000 of income before taxes.
61
PRO FORMA CONDENSED INCOME STATEMENT
Year Ended December 31, 2004
(Dollars in thousands, except per share data)
Pro-forma Pro-Forma
Historical Adjustments Combined
-------------- -------------- --------------
SALES $ 21,835 - $ 21,835
COST OF SALES 16,283 16,283
-------------- -------------- --------------
GROSS PROFIT 5,552 - 5,552
-------------- -------------- --------------
OPERATING EXPENSES
Administrative 1,374 (115) (1) 1,259
Research and development 1,171 1,171
Sales and marketing 2,371 2,371
-------------- -------------- --------------
4,916 (115) 4,801
-------------- -------------- --------------
INCOME FROM OPERATIONS 636 115 751
-------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest and other income 230 (12) (2) 218
Interest and financing costs (90) (90)
-------------- -------------- --------------
140 (12) 128
-------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 776 103 879
PROVISION FOR INCOME TAXES 311 41 (3) 352
-------------- -------------- --------------
NET INCOME $ 465 $ 62 $ 527
============== ============== ==============
INCOME PER COMMON SHARE
Basic $ 0.04 $ 0.04
Diluted $ 0.04 $ 0.04
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 12,703,575 (272,244) 12,431,331
Assumed Conversion 6,731 6,731
-------------- -------------- --------------
Diluted 12,710,306 (272,244) 12,438,062
============== ============== ==============
FIXED CHARGE COVERAGE 210% (4) 220%
---------------------
(1) Assumes $115,000 savings for being non-reporting (refer to "Estimated Cost
Savings").
(2) Interest forfeited using $487,500 in short-term investments to fund the
transaction (refer to "Solicitation and Costs").
(3) Assumes 40% effective federal and state income tax rates.
(4) Pro forma assumes the additional $103,000 of income before taxes.
62
PROPOSAL NO. 2 - ELECTION OF DIRECTORS
The proxy holders intend to vote "FOR" election of the nominees named below, who
are currently members of the board, as directors of Color Imaging, unless
otherwise specified in the proxy. Directors of Color Imaging elected at the
annual meeting to be held on September 19, 2005 will hold office until the next
annual meeting or until their successors are elected and qualified.
Each of the director nominees below has consented to serve on the Board of
Directors, if elected. Should any nominee for the office of director become
unable to accept nomination or election, which is not anticipated, it is the
intention of the persons named in the proxy, unless otherwise specifically
instructed in the proxy, to vote for the election of such other person as the
board may recommend.
The individuals listed below as nominees for the Board of Directors were
directors of Color Imaging during 2004. The name and age of each nominee, and
the period during which such person has served as a director, is set forth
below:
NAME AGE SERVICE AS A DIRECTOR POSITION
Jui-Kung (Elmer) Wang 61 Since September 2001 Chief Executive Officer, Director
and Chairman of the Board
Sueling Wang, PhD 51 Since June 2000 President, Vice Chairman
and Director
Morris E. Van Asperen 61 Since June 2000 Executive Vice President,
Chief Financial Officer,
Secretary and Director
Yi-Jen (Tina) Wang 28 Since April 2003 Director
Jui-Hung (Jack) Wang 58 Since June 2001 Director
Jui-Chi (Jerry) Wang 48 Since June 2000 Director
Richard S. Eiswirth 35 Since April 2003 Director
Jui-Kung (Elmer) Wang, Chief Executive Officer and Chairman of the Board since
August 2003, has served as a director of Color Imaging since September 2001. He
was a founder of Color Image, Inc. in 1989 and its Chairman until its merger
with Color Imaging. He is a co-founder and has served as a director of General
Plastic Industrial Co., Ltd., a leading Taiwan-based manufacturer of after
market injection molded cartridges and accessories for copiers and laser
printers since 1978. In 1998 Mr. Wang was a founding member of Kings Brothers
LLC, which leases space to Color Imaging's headquarters and manufacturing
facilities in Norcross, Georgia. Mr. Wang has been a professor of management
with Tung-Hai University, Taiwan for over 20 years. He received a bachelor's
degree in economics, and MBA and PhD degrees in management. Jui-Kung Wang is the
brother of Sueling Wang, Jui-Hung Wang and Jui-Chi Wang, and the uncle of Yi-Jen
Wang.
Sueling Wang, PhD., became President and Vice-Chairman of Color Imaging in June
2000. From 1989 to 2000, he served as President and director of Color Image,
Inc., which was merged with Color Imaging. Dr. Wang was also a founder of Color
Image Inc. In 1998, Dr. Wang was a founding member of Kings Brothers LLC, which
leases space to Color Imaging's headquarters and manufacturing facilities in
Norcross, Georgia. Dr. Wang received a M.S. degree from the University of
Windsor, in Ontario, Canada and a PhD degree from the University of Detroit. Dr.
Wang's expertise in resin synthesis brought him into the toner industry and led
to the formation of Color Image, Inc. in 1989. Sueling Wang is the brother of
Jui-Kung Wang, Jui-Hung Wang and Jui-Chi Wang, and the uncle of Yi-Jen Wang.
Morris E. Van Asperen has served as Executive Vice President, Chief Financial
Officer and director of Color Imaging since June 2000. In June 2001 he was made
Secretary and on July 14, 2003, he was given the additional responsibilities of
Marketing and Sales which he held until April 1, 2004. From 1998 he served as
director of Logical Imaging Solutions and was from August 2000 its Executive
Vice President, Chief Financial Officer and Secretary until it was disposed of
by Color Imaging in September 2002. In 1986 he was employed by the National Bank
of California as Senior Vice President, Corporate Banking, and when he left the
bank in July 2000 he was its Executive Vice President and Credit Administrator.
63
Mr. Van Asperen also has extensive experience as a financial and management
consultant to businesses of up to $50.0 million in revenues and 1,000 employees
in construction, household goods, industrial glass, electronics manufacturing
and software development. From 1977 to 1984, he served as Vice President & Chief
Financial Officer of ATE Associates, Inc., a supplier of test fixtures and
software for numerous military aircraft programs. Mr. Van Asperen received a
B.S. degree in Mathematics from the University of Oklahoma and an M.B.A. degree
from Pepperdine University.
Yi-Jen (Tina) Wang has served as a director of Color Imaging since April 2003.
Until her resignation on January 28, 2005, to relocate outside of the country,
she was an Assistant Vice President and Human Resources Manager, having first
been employed by Color Imaging in February 2003. Prior to that she is attend the
University of San Francisco, pursuing an MBA degree. From October 2000 to June
2001 Ms. Wang served as a property manager for Kings Brothers LLC. From June
1998 to August 2000 Ms. Wang served as controller for GPI-USA, Inc. until it
discontinued its warehouse and marketing activities in the United States. From
January 1997 to May 1998 Ms. Wang was a sales representative assistant for our
affiliate General Plastic Industrial Co Ltd, Taiwan, R.O.C. Ms. Wang received a
Bachelor of Arts degree in June 1998 from Providence University, Taiwan, R.O.C.
Yi-Jen Wang is the niece of Jui-Kung Wang, Sueling Wang, Jui-Hung Wang and
Jui-Chi Wang.
Jui-Hung (Jack) Wang has served as a director of Color Imaging since June 2001
and was Chairman from June 2002 through August 2003. He was a founder and
director of Color Image, Inc. until its merger with Color Imaging. He is a
founder and serves as Chairman of General Plastic Industrial Co., Ltd, a leading
Taiwan based manufacturer of after market injection molded cartridges and
accessories for copiers and laser printers. Since January 2001, Mr. Wang has
served as a director of Taiwan Yu-Tzu Company, a food company. In 1998, Mr. Wang
was a founding member of Kings Brothers LLC, which leases space to Color Imaging
used for our headquarters and manufacturing facilities in Norcross, Georgia.
From 1986 to 1994, Mr. Wang was mayor of Wu-Chi Town, Taiwan. Jui-Hung Wang is
the brother of Sueling Wang, Jui-Kung Wang and Jui-Chi Wang, and the father of
Yi Jen Wang.
Richard S. Eiswirth has been a Director of the Company since April 2003 and is
Chairman of the Audit Committee. Since April 2002 he has been involved in
capital raising efforts for several start-ups. From August 1999 to April 2002,
he was Senior Executive Vice President and Chief Financial Officer of Netzee,
Inc., a publicly owned affiliate of The Intercept Group. Mr. Eiswirth was
responsible for the initial public offering and the identification, evaluation
and negotiation of ten acquisitions that fortified Netzee's product offerings.
Additionally, he facilitated the disposition of three operating units during the
company's restructuring. He has extensive experience in managing investment
bankers, brokers, attorneys, and accountants. For nine years prior to joining
Netzee, Mr. Eiswirth worked for Arthur Andersen LLP, where he was a senior
manager. In this capacity he provided audit, accounting, due diligence, merger
and acquisition, and consulting services to a variety of industries including
real estate, technology, banking, insurance and financial services. A certified
public accountant (CPA), Eiswirth graduated cum laude from Wake Forest
University in 1991 with a Bachelor of Arts degree in accounting.
Jui-Chi (Jerry) Wang has served as a director of Color Imaging since June 2000.
From 1994 until 2000, he served as a director of Color Image, Inc., which was
merged with Color Imaging. Since 1984, Mr. Wang has served as President of
General Plastic Industrial Co. Ltd (GPI), a Taiwan-based plastics manufacturer
specializing in injection moldings and more particularly toner cartridges and
accessories for copiers and laser printers. In 1998, Mr. Wang was a founding
member of Kings Brothers LLC, which leases space to Color Imaging used for our
headquarters and manufacturing facilities in Norcross, Georgia. Mr. Wang
received a Master's Degree in Computer Engineering from the University of
Southern California. Jui-Chi Wang is the brother of Sueling Wang, Jui-Hung Wang
and Jui-Kung Wang, and the uncle of Yi Jen Wang.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF
EACH OF THE ABOVE-NAMED DIRECTOR NOMINEES.
INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
DIRECTOR NOMINATIONS
In accordance with Article III, Section 3.3 of the Bylaws of the Company,
nominees for election as a director may be proposed only by the directors or by
a stockholder entitled to vote for directors.
A stockholder who wishes to make a director nomination at a stockholder meeting
must follow these procedures. For an annual meeting, the stockholder must submit
a written notice to the Secretary of the Company by the earlier of ninety days
before the first anniversary of the most recent annual meeting of stockholders
held for the election of directors and the close of business on the third day
following the date on which notice of the annual meeting is first given to
stockholders. For a special meeting, the written notice must be submitted by the
64
close of business on the third day following the date on which notice of the
meeting is first given to stockholders for the election of directors. The notice
must include:
(a) the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated,
(b) a representation that the stockholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice,
(c) a description of all arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder,
(d) such other information regarding each nominee proposed by such stockholder
as would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission, and
(e) the consent of each nominee to serve as a director of the Company if so
elected.
The presiding officer of the meeting may refuse to acknowledge the nomination of
any person not made in compliance with this procedure. The address for notices
of nominations is Color Imaging, Inc., Attn: Corporate Secretary, 4350 Peachtree
Industrial Blvd., Suite 100, Norcross, Georgia 30071.
The Board of Directors has not established a nominating committee but instead
determines its director nominations as a full Board. The Board of Directors
includes one director meeting the definition of "independent director" under the
rules of the Nasdaq Stock Market, as well as the Chairman and Chief Executive
Officer, the President, and the Chief Financial Officer of the Company, and two
other directors who are not independent by virtue of their family relationships
with the Chairman and the President. The Board of Directors believes that the
determination of nominees is benefited by the knowledge and perspective of these
corporate officers. Due to the small size of its Board, the Company does not
foresee the need to establish a separate nominating committee. Future candidates
for director will either be (i) recommended by a majority of the independent
directors for selection by the Board or (ii) discussed by the full Board and
approved for nomination by the affirmative vote of a majority of the Board,
including the affirmative vote of a majority of the independent directors. The
Company does not have a nominating committee charter.
The Company has not engaged, nor does it believe that it is necessary to engage,
any third party to assist it in identifying director candidates, and it has
never received a proposed candidate from a source outside of the Company.
Historically, the Board of Directors has not entertained outside candidates for
board nominees given that the Company is a "controlled" company under the rules
of the Nasdaq Stock Market, with management and affiliates controlling an
aggregate of approximately 65% of the voting shares. In formulating its slate of
director nominees for the annual meeting each year, the Board of Directors may
consider director candidates recommended by stockholders. The Board of Directors
does not have a written policy for how it will consider such recommendations due
to the lack of experience with such recommendations and the need to evaluate
such recommendations on a case-by-case basis.
Before consideration by the Board, nominations must satisfy the requirements
listed above, except that the nominations must be received no later than the
date disclosed in the prior year proxy statement for inclusion of stockholder
proposals for the current year proxy statement. In addition, each such written
nomination must state the name, age, business or residence address of the
nominee, the principal occupation or employment of the nominee, the number of
shares owned either beneficially or of record by each such nominee and the
length of time such shares have been so owned. Prior to further consideration,
the nominee must acknowledge that he/she is willing to (i) be named as a
nominee, (ii) serve as a director, and (iii) complete an officer and director
questionnaire for necessary disclosure items. The Board of Directors has not
established minimum qualifications that must be met by a board-recommended
nominee. However, the Board evaluates candidates based on financial literacy,
knowledge of the Company's industry or other background relevant to the
Company's needs, status as a stakeholder in the Company, "independence" (for
purposes of compliance with the rules of the SEC and the listing standards of
the Nasdaq National Market), and willingness, ability and availability for
service. The Board of Directors is not bound to accept any candidate proposed by
a stockholder, and may reject a candidate in its sole discretion. Stockholders
may submit proposed candidates to the Corporate Secretary at the above address.
STOCKHOLDER COMMUNICATIONS
Stockholders may communicate with the Company's Directors in care of the
Secretary of the Company in writing to Color Imaging, Inc., Attn: Corporate
Secretary, 4350 Peachtree Industrial Blvd, Suite 100, Norcross, GA 30071 or via
e-mail to van@colorimaging.com. Communication by mail to any or all of the
directors in care of the Secretary of the Company will be forwarded to the
director(s). E-mails received by the Secretary of the Company for any or all of
the Company's Directors will be forwarded by the Secretary of the Company to the
director(s). All stockholder messages will be forwarded directly to the
Directors specified by the stockholder.
65
DIRECTOR ATTENDANCE AT STOCKHOLDER MEETINGS
At last year's annual meeting of stockholders, the following directors were in
attendance: Jui-Kung Wang, Sueling Wang, Morris E. Van Asperen, Yi-Jen Wang and
Jui-Chi Wang. Two directors, Jui-Hung Wang and Richard S. Eiswirth, did not
attend the 2004 annual meeting of the stockholders. The board does not have a
formal policy on director attendance at stockholder meetings. The Company's
stockholder meetings historically have had light attendance, with typically
fewer than ten stockholders attending in person. All of the Directors intend to
attend the 2005 meeting of the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
There were four meetings of the Board of Directors during 2004. Each incumbent
director who was a director during 2004 attended 75 percent or more of the
aggregate of all meetings of the Board of Directors and any committees on which
that director served, except Jui-Hung Wang who attended 50% of the meetings.
DIRECTOR COMPENSATION
Each of Color Imaging's non-employee directors receives fees of $1,000 per board
meeting physically or telephonically attended and $500 for other meetings of the
Board of Directors. Each director who is a member of the Audit Committee
receives $500.00 for each meeting of the Audit Committee attended; and in 2005
will receive $1,000 for each Audit Committee meeting attended. In addition, each
director is reimbursed for certain out-of-pocket expenses incurred in connection
with attendance at board and committee meetings. Each of Color Imaging's
non-employee directors, on the date they are first elected or appointed to the
board, receives a grant of non-qualified stock options to purchase 25,000 shares
of Color Imaging's common stock at the fair market value of the common stock on
the date of grant. The directors' options vest in equal annual installments over
a five year period. The sole member of the Special Committee of the Board of
Directors, appointed January 27, 2005, to investigate strategic alternatives to
increase stockholder value, including potential mergers or acquisitions and
going private, is paid an additional $5,000 per month in director fees fore
these additional duties and responsibilities.
AUDIT COMMITTEE
The Audit Committee engages Color Imaging's independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and any non-audit fees, and reviews
the adequacy of Color Imaging's internal accounting controls and financial
management practices. Until April 2003 the entire Board of Directors constituted
the Audit Committee, and thereafter the Audit Committee consisted of Richard S.
Eiswirth, CPA. There were four meetings of the Audit Committee during 2004 with
the incumbent member attending 100 percent of all meetings of the Audit
Committee.
The Board of Directors nominates and appoints the members of the Audit
Committee.
NOMINATING AND COMPENSATION COMMITTEES
The Board of Directors acts as the nominating and compensation committees of
Color Imaging.
Notwithstanding anything to the contrary that is or may be set forth in any of
Color Imaging's filings under the Securities Act of 1933 or the Securities
Exchange Act of 1934 that might incorporate Color Imaging filings, including
this proxy statement, in whole or in part, the following Reports and the
Performance Graph, shall not be incorporated by reference into any such filings.
REPORT OF AUDIT COMMITTEE
Since April 2003, Color Imaging had an Audit Committee (the "Committee")
composed entirely of non-management directors and the oversight responsibility,
authority and specific duties of the Committee have been performed by the
Committee in accordance with the Audit Committee Charter of Color Imaging. The
members of the Committee, after April 2003, met the independence and experience
requirements of the NASD. The Committee met with Lazar Levine & Felix LLP, the
independent auditors, and management prior to issuance of Color Imaging's annual
report on Form 10-K for the year ending December 31, 2004. The Committee
reviewed the charter last amended on October 31, 2002, and determined that
further amendments were not needed at that time. The charter, as previously
66
amended, outlines the practices the Committee follows. A copy of the Committee
charter, as amended, was attached as Appendix A to the 2003 Proxy Statement.
The Committee recommended to the Board of Directors the engagement of Lazar
Levine & Felix LLP as Color Imaging's independent auditors and reviewed with
Color Imaging's financial managers and the independent auditors overall audit
scope and plans, the results of internal and external audit examinations,
evaluations by the auditors of Color Imaging's internal controls, and the
quality of Color Imaging's financial reporting.
The Committee has reviewed and discussed with management the audited financial
statements in the Annual Report, including a discussion of the quality, not just
the acceptability, of the accounting principles, the reasonableness of
significant judgments, and the clarity of disclosures in the financial
statements. In addressing the quality of management's accounting judgments,
members of the Audit Committee asked for management's representations that the
audited consolidated financial statements of Color Imaging have been prepared in
conformity with generally accepted accounting principles and have expressed to
both management and the independent auditors their general preference for
conservative policies when a range of accounting options is available.
In its meetings with representatives of Lazar Levine & Felix LLP, the
independent auditors, the Committee asks them to address, and discuss their
responses to, several questions that the Committee believes are particularly
relevant to its oversight. These questions include:
o Are there any significant accounting judgments made by management in
preparing the financial statements that would have been made
differently had the independent auditors themselves prepared and been
responsible for the financial statements?
o Based on the independent auditors' experience and their knowledge of
Color Imaging, do Color Imaging's financial statements fairly present
to investors, with clarity and completeness, Color Imaging's financial
position and performance for the reporting period in accordance with
generally accepted accounting principles and SEC disclosure
requirements?
o Based on the independent auditors' experience and their knowledge of
Color Imaging, has Color Imaging implemented internal controls and
internal audit procedures that are appropriate for Color Imaging?
The Committee believes that by thus focusing its discussions with the
independent auditors, it can promote a meaningful dialogue that provides a basis
for its oversight judgments.
The Committee discussed with Lazar Levine & Felix LLP, the independent auditors,
the matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended by the Auditing Standards Board
of the American Institute of Certified Public Accountants. The Committee also
received and reviewed the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit committees, by the Independence Standards
Board, and have discussed the auditors' independence.
In performing all of these functions, the Audit Committee acts only in an
oversight capacity. The Committee, in its oversight role, necessarily relies on
the work and assurances of Color Imaging's management, which has the primary
responsibility for financial statements and reports, and of the independent
auditors, who, in their report, express an opinion on the conformity of Color
Imaging's annual financial statements to generally accepted accounting
principles.
In reliance on these reviews and discussions, and the report of Lazar Levine &
Felix LLP, the independent auditors, the Audit Committee recommended to the
Board of Directors, and the board approved, that the audited financial
statements be included in Color Imaging's Annual Report on Form 10-K for the
year ended December 31, 2004, for filing with the Securities and Exchange
Commission.
FEES PAID TO COLOR IMAGING'S INDEPENDENT AUDITORS
Color Imaging incurred the following aggregated fees for professional services
performed by Lazar Levine & Felix LLP for audit fees, including our annual
financial statements and limited reviews of financial statements included in
Forms 10-Q, audit related professional fees for assurance and related services
that have not been reported as audit fees, tax services and the filing of
Federal and state income tax returns and professional services in connection
with Color Imaging's registration statements on Form S-8, during 2004, and Form
SB-2, during 2003 and 2002:
67
PROFESSIONAL SERVICES 2004 2003 2002
--------------------- --------- --------- ---------
Audit Fees $ 85,339 $ 78,171 $ 91,717
Audit-Related Fees 0 0 0
Tax Fees 14,775 15,000 12,000
All Other Fees 500 4,895 19,236
--------- --------- ---------
Total Fees $100,614 $ 98,066 $122,953
========= ========= =========
The Audit Committee has determined that the payments made to its independent
accountants for non-audit services for 2004, 2003 and 2002 are compatible with
maintaining such auditors' independence.
AUDIT COMMITTEE'S PRE-APPROVAL POLICES AND PROCEDURES
The Committee has the sole authority to appoint or replace, compensate, and
oversee the work of any independent auditor, who must be, when required, a
registered firm as defined by law, whose purpose is the preparation or issuance
of an audit report or related work. The independent auditor's reports and other
communications are to be delivered directly to the Committee, and the Committee
is responsible for the resolution of disagreements between management and the
independent auditor regarding financial reporting.
The Committee pre-approves all audit and non-audit services and all engagement
fees and terms in connection therewith, except as otherwise permitted by
regulation or the exchange.
The fees for professional services other than Audit Fees, in aggregate, for
2004, 2003 and 2002, approved by the Committee, were approximately $15,325,
$19,895 and $31,236. All of the hours expended on the principal accountant's
engagement to audit the financial statements of Color Imaging for the years
2004, 2003 and 2002 were attributable to work performed by full-time, permanent
employees of the principal accountant.
Management is responsible for planning Color Imaging's financial reporting
process and compliance of the consolidated financial statements with generally
accepted accounting principles. Color Imaging's independent auditors are
responsible for auditing those financial statements. The Audit Committee
necessarily must rely, without independent verification, on (a) management's
representation that the financial statements have been prepared with integrity
and objectivity and in conformity with accounting principles generally accepted
in the United States of America, and (b) on the representations of the
independent auditors included in their report on Color Imaging's financial
statements.
AUDIT COMMITTEE:
Richard S. Eiswirth
FEBRUARY 18, 2005
68
REPORT OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION
OVERVIEW
During the year ended 2004, the Board of Directors held primary responsibility
for determining the compensation for Jui-Kung Wang, Chairman of the board and
Chief Executive Officer (principal executive officer), Sueling Wang, Vice
Chairman of the board and President, Morris E. Van Asperen, Director and
Executive Vice President, Chief Financial Officer, principal accounting and
financial officer and Secretary and Patrick J. Wilson, Senior Vice President
Marketing and Sales (hired April 1, 2004), and the stock based incentives for
all the Named Executives. The compensation committee is comprised of Color
Imaging's Board of Directors over whose name this report is also presented.
Color Imaging is engaged in a highly competitive industry. The actions of the
executive officers have a profound impact on the short-term and long-term
profitability of Color Imaging; therefore, the design of the executive officer
compensation package is very important. In order to retain key employees, Color
Imaging has an executive compensation package that is driven by an increase in
stockholder value, the overall performance of Color Imaging, and the individual
performance of the executive. The measures of Color Imaging's performance
include revenue growth, pretax profit achievement, and pretax profit improvement
over the past year.
Pursuant to the above compensation philosophy, the three main components of the
executive compensation package are base salary, a cash incentive plan
(discretionary bonus or commission based program), and stock-based incentive
plans.
BASE SALARY
The factors subjectively used in determining base salary include the recent
profit performance of Color Imaging, the magnitude of responsibilities, the
scope of the position, individual and overall departmental performance
improvements, and the salary received by peers in similar positions in the same
geographic area. These factors are not used in any specific formula or
weighting. The salaries of the Named Executives are reviewed annually. Further,
in connection with the appointment of the Senior Vice President Marketing and
Sales on April 1, 2004 at a base salary of $150,000 without a commission
program, and the responsibilities of the Executive Vice President was reassessed
and his compensation package was restructured, reducing his base salary from
$150,000 to $120,000. Increases in base salary of the President is set at a
minimum of 5% per annum pursuant to his employment agreement. However, for the
year ended 2004, the President received no increase to his base salary and his
salary remains at the reduced amount of $120,000. The base salaries,
commissions, bonuses and other compensation received by the Named Executives for
the year ended December 31, 2004, were summarized for and reviewed by the
Committee.
CASH BASED INCENTIVE PLANS
Other than commissions based on the achievement of certain sales objectives paid
to the Executive Vice President to whom it is applicable, Color Imaging does not
have an annual cash based incentive compensation package for the Named
Executives, and instead Color Imaging utilizes discretionary annual bonuses
based upon performance objectives for the ensuing fiscal year. The Named
Executives participate in a performance bonus plan designed to encourage
achievement of short-term objectives. The plan's payouts are subjectively based
on net income, budget objectives, and other individual specific performance
objectives. The specific performance objectives relate to each executive
improving the contribution of his functional area of responsibility to further
enhance the earnings of Color Imaging. These performance objectives and
incentive packages are then reviewed by the Board of Directors and either
accepted, amended, or modified. There was, as a result, a discretionary bonus
was paid at the end of 2004 to the Named Executives as follows:
NAMED EXECUTIVE BONUS AMOUNT
-------------------------------------------- --------------
Wang, Jui-Kung, Chairman/CEO $ 4,200
Wang, Sueling, President, Director $ 4,000
Van Asperen, Morris E., EVP/CFO, Director $ 3,500
Wilson, Patrick J., SrVP, Marketing & Sales $ 3,000
69
STOCK BASED INCENTIVE PLANS
During the fiscal year 2004, the Senior Vice President Marketing and Sales,
effective with his employment by Color Imaging on April 1, 2004, was granted
options to purchase 100,000 shares of Color Imaging's common stock at an
exercise price of $0.73 per share, with 25% vesting immediately and 25% vesting
upon each anniversary date of the grant thereafter and expiring 5 years from the
respective date of vesting.
On May 18, 2004, the other Named Executives and longer service non-employee
directors were granted options to purchase Color Imaging's common stock at an
exercise price of $0.54 as follows:
NAMED EXECUTIVE SHARES
------------------------------------------ -----------
Wang, Jui-Kung, Chairman/CEO 25,000
Wang, Sueling, President, Director 100,000
Van Asperen, Morris E., EVP/CFO, Director 100,000
Wang, Jui-Hung, Director 25,000
Wang, Jui-Chi, Director 25,000
Fifty percent of the options vested immediately and the remainder vested equally
upon each of the next two anniversaries of the grant and expire 5 years from the
respective date of vesting.
On April 1, 2004, upon his employment by Color Imaging as Senior Vice President,
Marketing and Sales, Mr. Wilson was granted an option to purchase 100,000 shares
of Color Imaging's common stock at an exercise price of $0.73 per share. 20%
vested immediately and the remainder vested equally upon each of the next four
anniversaries of the grand and expire five years from their respective date of
vesting.
The grant of awards is purely discretionary and are not based on any specific
formula and may or may not be granted in any given fiscal year. The Board of
Directors gives consideration to the overall performance of Color Imaging and
the performance and contributions of the individual grantees.
CHIEF EXECUTIVE OFFICER COMPENSATION
Color Imaging's principal executive officer's compensation is determined by the
Board of Directors. For year ended 2004, the duties of the principal executive
officer were performed by Jui-Kung Wang. The cash compensation of Jui-Kung Wang,
Chairman and Chief Executive Officer, was $102,008, including the $4,200 cash
based incentive compensation (bonus). This represents the total compensation for
Jui-Kung Wang, no portion of which was in stock based incentive plans, while
payments on his behalf for benefits and other perquisites (other compensation)
bring the total to $120,361 for 2004. The Chief Executive's compensation is
based upon the long-term growth in net income, stockholder value improvements
and the Chief Executive Officer's individual performance. The decision of the
Board of Directors is subjective and is not based upon any specific formula or
guidelines. The Chief Executive Officer does not consult with the board when his
compensation is determined and voluntarily accepts amendments to his employment
agreement, if applicable, as required.
COMPENSATION COMMITTEE
Jui-Kung Wang
Sueling Wang
Morris E. Van Asperen
Jui-Hung Wang
Jui-Chi Wang
Yi-Jen Wang
Richard S. Eiswirth
JANUARY 27, 2005
70
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned by
our chief executive officer and the three other most highly compensated
executive officers who were serving as such as of December 31, 2004, 2003 and
2002 (collectively, the Named Executive Officers), whose aggregate compensation
for fiscal years 2004, 2003 and 2002 exceeded $100,000 for services rendered in
all capacities to Color Imaging and its subsidiaries for that fiscal year.
Annual Compensation Long Term Compensation
---------------------------------------------- ----------------------
Other Annual Securities
Compensation Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) Options/SARS(#) Compensation
--------------------------- -------- ----------- ----------- ------------ ----------------- --------------
Jui-Kung Wang (2) 2004 97,808 4,200 18,354 25,000 --
Chief Executive Officer 2003 29,908 -- 6,501 -- --
2002 N/A -- 1,000 -- --
Dr. Sueling Wang (3) 2004 115,500 4,000 12,841 100,000 --
President 2003 136,826 140,000 4,203 -- --
2002 158,439 -- 38,736 -- --
Morris E. Van Asperen (4) 2004 152,589 3,500 7,082 100,000 --
Executive Vice President, 2003 162,001 -- 9,204 -- --
Chief Financial Officer & 2002 151,200 -- 14,353 -- --
Secretary
Patrick J. Wilson (5)
Senior Vice President 2004 110,769 3,000 69,426 100,000 --
2003 -- --
2002 -- --
(1) For named executive officers the amount reported represents the cost of
group insurance benefits, Color Imaging's matching contribution to the 401(k)
plan for the officer, other life insurance policies maintained for him, and
other compensation as further described in the notes for each officer,
respectively.
(2) Mr. Wang was employed by Color Imaging on August 15, 2003, and other annual
compensation included the personal benefit of his use of a company automobile of
$10,273 and $4,442 during 2004 and 2003, respectively, and $5,342 for the
personal use of a corporate apartment. Also included in other annual
compensation are the fees paid to the named executive officer while he was an
outside director which were $0, $ 2,000 and $1,000 during 2004, 2003 and 2002,
respectively. The options were granted by action of the board on May 18, 2004,
with 50% vesting immediately and the remainder vesting equally upon the next two
anniversary dates of the grant, expiring 5 years from their respective date of
vesting.
(3) Other annual compensation includes the personal benefit of his use of a
company automobile of $5,000 and $1,358 during 2004 and 2003, respectively and
split dollar life insurance premiums of $0, $660 and $16,773 during 2004, 2003
and 2002, respectively. During 2003 the officer repaid the loan due to the Color
Imaging in connection with the split dollar life insurance policy and the
collateral assignment of the policy was released by Color Imaging and the plan
between Color Imaging and the officer was terminated. Options granted by action
of the board on May 18, 2004. 50% vested immediately and the balance vest
equally upon each of the next two anniversary dates of the grant. The options
expire five years after their respective vesting date(s).
(4) Other annual compensation includes, by agreement, the reimbursement for a
supplemental life insurance policy for the benefit of the officer. The life
insurance premiums reimbursed or paid by Color Imaging in 2004, 2003 and 2002
were $0, $5,525, and $6,446, respectively. In 2003 the officer voluntarily
terminated the life insurance reimbursement program previously funded by Color
Imaging; and, subsequently, the officer's employment agreement was modified to
delete the provision of the additional life insurance benefit. Options granted
by action of the board on May 18, 2004. 50% vested immediately and the balance
vest equally the next two anniversary dates of the grant. The options expire
five years after their respective vesting date(s).
(5) Other annual compensation includes payments made to the officer prior to his
employment by Color Imaging under the consulting agreement between the officer
and the Color Imaging. Options granted by action of the board upon the
employment of the officer on April 1, 2004. 20% vested immediately and the
balance vest equally upon each of the next four anniversary dates of the grant.
The options expire five years after their respective vesting date(s).
71
OPTION GRANTS TABLE
Options granted the Named Executive Officers during the year ended December 31,
2004 were:
----------------------------------------------------------------------------------------------------------------------------
Percent of Potential realizable value at
Number of total assume annual rate of stock
securities options/SARS price appreciation for the
underlying granted Exercise or option term
Options/SARS employees in base price Expiration
Name (#) fiscal year (%) ($/Share) date 5% ($) (f) 10% ($) (g)
------------------------ -------------- --------------- -------------- -------------- ----------- ----------- -------
Jui-Kung Wang (2) 25,000 5.4% $0.54 05/18/11 8,490 21,516
Chief Executive Officer
Dr. Sueling Wang (3) 100,000 21.5% $0.54 05/18/11 33,960 86,082
President
Morris E. Van Asperen
Executive Vice
President, Chief
Financial Officer 100,000 21.5% $0.54 05/18/11 33,960 86,082
& Secretary
Patrick J, Wilson 100,000 21.5% $0.77 04/01/13 48,425 122,718
Senior Vice President
OPTION EXERCISES AND YEAR-END VALUE TABLE
None of the Named Executive Officers exercised stock options during 2004. The
following table sets forth certain information regarding unexercised options
held at year-end by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 2004 AND OPTION VALUES AT DECEMBER 31, 2004
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
SHARES OPTIONS
ACQUIRED VALUE -------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
---------------------- ------------ ---------- ------------- ---------------
Jui-Kung Wang 0 0 22,500 27,500
Sueling Wang 0 0 350,000 50,000
Morris E. Van Asperen 0 0 350,000 50,000
Patrick J. Wilson 0 0 25,000 75,000
Based on the closing price of our common stock of $0.52 on December 31, 2004, no
unexercised options were in the money for the Named Executive Officers.
EMPLOYMENT AGREEMENTS
On June 28 and August 1, 2000, Color Imaging entered into employment agreements
with its President and Executive Vice President. Each of the employment
agreements has a 5-year term. Color Imaging is obligated to pay the President an
annual salary of $150,000 with a guaranteed increase of 5% per annum over the
term of the agreement. Color Imaging is obligated to pay the Executive Vice
President an annual salary of $144,000 with a guaranteed increase of 5% over the
term of his agreement. Each employee may terminate the agreement upon 6 months
notice to Color Imaging. Color Imaging may terminate each employee upon 6 months
notice by Color Imaging; provided, however, that Color Imaging is obligated to
pay to the employee his annual base salary, commissions or bonuses earned, and
benefits for a period of 12 months after the date of such notice.
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Executive Vice President voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. On July 14, 2003, the Executive
Vice President's employment agreement was modified, giving him the additional
duties of marketing and sales, provide for commissions, a reduced base salary of
72
$78,000 per annum and deleting the provision providing for a minimum 5% annual
salary increase. On October 1, 2003, the Executive Vice President's employment
agreement was again amended to return his base salary to its former level of
$151,200 and his commission program on certain sales of Color Imaging was
modified. On April 19, 2004, the Executive Vice President's employment agreement
was again amended, reducing his base salary to $120,000 and providing for a
commission or certain sales of Color Imaging.
The employment agreements with the above named officers also commit Color
Imaging to purchasing, for their benefit, certain life insurance plans. Color
Imaging pays the premiums and is the collateral assignee of four split dollar
life insurance policies owned by the President. Pursuant to the policies, Color
Imaging will, upon his death or earlier liquidation of each such policy, be
entitled to the refund of all premium payments made by Color Imaging on the
policies, and the balance of the proceeds will be paid to the President's
designated beneficiaries. During 2003 the President repaid the loan due Color
Imaging in connection with the split dollar life insurance policies, Color
Imaging then released its collateral assignment of the policies and is no longer
required to pay any premiums in connection with the four policies. The split
dollar life insurance premiums paid by Color Imaging during 2004, 2003 and 2002
were $0, $660, $15,773, respectively. The amount due from its President in
connection with these life insurance policies at the years ended December 31,
2004, 2003 and 2002 was $0, $0 and $134,877, respectively. Color Imaging paid or
reimbursed the Executive Vice President for such supplemental life insurance
plans $0, $5,525 and $6,446 during 2004, 2003 and 2002, respectively. On July
14, 2003, the Executive Vice President's employment agreement was amended to
delete the provision requiring Color Imaging to pay or reimburse premiums in
connection with his supplemental life insurance policy.
On April 1, 2004, the Company hired and entered into a two year employment
agreement with the Senior Vice President of Marketing and Sales, providing the
employee with an annual salary of $150,000, the lesser of three months severance
or the remainder of the term of the agreement if terminated by the Company
without cause and granting the employee options to purchase 100,000 shares of
the Company's common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors of the Company serves as the Compensation
Committee of the Company. Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang,
are owners in and Chairman, Auditor and President, respectively, of General
Plastic Industrial Co., LTD (GPI), a Taiwanese manufacturer of all in one and
injection molded cartridges and accessories for copiers and laser printers. For
the twelve months ended December 31, 2004, 2003 and 2002 we purchased
$4,028,303, $2,091,785 and $2,148,279, respectively, of all in one and injected
molded products from GPI.
On March 6, 2003, Color Imaging received from Chi Fu Investment Co Ltd
$6,075,000 of subscription proceeds for the public sale of 4,500,000 of our
common shares at a price of $1.35 per share in our offering on Form SB-2 filed
with the Securities and Exchange Commission. Chi Fu Investment Co Ltd is a
wholly owned subsidiary of our affiliate General Plastic Industrial Co., Ltd,
and as of December 31, 2004 our directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each own 8.03%, 8.39% and 1.84%, respectively, of General Plastic
Industrial Co., Ltd.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q on October 28, 2003) with its
affiliate General Plastic Industrial Co Ltd. Per the Marketing and Licensing
Agreement General Plastic Industrial Co Ltd agrees to indemnify and hold
harmless Color Imaging for any costs and expense arising from any defective
licensed product, and/or any recalled licensed product including litigation
arising therefrom. In addition, General Plastic Industrial Co Ltd agrees to
credit Color Imaging for product cost, shipping and related expenses arising
from any defective licensed product, and/or any recalled licensed product. On
November 15, 2004 the Marketing and License Agreement was amended and replaced
in its entirety effective April 1, 2004, and it is filed with our Annual Report
on Form 10-K as Exhibit 10.13. For the periods ended December 31, 2004, 2003 and
2002, the Company paid its affiliate royalties under the Marketing and Licensing
Agreement of $86,073, $0 and $0, respectively.
PERFORMANCE GRAPH
Set forth below is a line graph presentation comparing the cumulative
stockholder return on the Color Imaging's common stock (OTC: CIMG), on an
indexed basis, against cumulative total returns of the Nasdaq Stock Market (U.S.
Companies) Index and the Special Chemicals Index, which is composed of 68
companies which operate in the specialty chemical industry, the industry in
which the financial community has categorized Color Imaging. A list of the
companies included in this index will be furnished by Color Imaging to any
stockholder upon written request of the Corporate Secretary. The graph assumes
that the value of the investment in the common stock in each index was $100 on
73
December 31, 1999 and any dividends were reinvested. The Performance Graph shows
total return on investment for the period beginning December 31, 1999 through
December 31, 2004.
Note: Management cautions that the stock price performance information shown in
the graph below may not be indicative of current stock price levels or future
stock price performance.
[graph omitted]
The performance graph was plotted using the following table:
1999 2000 2001 2002 2003 2004
-------- -------- -------- -------- -------- --------
COLOR IMAGING, INC. 100.00 210.66 242.95 94.04 54.86 40.75
SPECIAL CHEMICALS INDEX 100.00 98.51 105.93 87.98 113.24 157.58
NASDAQ MARKET INDEX 100.00 62.85 50.10 34.95 52.55 56.97
74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from which 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 2004, 2003 and 2002 were $544,728, $531,444 and $518,484,
respectively.
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 3.07%, inclusive of the 1% letter of credit
fee annually, revenue bonds as of December 31, 2004, are payable in varying
annual principal and monthly interest payments through July 2019. The bond is
secured by all the assets of the Company and by real property owned by 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 Kings Brothers LLC are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and 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 personal guarantee of the managing member of Kings Brothers LLC. At this
time, the Company believes that the Kings Brothers LLC portion of the bond is
fully collectible. As of December 31, 2004, the bond principal outstanding was
$2,725,000 and the portion due from Kings Brothers LLC was $647,428.
Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang, are owners in and
Chairman, Auditor and President, respectively, of General Plastic Industrial
Co., LTD (GPI), a Taiwanese manufacturer of injection molded cartridges and
accessories for copiers and laser printers. For the twelve months ended December
31, 2004, 2003 and 2002 we purchased $4,028,303, $2,091,785 and $2,148,279,
respectively, of injected molded products from GPI.
On March 14, 2002, the Company borrowed $500,000 from director, Sueling Wang, on
an unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and is evidenced in writing. On September 2, 2002, the note was
modified to extend the term to March 1, 2005, provide for a $100,000 principal
payment, decreased the interest rate to 6% per annum, provided for interest only
payments through February 28, 2003, and 24 monthly payments of principal and
interest beginning on April 1, 2003, in the amount of $17,735.67. The Company
borrowed the $500,000 to meet a supplier commitment for product. Interest paid
Sueling Wang on the note for the years ended December 31, 2004, 2003 and 2002
was $3,607, $14,641 and $36,296, respectively. As of December 31, 2004, 2003 and
2002, the principal outstanding was $15,000, $105,000 and $400,000,
respectively. The loan was repaid in full in February 2005.
On August 21, 2002, the Company borrowed $100,000 from director, Jui-Chi Wang,
on an unsecured basis. The loan bears interest at the rate of 6% per annum,
matures on March 1, 2005 and is evidenced in writing. The Company borrowed this
amount in order to repay $100,000 borrowed from director Sueling Wang on March
14, 2002. The note is interest only through February 28, 2003, and then is fully
amortizing over 24 months with principal and interest payments payable monthly
beginning April 1, 2003 in the amount of $4,434. As of December 31, 2004, 2003
and 2002, the interest accrued and paid on the note was $2,203, $ 5,115 and
$2,170, respectively. As of December 31, 2004, 2003 and 2002 the outstanding
principal balance on the note was $8,803, $59,806 and $100,000, respectively.
The loan was repaid in full in February 2005.
On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, matures on March 1, 2005 and is
evidenced in writing. The Company borrowed this amount in order to make a
principal payment due on its industrial development bond in the approximate
amount of $255,000, for the acquisition of capital equipment in the approximate
of $125,000 and for general corporate purposes. The note is interest only
through February 28, 2003, and then is fully amortizing over 24 months with
principal and interest payments payable monthly beginning April 1, 2003 in the
amount of $22,169.60. As of December 31, 2004, 2003 and 2002, interest accrued
and paid on the note was $11,017, $ 25,577 and $10,259, respectively. As of
December 31, 2004, 2003 and 2002, the principal outstanding was $44,013,
$299,032 and $500,000, respectively. The loan was repaid in full in February
2005.
75
We believe that the terms of the loans and borrowings from affiliates were on
terms more favorable than were otherwise available from third parties.
On March 6, 2003, the Company received from Chi Fu Investment Co Ltd $6,075,000
of subscription proceeds for the public sale of 4,500,000 of its common shares
at a price of $1.35 per share in its offering on Form SB-2 filed with the
Securities and Exchange Commission. Chi Fu Investment Co Ltd is a wholly owned
subsidiary of the Company's affiliate, General Plastic Industrial Co., Ltd, and
as of December 31, 2004, Company directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each owned 8.03%, 8.39% and 1.84%, respectively, of General
Plastic Industrial Co., Ltd.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q on October 28, 2003) with its
affiliate General Plastic Industrial Co Ltd, which was amended and restated on
November 15, 2004, effective April 1, 2004. The agreement was further amended on
July 31, 2005. Per the amended Marketing and Licensing Agreement, General
Plastic Industrial Co Ltd agrees to indemnify and hold harmless Color Imaging
for any costs and expense arising from any defective licensed product, and/or
any recalled licensed product including litigation arising therefrom. Further
General Plastic Industrial Co Ltd agrees to credit Color Imaging for product
cost, shipping and related expenses arising from any defective licensed product,
and/or any recalled licensed product. For the periods ended December 31, 2004,
2003 and 2002, the Company paid its affiliate royalties under the Marketing and
Licensing Agreement of $86,073, $0 and $0, respectively.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to Color Imaging with respect
to the beneficial ownership of Color Imaging's common stock as of June 10, 2005
by:
o each stockholder known by Color Imaging to own beneficially more than
5% of Color Imaging's common stock;
o each Named Executive Officer;
o each of Color Imaging's directors; and
o all directors and executive officers as a group.
Except as otherwise indicated in the footnotes, Color Imaging believes that the
beneficial owners of the common stock listed below, have sole voting power and
investment power with respect to such shares of common stock indicated. In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of the date of this report are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percent ownership of
any other person.
PERCENTAGE OF
NAME OF BENEFICIAL OWNER NO. OF SHARES OWNERSHIP(1)
---------------------------------- ------------------- ------------------
Sueling Wang (2) 1,811,551 13.9%
Morris E. Van Asperen (3) 505,906 3.9%
Jui-Chi Wang (4)(5) 5,508,200 43.2%
Jui-Hung Wang (5)(6) 5,237,928 41.1%
Jui-Kung Wang (5)(7) 4,844,959 38.1%
Patrick J. Wilson (8) 52,000 *
Yi-Jen Wang 40,000 *
Richard S. Eiswirth (9) 10,000 *
Chi Fu Investment Co Ltd (5) 4,500,000 35.4%
General Plastic Industrial Co., Ltd (5) 4,500,000 35.4%
Executive officers and directors
as a group (8 persons) (10) 9,010,544 66.2%
----------------
* Less than 1%
76
(1) Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). The table above includes the number of shares underlying
options and warrants which are exercisable within 60 days after the date
of this report.
(2) Includes: (a) 330,000 shares owned by Sueling Wang's four children, (b)
141,204 shares owned by Yik-Li Sih, Sueling Wang's wife, in which Dr. Wang
may be deemed to have pecuniary interest. Dr. Wang disclaims beneficial
ownership of such 471,204 shares. Also includes 375,000 shares subject to
options that are currently exercisable.
(3) Includes 375,000 shares subject to options that are currently exercisable.
(4) Includes 43,750 shares subject to options that are currently exercisable.
(5) Includes 4,500,000 shares held by Chi Fu Investment Co Ltd ("CFI"). CFI is
a wholly owned subsidiary of General Plastic Industrial Co., Ltd ("GPI").
Jui-Hung Wang, Jui-Chi Wang and Jui-Kung Wang own 8.03%, 8.39% and 1.84%,
respectively, of the outstanding common stock of GPI as of December 31,
2004. Each of Messrs. Wang disclaims beneficial ownership of the shares
held by CFI except to the extent of his pecuniary interest.
(6) Includes 38,750 shares subject to options that are currently exercisable.
(7) Includes 28,750 shares subject to options that are currently exercisable.
(8) Includes 40,000 shares subject to options that are currently exercisable.
(9) Includes 10,000 shares subject to options that are currently exercisable.
(10) Includes 921,250 shares subject to options that are currently exercisable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The members of the Board of Directors, certain executive officers of Color
Imaging and persons who hold more than 10% of Color Imaging's outstanding common
stock are subject to the reporting requirements of Section 16(a) of the Exchange
Act, which require them to file reports with respect to their ownership of
common stock and their transactions in common, stock. Based upon the copies of
Section 16(a) reports that the Color Imaging received from such persons for
their 2004 fiscal year transactions in the common stock and their common stock
holdings, Color Imaging believes that all reporting requirements under Section
16(a) for such fiscal year were met in a timely manner by its executive
officers, board members and greater than ten-percent stockholders, excepting the
late filing of (a) one late Form 4 filed on August 23, 2004, by Patrick J.
Wilson disclosing the purchase of 6,000 shares of our common stock, and (b) the
late filing of one Form 4 each by directors Jui-Kung Wang, Sueling Wang, Jui-Chi
Wang, Jui-Hung Wang and Morris E. Van Asperen reflecting one exempt option
grant.
PROPOSAL NO. 3 - RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Lazar Levine & Felix LLP as Color Imaging's
independent accountants for the year ending December 31, 2005, and has further
directed that management submit the selection of independent accountants for
ratification by the stockholders at the annual meeting. Lazar Levine & Felix LLP
has no financial interest in Color Imaging and neither it nor any member or
employee of the firm has had any connection with Color Imaging in the capacity
of promoter, underwriter, voting trustee, director, officer or employee. The
Delaware General Corporation Law does not require the ratification of the
selection of independent accountants by Color Imaging's stockholders, but in
view of the importance of the financial statements to the stockholders, the
Board of Directors deems it advisable that the stockholders pass upon such
selection. A representative of Lazar Levine & Felix LLP is not expected to be
present at the annual meeting.
In the event the stockholders fail to ratify the selection of Lazar Levine &
Felix LLP, the Audit Committee will reconsider whether or not to retain the
firm. Even if the selection is ratified, the Audit Committee and the Board of
Directors in their discretion may direct the appointment of a different
independent accounting firm at any time during the year if they determine that
such a change would be in the best interests of Color Imaging and its
stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
OTHER BUSINESS
Color Imaging does not know of any other business to be presented to the annual
meeting and does not intend to bring any other matters before such meeting. If
any other matters properly do come before the annual meeting, however, the
persons named in the accompanying Proxy are empowered, in the absence of
contrary instructions, to vote according to their best judgment.
77
STOCKHOLDER PROPOSALS
We do not currently expect to hold a 2006 annual meeting of stockholders,
because upon completion of the Stock Splits, we would no longer have public
stockholders or any public participation in our stockholder meetings. If the
Stock Splits proposal is not completed, we will hold a 2006 annual meeting of
stockholders. Appropriate proposals of stockholders intended to be presented at
Color Imaging's 2006 Annual Meeting of Stockholders pursuant to Rule 14a-8
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), must be received by Color Imaging by April 26, 2006 for inclusion in its
proxy statement and form of proxy relating to that meeting. In addition, all
stockholder proposals submitted outside of the stockholder proposal rules
promulgated pursuant to Rule 14a-8 under the Exchange Act must be received by
Color Imaging by July 5, 2006 in order to be considered timely. If such
stockholder proposals are not timely received, proxy holders will have
discretionary voting authority with regard to any such stockholder proposals
that may come before the 2006 Annual Meeting.
AVAILABLE INFORMATION
The Stock Splits will constitute a "going-private" transaction for purposes of
Rule 13e-3 of the Exchange Act. As a result, Color Imaging has filed the
Schedule 13E-3 which contains additional information about Color Imaging. Copies
of the Schedule 13E-3 are available for inspection and copying at Color
Imaging's principal executive offices during regular business hours by any
interested stockholder of Color Imaging, or a representative who has been so
designated in writing, and may be inspected and copied, or obtained by mail, by
written request addressed to Color Imaging, Inc., 4350 Peachtree Industrial
Blvd, Suite 100, Norcross, GA 30071.
Color Imaging is currently subject to the information requirements of the
Exchange Act and files periodic reports, proxy statements and other information
with the SEC relating to its business, financial and other matters. Copies of
such reports, proxy statements and other information, as well as the Schedule
13E-3, may be copied (at prescribed rates) at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. For further information concerning the SEC's public
reference rooms, you may call the SEC at 1-800-SEC-0330. Some of this
information may also be accessed on the World Wide Web through the SEC's
internet address at "www.sec.gov."
Color Imaging maintains on its website, www.colorimaging.com, recent filings on
SEC Form 10-Q/K and 8-K, and these may be viewed or downloaded without charge
from our website.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In our filings with the SEC, information is sometimes incorporated by reference.
This means that we are referring you to information that we have filed
separately with the SEC. The information incorporated by reference should be
considered part of this Proxy Statement, except for any information superseded
by information contained directly in this Proxy Statement.
This Proxy Statement incorporates by reference the following documents that we
have previously filed with the SEC. They contain important information about
Color Imaging and its financial condition.
o Our Annual Report on Form 10-K for the year ended December 31, 2004,
as amended by Form 10-K/A;
o Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005;
o Our Current Report on Form 8-K filed on March 15, 2005;
o Our Current Report on Form 8-K filed on April 19, 2005; and
o Our Current Report on Form 8-K filed on August 9, 2005.
We also incorporate by reference any additional documents that we may file with
the Commission under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
between the date of this Proxy Statement and the date of the Annual Meeting.
Stockholders should not rely on information other than that contained or
incorporated by reference in this proxy statement (including its appendices).
Color Imaging has not authorized anyone to provide information that is different
from that contained in this proxy statement. This proxy statement is dated
August 22, 2005. No assumption should be made that the information contained in
this proxy statement is accurate as of any other date, and the mailing or
78
delivery of this proxy statement will not create any implication to the
contrary.
We will provide, without charge, upon the written or oral request of any person
to whom this Proxy Statement is delivered, by first class mail or other equally
prompt means within one business day of receipt of such request, a copy of any
and all information that has been incorporated by reference, without exhibits
unless such exhibits are also incorporated by reference in this Proxy Statement.
You may obtain a copy of these documents and any amendments thereto by written
request addressed to Color Imaging, Inc., 4350 Peachtree Industrial Blvd, Suite
100, Norcross, GA 30071. Copies of Color Imaging's Annual Report on Form 10-K
and Quarterly Report on Form 10-Q for the periods ended December 31, 2004 and
March 31, 2005, may also be viewed and or downloaded from our website without
charge at www.colorimaging.com.
ANNUAL REPORT ON FORM 10-K
A copy of Color Imaging's Annual Report on Form 10-K, as amended, for the
calendar year ended December 31, 2004 is being mailed to stockholders with this
proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ MORRIS E. VAN ASPEREN
Morris E. Van Asperen
Secretary
Norcross, Georgia
August 22, 2005
Please Complete, Date, And Sign The Enclosed Proxy Card And Return It Promptly
In The Enclosed Reply Envelope. No Postage Is Required If Mailed In The United
States.
79
EXHIBIT A
---------
CBIZ VALUATION GROUP, LLC
780 JOHNSON FERRY ROAD, N.E.
SUITE 600
ATLANTA, GA 30342
(404) 257-2298 (404) 497-9155 FAX
PRIVILEGED AND CONFIDENTIAL
May 2, 2005
Mr. Richard Eiswirth
Chairman of the Special Committee of the Board of Directors of
Color Imaging, Inc.
4350 Peachtree Industrial Boulevard, Suite 100
Norcross, Georgia 30071
Dear Mr. Eiswirth:
We understand that Color Imaging, Inc., (the "Company"), is contemplating a
"going private" transaction by implementing a reverse stock split at one of the
following ratios: 5,000 to 1; 2,500 to 1 or 1,500 to 1 with common shareholders
of owning less than one share after the reverse stock split receiving cash in
the amount of $1.10 per pre split share ("Transaction").
You have asked us to render our opinion as to whether the Transaction is fair,
from a financial point of view, to stockholders who would not retain their
interest in the Company after completion of the Transaction, and stockholders
who would retain their interest in the Company after completion of the
Transaction, in each case other than stockholders who are directors, or
executive officers of the Company or affiliates of directors or executive
officers of the Company. The Opinion does not address the Company's underlying
business decision to effect the transaction. This opinion is based on the terms
articulated in the resolution of the Board of Directors dated April 14, 2005. We
have not been asked to, and did not, solicit third-party expressions of interest
in acquiring all or any part of the Company's assets or securities other than
for the purpose of assessing the likelihood of a merger or acquisition
transaction.
In the course of our analyses for rendering this opinion, we have:
o Reviewed the Transaction Documents, including a draft of the proxy
statement for the stockholders approval of the Transaction;
o Reviewed the Company's audited financial statements for the fiscal
years ended 2001, 2002, 2003 and 2004;
o Review minutes of the Board of Directors for fiscal years 2002 through
2005;
o Analyzed certain operating and financial information, including
projections, provided to us by management relating to the Company's
business prospects;
o Met with certain members of the Company's senior and operating
management to discuss Color Imaging, Inc.'s operations, historical
financial results and future prospects;
o Visited the Company's facilities in Atlanta, Georgia;
o Discussed with management its activities with respect to their
contacts with other investment bankers, private equity investors and
potential merger or acquisition candidates;
o Evaluated the stock price history and reported events of the Company;
o Evaluated other strategic alternatives for the Company;
o Evaluated the liquidation value of the Company's common stock;
A-1
o Considered publicly available data and stock market performance data
of public companies we deem comparable to the Company; and
o Conducted such other studies, analyses, inquiries and investigations,
as we deemed appropriate.
In the course of our investigation, we have assumed and relied upon the accuracy
and completeness of the financial statements, forecasts, projections and other
information provided to us by management and we have further relied upon the
assurances of management that they were unaware of any facts that would make the
information provided to us incomplete or misleading. We have not assumed any
responsibility for independent verification of such information or assurances.
In arriving at our opinion, we have not performed any independent appraisal of
the assets of the Company. Our analysis does not constitute an examination,
review of, or compilation of prospective financial statements in accordance with
standards established by the American Institute of Certified Public Accountants
("AICPA"). We do not express an opinion or any other form of assurance on the
reasonableness of the underlying assumptions or whether any of the prospective
financial statements are presented in conformity with AICPA presentation
guidelines. Further, there will usually be differences between prospective and
actual results because events and circumstances frequently do not occur as
expected and those differences may be material. We have also assumed the Company
is not currently involved in any material transaction other than the
Transaction, and those activities undertaken in the ordinary course of
conducting its business other than those disclosed.
We have acted as financial advisor to the Special Committee in connection with
the Proposed Transaction and will receive a fee for these services. We will
receive an additional fee upon delivery of this opinion. In addition, the
Company has agreed to indemnify us for certain liabilities arising out of our
services for the Proposed Transaction.
This Opinion is furnished for the use and benefit of the Special Committee and
does not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote with respect to the Transaction. This Opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understanding set forth in this Opinion and subject to the
understanding that the obligations of CBIZ Valuation Group, LLC in the
Transaction are solely corporate obligations. Furthermore, no officer, director,
employee or shareholder of CBIZ Valuation Group, LLC shall be subjected to any
personal liability whatsoever to any person, nor will any such claim be asserted
by or on behalf of you or your affiliates.
On the basis of the forgoing, it is our opinion that the Transaction is fair,
from a financial point of view, to the Company's stockholders who would not
retain their interest in the Company after completion of the Transaction, and
stockholders who would retain their interest in the Company after completion of
the Transaction, in each case other than stockholders who are directors, or
executive officers of the Company or affiliates, of directors or executive
officers of the Company.
Very truly yours,
/S/ CBIZ VALUATION GROUP, LLC
CBIZ VALUATION GROUP, LLC
A-2
EXHIBIT B
FORM OF
REVERSE STOCK SPLIT
AMENDMENT
(A) Article FOURTH of the Articles of Incorporation, as amended, of Color
Imaging, Inc. is hereby amended and replaced in its entirety as follows:
FOURTH:
A. The total number of shares of stock which the Corporation shall
have authority to issue is twenty thousand six hundred and [INSERT # (A) BELOW
BASED ON PROPOSAL APPROVED BY STOCKHOLDERS], consisting of [INSERT # (B) BELOW
BASED ON PROPOSAL APPROVED BY STOCKHOLDERS] shares of Common Stock having a par
value of $0.01 per share and [INSERT # (C) BELOW BASED ON PROPOSAL APPROVED BY
STOCKHOLDERS] shares of Preferred Stock having a par value of $0.01 per share.
B. The Board of Directors is expressly authorized to provide for the
issuance of the shares of Preferred Stock in one or more series by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
(B) Effective at the date and time this amendment to the Certificate of
Incorporation is accepted by the Secretary of State of the State of Delaware
(the "Effective Time"), each D. [INSERT RATIO (D) BELOW ON PROPOSAL APPROVED BY
STOCKHOLDERS] of the corporation's common shares then issued and outstanding
shall be automatically converted into one fully-paid and non-assessable common
share (the "Reverse Stock Split"). In lieu of the issuance of any fractional
common shares or scrip of less than one whole common share that would otherwise
result from the Reverse Stock Split, any holder of common shares who would
otherwise be entitled to receive less than one share in total shall be entitled
to receive the amount of One and 10/100 Dollars ($1.10) in cash for each common
share held immediately prior to the Effective Time. This subsection (B) of this
Certificate of Amendment shall affect only issued and outstanding shares of the
corporation and shall not affect the total authorized number of shares.
(C) This Certificate of Amendment shall not change the stated capital or paid-in
surplus referable to the common shares, if any.
Note: (a) (b) (c) (c)
Total Common Preferred Ratio
--------- --------- --------- ---------
Proposal 1-A 20,667 20,000 667 1,500
Proposal 1-B 12,400 12,000 400 2,500
Proposal 1-C 6,200 6,000 200 5,000
B-1
EXHIBIT C
FORM OF
FORWARD STOCK SPLIT
AMENDMENT
(A) Article FOURTH of the Articles of Incorporation, as amended, of Color
Imaging, Inc. is hereby amended and replaced in its entirety as follows:
FOURTH:
A. The total number of shares of stock which the Corporation shall
have authority to issue is thirty-one million (31,000,000), consisting of thirty
million (30,000,000) shares of Common Stock having a par value of $0.01 per
share and one million (1,000,000) shares of Preferred Stock having a par value
of $0.01 per share.
B. The Board of Directors is expressly authorized to provide for the
issuance of the shares of Preferred Stock in one or more series by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
(B) Effective at the date and time this amendment to the Certificate of
Incorporation is accepted by the Secretary of State of the State of Delaware
(the "Effective Time"), each share of the corporation's common shares then
issued and outstanding shall be automatically converted into ****[INSERT RATIO
BELOW] fully paid and non-assessable common shares. This subsection (B) of this
Certificate of Amendment shall affect only issued and outstanding shares of the
corporation and shall not affect the total authorized number of shares.
(C) This Certificate of Amendment shall not change the stated capital or paid-in
surplus referable to the common shares, if any.
****To be completed according to the Proposal adopted:
Proposal 1-A fifteen hundred (1,500)
Proposal 1-B two thousand five hundred (2,500)
Proposal 1-C five thousand (5,000)
C-1
EXHIBIT D
FORM OF TRANSMITTAL LETTER
COLOR IMAGING, INC.
4350 Peachtree Industrial Blvd
Suite 100 TELEPHONE
Norcross, GA 30071 (770) 840-1090
July __, 2005 TELECOPY
(770) 242-3494
September __, 2005
Dear Stockholder:
At the recent Annual Meeting of Stockholders of Color Imaging, Inc. ("Color
Imaging" or the "Company"), the stockholders approved amendment of Color
Imaging's Certificate of Incorporation to effect a reverse split at a ratio of
[1500 to 1 (or 2500 or 5000 to 1 as determined by the Board)] of Color Imaging's
common stock, par value $0.01 per share (the "Common Stock"; the "Transaction").
The Transaction occurred on September __, 2005 (the "Effective Date"). As a
result of the Transaction, stockholders with less than [1500 or 2500 or 5000]
share of Common Stock in any account immediately prior to the Effective Date
have had these shares cancelled and converted to the right to receive the fair
market value of such shares in cash in an amount equal to $1.10 per share of
Common Stock prior to the Effective Date. The Transaction has no effect upon
stockholder accounts with [1500 or 2500 or 5000] or more shares of Color Imaging
Common Stock, other than the change in the CUSIP number from 196245 10 4 to
CUSIP number ______ __ _, since a forward split after the Effective Date means
you have the same number of shares you held prior to the reverse split.
In order to receive the cash payment for your cancelled shares you must
surrender to American Stock Transfer and Trust Company, Color Imaging's transfer
agent, the certificates representing such cancelled shares. Accordingly, you
must complete, date, sign and return the enclosed Letter of Transmittal to
American Stock Transfer and Trust Company, along with all of your share
certificate(s) representing cancelled Color Imaging Common Stock. We suggest
that you mail the share certificate(s) in a traceable manner (i.e., registered
mail, overnight courier, etc.). Any person holding more than one certificate
representing shares of Color Imaging Common Stock cancelled as a result of the
Transaction must surrender all such affected certificates registered in their
name in order to receive payment.
Only upon receipt of your properly completed Letter of Transmittal and your
certificate(s) representing cancelled shares of Color Imaging Common Stock will
American Stock Transfer and Trust Company forward you your cash payment. Please
read and follow all instructions on the Letter of Transmittal, and direct any
questions you might have to American Stock Transfer and Trust Company at (877)
248-6417 or (718) 921-8317.
By order of the Board of Directors of the Company
-------------------------------------------------
Morris E. Van Asperen,
Executive Vice President, Chief Financial Officer
and Corporate Secretary
D-1
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
COLOR IMAGING, INC.
The undersigned hereby appoints Sueling Wang, PhD and Morris E. Van Asperen,
attorneys and proxies, each with power to act without the other and with power
of substitution, and hereby authorizes them to represent and vote all of the
shares of stock of Color Imaging, Inc., standing in the name of the undersigned
with all powers which the undersigned would possess if present at the Annual
Meeting of Stockholders of Color Imaging to be held September 19, 2005 or any
adjournment or postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1 TO AMEND THE
CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT AND A FORWARD STOCK
SPLIT, USING ONE OF THREE RATIOS TO BE SELECTED BY, AND AT THE ELECTION OF, THE
BOARD OF DIRECTORS, "FOR" THE ELECTION OF EACH NOMINEE TO SERVE AS A DIRECTOR,
AND "FOR" PROPOSAL 3 TO RATIFY THE SELECTION OF LAZAR LEVINE & FELIX LLP AS
COLOR IMAGING'S ACCOUNTANTS. IF NO DIRECTION IS GIVEN IN THE SPACE PROVIDED ON
THE REVERSE SIDE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF DIRECTORS AND
"FOR" PROPOSALS 1 AND 3. IF ANY OTHER BUSINESS SHOULD COME BEFORE THE MEETING,
AND THE BOARD DID NOT HAVE NOTICE OF SUCH MATTER PRIOR TO THE MAILING OF THIS
PROXY, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE BEST JUDGMENT OF THE
PROXY HOLDER.
If you intend to attend the annual meeting, please be sure to check the "I plan
to attend the meeting" box on the reverse side of the Proxy.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
ANNUAL MEETING OF STOCKHOLDERS OF
COLOR IMAGING, INC.
SEPTEMBER 19, 2005
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD IN THE ENVELOPE PROVIDED
AS SOON AS POSSIBLE.
| Please detach along perforated line and mail in |
V the envelope provided. V
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PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
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2. Election of Directors
FOR AGAINST ABSTAIN
NOMINEES:
1A. To approve amendments of [ ] [ ] [ ]
[ ] FOR ALL NOMINEES [ ] Jui-Kung Wang Color Imaging's Certificate
[ ] Sueling Wang, PhD of Incorporation to effect a
[ ] WITHHOLD AUTHORITY [ ] Morris E. Van Asperen one-for-1500 reverse stock
FOR ALL NOMINEES [ ] Yi-Jen Wang split of the outstanding shares
[ ] Jui-Hung Wang of Color Imaging's common stock,
[ ] FOR ALL EXCEPT [ ] Jui-Chi Wang followed by a 1500-for-one
(see instructions [ ] Richard S. Eiswirth forward stock split.
below)
1B. To approve amendments of Color [ ] [ ] [ ]
Imaging's Certificate of
Incorporation to effect a
one-for-2500 reverse stock
split of the outstanding shares
of Color Imaging's common stock,
followed by a 2500-for-one
forward stock split.
1C. To approve amendments of Color [ ] [ ] [ ]
Imaging's Certificate of
Incorporation to effect a
one-for-5000 reverse stock
split of the outstanding shares
of Color Imaging's common stock,
followed by a 5000-for-one
forward stock split.
3. Ratify the selection of Lazar [ ] [ ] [ ]
Levine & Felix LLP as Color
Imaging's Accountants for the
year ending December 31, 2005.
4. In their discretion upon such other business as may properly come
before the meeting or any adjournment or postponement thereof.
INSTRUCTION:
To withhold authority to vote for any individual nominee(s), mark "FOR ALL
EXCEPT" and fill in the circle next to each nominee you wish to withhold, as
shown here: [X]
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To change the address on your account, please check the I plan to attend the meeting. [ ]
box at right and indicate your new address in the [ ]
address space above. Please note that changes to the
registered name(s) on the account may not be submitted
via this method.
Signature of Stockholder _____________________ Date: ________ Signature of Stockholder _______________________ Date: ________
Note:Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee, or guardian, please give full title as
such. If the signer is a corporation, please sign full corporate name by
duly authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized person.