UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _________ to _________
Commission file number 0-18450
SECURITIES AND EXCHANGE COMMISSION
COLOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3453420
- --------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identifi8cation No.)
incorporation or organization)
4350 Peachtree Industrial Blvd,
Suite 100
Norcross, GA 30071
- --------------------------------- ---------------------------------
(Address of principal (Zip Code)
executive offices)
(770) 840-1090
---------------------------------
Registrant's telephone number, including area code
Not Applicable
--------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes __ No x
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of October 27, 2003, there were 12,925,005 shares outstanding of Common
Stock.
1
COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002(Audited)...........................3
Condensed Statements of Operations (Unaudited) for the
Three and Nine Months ended September 30, 2003 and 2002..............4
Condensed Statements of Cash Flows (Unaudited)
for the Nine Months ended September 30, 2003 and 2002................5
Notes to Interim Unaudited Condensed Financial
Statements ..........................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risks.........24
Item 4. Controls and Procedures.............................................25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ..................................................25
Item 2. Changes in Securities and Use of Proceeds...........................25
Item 3. Defaults Upon Senior Securities.....................................27
Item 4. Submission of Matters to a Vote of Security Holders.................27
Item 5. Other information ..................................................27
Item 6. Exhibits and Reports on Form 8-K....................................28
Signatures....................................................................31
2
PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC.
CONDENSED BALANCE SHEETS
ASSETS
30-Sept-03 31-Dec-02
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS
Cash $ 2,029,033 $ 128,501
Accounts receivable, net 2,389,542 2,390,019
Inventories 6,329,431 5,080,237
Related party portion of IDR bond 87,912 83,160
Other current assets 167,008 304,672
------------ ------------
TOTAL CURRENT ASSETS 11,002,926 7,986,589
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,991,939 7,038,111
------------ ------------
OTHER ASSETS
Related party portion of IDR bond 647,428 735,340
Deferred offering costs -- 121,924
Other assets 223,191 231,571
------------ ------------
TOTAL OTHER ASSETS 870,619 1,088,835
------------ ------------
$ 18,865,484 $ 16,113,535
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit lines $ -- $ 1,022,470
Accounts payable 2,958,495 3,543,680
Current portion of notes payable 5,502 363,789
Current portion of bonds payable 370,000 350,000
Notes payable - related parties 339,937 401,937
Other current liabilities 504,634 507,782
------------ ------------
TOTAL CURRENT LIABILITIES 4,178,568 6,189,658
------------ ------------
LONG TERM LIABILITIES
Notes payable 12,954 989,667
Bonds payable 2,725,000 3,095,000
Notes payable - related parties 220,041 598,063
Deferred tax liability 349,000 --
------------ ------------
LONG TERM LIABILITIES 3,306,995 4,682,730
------------ ------------
TOTAL LIABILITIES 7,485,563 10,872,388
------------ ------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; 12,925,005 and 8,437,965 shares issued
and outstanding on September 30, 2003 and
December 31, 2002, respectively 129,250 84,380
Additional paid-in capital 13,035,258 7,205,909
Accumulated deficit (1,531,306) (2,049,142)
Treasury stock, at cost, 147,168 shares ( 253,281) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,379,921 5,241,147
------------ ------------
$ 18,865,484 $ 16,113,535
============ ============
See accompanying notes
3
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- --------------------------
30-SEP-03 30-SEP-02 30-SEP-03 30-SEP-02
------------ ----------- ------------ ------------
SALES $ 5,360,703 $ 6,654,366 $16,048,697 $22,285,989
C0ST OF SALES 3,993,199 5,460,287 11,822,528 18,776,922
------------ ------------ ------------ ------------
GROSS PROFIT 1,367,504 1,194,079 4,226,169 3,509,067
------------ ------------ ------------ ------------
OPERATING EXPENSES
Administrative 418,924 304,491 1,311,715 999,106
Research & development 286,407 237,553 883,888 688,660
Sales & marketing 439,441 351,568 1,195,061 963,645
------------ ------------ ------------ -----------
1,144,772 893,612 3,390,664 2,651,411
------------ ------------ ------------ -----------
INCOME FROM OPERATIONS 222,732 300,467 835,505 857,656
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSE)
Other income 57,216 ( 9,434) 165,740 19,771
Financing expenses (28,146) (84,820) (138,409) (250,640)
------------ ------------ ------------ -----------
29,070 (94,254) 27,331 (230,869)
------------ ------------ ------------ -----------
INCOME BEFORE TAXES 251,802 206,213 862,836 626,787
PROVISION FOR INCOME TAXES 100,000 89,488 345,000 250,738
------------ ------------ ------------ -----------
INCOME FROM
CONTINUING OPERATIONS 151,802 116,725 517,836 376,049
DISCONTINUED OPERATIONS (Note 2)
(Loss) from operations of
subsidiary disposed of -
net of income taxes -- ( 98,244) -- (261,326)
------------ ------------ ------------ -----------
NET INCOME (LOSS) $ 151,802 $ 18,481 $ 517,836 $ 114,723
============ ============ ============ ===========
INCOME (LOSS)
PER COMMON SHARE - BASIC
Continuing operations $ .01 $ .01 $ .04 $ .04
Discontinued operations -- -- -- (.03)
----------- ---------- ----------- ----------
$ .01 $ -- $ .04 $ .01
============ ============ ============ ===========
INCOME (LOSS)
PER COMMON SHARE - DILUTED
Continuing operations $ .01 $ .01 $ .04 $ .04
Discontinued operations -- -- -- (.03)
----------- ---------- ----------- ----------
$ .01 $ -- $ .04 $ .01
============ ============ ============ ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 12,838,170 10,122,283 11,710,487 10,107,156
Assumed conversion 9,091 -- 5,515 --
------------ ------------ ------------ -----------
12,847,261 10,122,283 11,716,002 10,107,156
============ ============ ============ ===========
See accompanying notes
4
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30
(UNAUDITED)
2003 2002
------------- -------------
Cash flows from operating activities:
Net income from continuing operations $ 517,836 $ 376,049
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 433,778 396,252
Deferred income taxes 349,000 167,001
Allowance for doubtful accounts 1,334 3,603
(Increase) decrease in:
Accounts receivable and other receivables (857) 26,672
Inventories (1,249,194) 308,188
Prepaid expenses and other assets 267,968 (24,797)
Due from related party - IDR bond 83,160 79,596
(Decrease) in:
Accounts payable and accrued liabilities (588,333) (595,922)
------------- -------------
Net cash (used in) provided by
continuing operations (185,308) 736,642
Net cash flows of discontinued operations -- (676,202)
------------- -------------
Net cash (used in) provided by
operating activities (185,309) 60,440
------------- -------------
Cash flows (used in) investing activities:
Capital expenditures (387,606) (527,149)
------------- -------------
Net cash (used in)
investing activities (387,606) (527,149)
------------- -------------
Cash flows from financing activities:
Net (payments) under line of credit (1,022,470) (370,135)
Net proceeds from sale of common stock 5,900,140 143,351
Repurchase of common shares and warrants (279,202) --
Net proceeds from related party borrowings -- 1,000,000
Principal payments on related party borrowings (440,022) --
Principal payments of long-term debt (1,685,000) (586,949)
------------- -------------
Net cash provided by
financing activities 2,473,446 186,267
------------- -------------
Net increase in cash 1,900,532 (280,442)
Cash at beginning of year 128,501 393,981
------------- -------------
Cash at end of period $ 2,029,033 $ 113,539
============= =============
See accompanying notes
5
COLOR IMAGING, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals
and adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2003.
NOTE 2. DISCONTINUED OPERATIONS
On September 30, 2002, the Company completed a share exchange agreement with
Digital Color Print, Inc. and four former Company directors, whereby the Company
received 1.7 million shares of its common stock in exchange for all of the
shares of the common stock of its subsidiary, Logical Imaging Solutions, Inc.
Based upon guidance provided by APB 29 in connection with accounting for
non-monetary transactions, the fair value of the 1.7 million shares of common
stock received was approximately $2,678,993; the fair value (approximating the
net book value) of Logical Imaging Solutions, Inc. plus the transaction costs
incurred.
Following is summary financial information for the Company's discontinued
Logical Imaging Solutions, Inc. subsidiary:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Loss) from discontinued operations:
Before income taxes $ -- $(146,244) $ -- $(406,570)
Income tax provision (benefit) -- (48,000) -- (145,244)
----------- ----------- ----------- -----------
Net (loss) from discontinued operations $ -- $ (98,244) $ -- $(261,326)
=========== =========== =========== ===========
Pursuant to the share exchange agreement, the Company also received a warrant to
purchase approximately 15% of the then outstanding common stock of Digital Color
Print, Inc. or Logical Imaging Solutions, Inc. The warrant has not been assigned
any value, since it is not cashless, increases from $1.50 to $2.25 and then to
$3.25 per share each year over three years, expires after three years, is not
registered for resale and has no current market.
NOTE 3. COMMON STOCK
On February 27, 2003, the Company entered into an agreement with a stockholder
to repurchase 150,000 shares of common stock and warrants to purchase 300,000
shares of the Company's common stock for an aggregate cost of $300,000. Under
the agreement, the stockholder has a one-time right to cancel the sale of the
common stock and warrants not yet paid for by the Company upon written notice to
the Company. Upon receipt of such notice, the Company is not obligated to
purchase the remaining common stock and warrants. The agreement provides that
the Company is to pay $2.00 for each common share and warrant to purchase two
common shares of the Company's common stock. The shares and warrants are to be
repurchased in approximately equal installments over nine months, beginning in
March and ending in November 2003. From March 24, 2003 through September 30,
2003, the Company repurchased 116,668 of the Company's common shares and
warrants to purchased 233,336 common shares, paying $233,336. The shares and
warrants repurchased by the Company are held in escrow, pending the completion
of the repurchase in November 2003, or its earlier cancellation, at which time
they will be cancelled.
6
NOTE 3. COMMON STOCK (CONTINUED)
On March 4, 2003, the Company completed the repurchase from a stockholder of
12,939 shares of the Company's common stock together with warrants to purchase
25,878 shares of the Company's common stock at an aggregate cost of $25,878. The
shares and warrants were originally sold in the Company's private placement that
was completed in December 2001, and the shares and warrants repurchased by the
Company were cancelled.
On March 13, 2003, the Company completed the public sale of 4,500,000 shares of
the Company's common stock at a price of $1.35 per share (see note 10), whereby
the Company received $5,900,140 in net proceeds.
On April 18, 2003, the Company established a stock repurchase program under
which the Company's common stock, with an aggregate market value up to the
lesser of $1 million or 1 million shares, may be acquired in the open market or
through private or other transactions. Through September 30, 2003, the Company
has repurchased some 30,500 shares its common stock, which have yet to be
certificated and cancelled, at a cost of $19,945.
On April 18, 2003, the Company granted options to two directors to purchase
25,000 shares of the Company's common stock at an exercise price of $.45 per
share. The options vest at the rate of 5,000 per year beginning on the first
anniversary date of the grant and continuing annually thereafter and expire
three years from their respective date of vesting. On June 2, 2003, the Company
granted options to an officer 100,000 shares of the Company's common stock at an
exercise price of $.77 per share. The options vest at the rate of 25,000 per
year beginning on the date of the grant and continuing annually thereafter and
expire five years from their respective date of vesting. The following is a
summary of total outstanding options and stock warrants at June 30, 2003:
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted-Average
Range of Exercise Weighted-Average Remaining Weighted-Average
Prices Number Exercise Price Contractual Life Number Exercise Price
------------------- ----------- -------------- ---------------- ----------- --------------
Options
$0.45-$2.75 970,000 $2.08 3.92 years 706,250 $2.23
Warrants
$2.00 702,001 $2.00 0.40 years 702,001 $2.00
----------- -----------
Options and warrants 1,672,001 $2.05 2.44 years 1,408,251 $2.11
=========== ===========
The warrants reflected in the above table exclude the warrants to purchase
233,336 shares of the Company's common stock that are held in escrow, pending
cancellation, as of September 30, 2003.
NOTE 4. INVENTORIES
Inventories consisted of the following components as of September 30, 2003 and
December 31, 2002:
September 30, 2003 December 31, 2002
------------------ ------------------
Raw materials $ 790,447 $ 427,752
Work-in-process 1,689,772 1,021,496
Finished goods 3,942,857 3,665,953
Obsolescence allowance ( 93,645) (34,964)
------------------ ------------------
Total $ 6,329,431 $ 5,080,237
================== ==================
7
NOTE 5. CHANGES TO BORROWING ARRANGEMENTS
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance of $0 as of September 30, 2003, bearing interest at the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50%. As of September 30, 2003, the interest rate was the
one-month Libor rate of 1.12% plus 2.50% (3.62%). This revolving line of credit
has a June 30, 2004 expiration date.
Under the line of credit, the Company is permitted to borrow up to 75% of
eligible accounts receivable and 50% of eligible inventories (up to a maximum of
$750,000 and not to exceed 50% of the total outstanding). The Company has
granted the Bank a security interest in all of the Company's assets as security
for the repayment of the line of credit. The Bank agreement contains various
covenants which the Company is required to maintain, and as of September 30,
2003, the Company was in compliance with these covenant requirements.
NOTE 6. EMPLOYMENT AGREEMENTS:
On June 27, 2003, the Vice President of Marketing and Sales retired, and the
Employment Agreement between he and the Company was cancelled. On July 14, 2003,
the Employment Agreement between the Company and its Executive Vice President
and Chief Financial Officer was amended, making the officer responsible for
marketing and sales while remaining chief financial officer for an indefinite
period, reducing the annual salary from $151,200 to $78,000, eliminating the
five percent (5%) annual increase and supplemental life insurance retirement
plan and providing for a one-half of one percent (0.5%) commission on certain of
the net sales of the Company.
NOTE 7. SIGNIFICANT CUSTOMERS
In the three and nine month periods ended September 30, 2003, two customers
accounted for 29% and 30% and 13% and 16%, respectively, of net sales. The
Company does not have a written or oral contract with these customers. All sales
are made through purchase orders. Accounts receivable from these customers at
September 30, 2003, were $712,390 and $183,793, respectively.
NOTE 8. SIGNIFICANT SUPPLIERS
In the three and nine month periods ended September 30, 2003, the Company
purchased 43% and 40% of its raw materials, components and supplies from one
supplier in connection with sales to its largest customers. At September 30,
2003, the accounts payable to this supplier was $1,279,023.
NOTE 9. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving the development and manufacture of products used in electronic
printing. All of the Company's assets are domestic. The sales to unaffiliated
customers by geographic region from continuing operations for the nine-month
periods ended September 30 are as follows:
2003 2002
----------- -----------
Sales to Unaffiliated Customers:
United States $ 9,534,055 $14,252,582
Europe/Eastern Europe 3,436,261 4,500,431
Mexico 1,896,999 1,863,843
Asia/Southeast Asia 618,688 986,666
South America 346,022 318,147
Others 216,672 364,320
----------- -----------
Total $16,048,697 $22,285,989
=========== ===========
8
NOTE 10. RELATED PARTY TRANSACTIONS:
The Company purchased from an affiliate for the three and nine month periods
ended September 30, 2003, $795,839 and $1,920,029, respectively, of all-in-one
imaging, toner and drum cartridges and injection molded cartridges and
accessories for copiers and laser printers. Accounts payable to the affiliate at
September 30, 2003, was $913,128.
On January 23, 2003 the Company's registration statement on Form SB-2, offering
of up to 7 million shares of its common stock, was declared effective by the
Securities and Exchange Commission. On March 6, 2003, the Company received
subscription gross proceeds from an affiliate of $6,075,000 for the public sale
of 4,500,000 shares of its common stock, and on March 13, 2003, the Company
accepted the investment in accordance with the offering procedures.
On March 14, 2002, the Company borrowed $500,000 from its President on an
unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and was evidenced in writing. On September 2, 2002, the Company
entered into a modification agreement with its President to change the terms of
the note, extending the term to March 1, 2005, providing for a $100,000
principal payment, decreasing the interest rate to 6% per annum, providing for
interest only payments through February 28, 2003, and providing for 24 monthly
payments of principal and interest beginning on April 1, 2003, in the amount of
$17,736. The Company borrowed the $500,000 amount to meet a supplier commitment
for product. From January 1 through September 30, 2003, interest accrued and
paid on the note was $12,812 and as of September 30, 2003, the outstanding
principal balance was $127,500.
On August 21, 2002, the Company borrowed $100,000 from a director 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 its President 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. From January 1 through September 30, 2003, the
interest accrued and paid on the note was $4,087, and as of September 30, 2003,
the outstanding principal balance was $72,080.
On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000,
respectively, from another director 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 our industrial development bond in the approximate amount of
$255,000, for the acquisition of capital equipment in the approximate amount of
$125,000 and for general corporate purposes. The note is interest only through
February 28, 2003, and then is fully amortizing over 24 months with principal
and interest payments payable monthly beginning April 1, 2003 in the amount of
$22,170. From January 1 through September 30, 2003, interest accrued and paid on
the note was $20,435, and as of September 30, 2003, the outstanding principal
balance was $360,398.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussions should be read in conjunction with our condensed
financial statements and the related notes thereto.
BACKGROUND
On June 28, 2000, Color Imaging, formerly known as Advatex Associates, Inc.
merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and Logical
Imaging Solutions and Color Image became wholly-owned subsidiaries of Advatex
Assocates. The financial information contained in this report is in conformity
with the purchase method of accounting. On December 31, 2000, Color Image was
merged with and into Color Imaging. On September 30, 2002, we divested Logical
Imaging Solutions in exchange for 1.7 million shares of our common stock and
warrants to purchase up to 15% of the common stock of Digital Color Print or
Logical Imaging Solutions. As a result of our disposing of Logical Imaging
Solutions, Inc. we no longer offer printing systems to commercial printers nor
the support services and consumables related thereto. As a further result of
Color Imaging's divestiture of Logical Imaging Solutions, our investments in the
furthering of Logical Imaging Solutions' technologies and carrying its
operations have ceased. Significantly, since the merger on June 28, 2000, Color
Imaging had invested approximately $2.35 million in the operations of Logical
Imaging Solutions and the development of its technologies. The disposal of
Logical Imaging Solutions eliminates the capital needed to support those
operations.
COLOR IMAGING, INC.
Color Imaging, Inc. has developed and manufactured products used in electronic
printing and copying. We formulate and produce black text and specialty toners,
including color and magnetic character recognition toners for numerous laser
printers and black text and color toners for many analog and digital
photocopiers. Our toners permit the printing and photocopying of a wide range of
user-selected colors and also the full process color printing of cyan, yellow,
magenta and black. Magnetic character recognition toners enable the printing of
magnetic characters that are required for the high-speed processing of checks
and other financial documents. We also supply other consumable products used in
electronic printing, and photocopying, including toner cartridges, cartridge
components, photoreceptors, imaging drums and parts.
Color Imaging, Inc. has continually expanded its product line and manufacturing
capabilities. This expansion has led to the creation of black text, color,
magnetic character recognition and specialty toner formulations, including
aftermarket toners and imaging products for printers and facsimile machines
manufactured by Brother(TM), Canon(TM), Delphax(TM), Hewlett Packard(TM),
IBM(TM), Lexmark(TM), Sharp(TM), Xerox(TM), Minolta(TM), Mita(TM), Panafax(TM),
Pentax(TM), Pitney Bowes(TM), Epson(TM), Fuji-Xerox(TM), Toshiba(TM),
Kyocera(TM), Okidata(TM), Panasonic(TM), and printing systems developed by
Logical Imaging Solutions, Inc. Color Imaging, Inc. also manufactures and/or
markets toners for use in Ricoh, Sharp(TM), Xerox(TM), Canon(TM), Lanier(TM),
Toshiba(TM), Savin(TM), Gestetner(TM), Minolta(TM) and Konica(TM) copiers. We
also offer product enhancements, including imaging supplies that enable standard
laser printers to print magnetic character recognition data. We market brand
products directly to OEMs and our aftermarket products worldwide to distributors
and remanufacturers of laser printer toner cartridges and to dealers and
distributors of copier products. During the second quarter of 2003 we commenced
the sale of all-in-one imaging, toner and drum cartridges for use in Xerox(TM)
and Canon(TM) personal copiers and a Hewlett Packard(TM) laser printer. In
addition to selling these all-in-one products to the abovementioned customers,
we are selling them to a multi-state retail chain store and are offering them to
the large, national, office supply retailers and wholesale catalog companies.
Our strategy for growing revenue and operating profit is to expand our printer
and copier products business. The key elements of our strategy are (1)
increasing vertical integration by supplying complete toner and cartridge
devices, (2) capitalizing on our research and development expertise of producing
specialty, color and digital copier and or multifunctional device toners, (3)
exploiting the efficiencies associated with the investment made in manufacturing
facilities, (4) expanding our sources for products from strategic suppliers that
we can add value to or resell that complement our product lines and (5)
expanding into new geographic markets, and broadening our sales channels,
including selling certain products directly to retailers.
10
RECENT DEVELOPMENTS
Recently we have further expanded our product offerings for copiers, including
adding toners and parts for several Minolta(TM) and Konica(TM) copiers and
introducing additional digital toners for Ricoh(TM), Canon(TM) and Toshiba
copiers(TM).
During the third quarter 2003, we opened a sales office and warehouse in
southern California to increase our customer base on the west coast and to
improve delivery to existing and prospective west coast customers.
OVERVIEW
Net sales are primarily generated from the sale of our black text, color and
magnetic character recognition toners, and we believe net sales of all-in-one
imaging, toner and drum cartridges will become a significant portion of our
total sales in the next few years. Net sales decreased to $16.0 million for the
nine months ended September 30, 2003, compared to $22.3 million for the nine
months ended September 30, 2002. This 28% decrease in net sales resulted
primarily from the decrease in sales to our two largest customers. In the nine
months ended September 30, 2003, our two largest customers, distributors of
imaging supplies for whom we private label, accounted for approximately 30% and
16%, respectively, of net sales, with the latter being an OEM. Sales to these
customers consist primarily of analog copier products, and as a result are
expected to decline over time. Further, both of these customers either have, or
will, manufacture themselves, or with another, certain products that we formerly
supplied to them. For the nine months ended September 30, 2003, our sales to our
two largest customers were some $8 million less than they were for the same
period in 2002, and we expect the sales to our two largest customers for the
entire 2003 year to be some $9.2 million less than the sales to these customers
in 2002. As a result, our sales will be less concentrated with our largest
customers and sales overall during 2003 will be less than those of 2002, while
we expect our gross profit margins to improve. Our inventory for product
discontinued by our largest customers has either been sold or is being sold to
other customers. Net sales made outside of the United States decreased to $6.5
million, or 41% of total sales for the nine months ended September 30, 2003,
compared to $8.0 million, or 36% for the nine months ended September 30, 2002.
This 19% decrease in international sales resulted primarily from the decrease in
sales to our two largest customers. The revenue decrease for the nine months
ended September 30, 2003 compared to the same period in 2002 for finished
products and bulk toners and parts for use in copiers and laser printers from
2002 to 2003 was 26% and 33%, respectively, reflecting our decreased sales to
our two largest customers and our continuing transition to the sale of more
finished products and less bulk toner.
All sales are made through purchase orders. Revenue is recognized from the sale
of products when the goods are shipped to the customer. Consistent with the
purchase orders and forecasts provided to us by our major customers, we provide
our major suppliers with purchase orders three months in advance and an
additional rolling forecast for two months. We communicate regularly and meet at
least twice annually with our major customers and suppliers to assess
developments in the industry and changes in the business expected from our
customers to maintain an efficient supply chain. In April 2001, we changed our
purchasing arrangement with our largest supplier to FOB origination from FOB
destination, and we adjusted our pricing to reflect the change to costs.
11
The following table reflects the consolidated new orders, net of cancellations,
revenues and backlog as of the beginning and end of the three and nine months
ended September 30, 2003, as well as for Color Imaging's two general product
lines.
Backlog Backlog
at start at end
of New Net of
Period Orders Revenue Period
--------- --------- --------- ---------
Three Months (IN THOUSANDS OF DOLLARS)
September 30, 2003:
Copier Products $ 2,047 $ 3,043 $ 3,553 $ 1,537
Printer Products 501 1,590 1,807 284
--------- --------- --------- ---------
Total 2,548 4,633 5,360 1,821
========= ========= ========= =========
Nine Months (IN THOUSANDS OF DOLLARS)
September 30, 2003:
Copier Products $ 2,718 $ 9,157 $ 10,338 $ 1,537
Printer Products 473 5,521 5,710 284
--------- --------- --------- ---------
Total 3,191 14,678 16,048 1,821
========= ========= ========= =========
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
A critical accounting policy is one that is both important to the portrayal of
Color Imaging's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its financial
statements.
VALUATION ALLOWANCE FOR ACCOUNTS RECEIVABLE. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. These allowances are based on historical experience,
credit evaluations and specific customer collection issues we have identified.
Since our accounts receivable are often concentrated in a relatively few number
of customers, a significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results.
INVENTORY VALUATION. Our inventories are recorded at the lower of standard cost
or the current estimated market value. As with any manufacturer or wholesaler,
economic conditions, cyclical customer demand, product introductions or pricing
changes of our competitors and changes in purchasing or distribution can affect
the carrying value of inventory. Demand for our products has fluctuated
significantly and may do so in the future, which could result in an increase in
the cost of inventory or an increase in excess inventory quantities on hand. As
circumstances warrant, we record lower of cost or market inventory adjustments.
In some instances these adjustments can have a material effect on the financial
results of an annual or interim period. In order to determine such adjustments,
we evaluate the age, inventory turns, estimated fair value and, in the case of
toner products, whether or not they can be reformulated and manufactured into
other products, and record any adjustment if estimated fair value is below cost.
12
Through periodic review of each of our inventory categories and by offering
markdown or closeout pricing, we regularly take steps to sell off slower moving
inventory to eliminate or lessen the effect of any lower of cost or market
adjustment. If assumptions about future demand or actual market conditions are
less favorable than those projected by management, write-downs of inventory
could be required, and there can be no assurance that future developments will
not necessitate further write-downs.
VALUATION OF LONG-LIVED ASSETS. We periodically evaluate whether events and
circumstances have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of our long-lived assets, such as our
investment in our toner manufacturing equipment. We have approximately $8.0
million invested in such equipment and plant improvements, with a carrying value
of $6.6 million, that have estimated lives of up to twenty years. Should
competing technologies or offshore competitors cause our manufacturing
technology to be non-competitive, or should other events or circumstances
indicate that the carrying amount of these assets would not be recoverable, the
estimated life of these assets may need to be shortened and their carrying value
could be materially affected. If the sum of the undiscounted expected cash flows
from an asset to be held and used in operations is less than the carrying value
of the asset, an impairment loss is recognized.
WARRANTY. We provide a limited warranty, generally ninety (90) days, to all
purchasers of our products. Accordingly, we do not make a provision for the
estimated cost of providing warranty coverage, and instead we expense these
costs as they are incurred. On occasion, we have been required and may be
required in the future to provide additional warranty coverage to ensure that
our products are ultimately accepted or to maintain customer goodwill. While our
warranty costs have historically not been significant, we cannot guarantee that
we will continue to experience a similar level of predictability with regard to
warranty costs as we have in the past. In addition, the introduction of more
expensive finished products, technological changes or previously unknown defects
in raw materials or components may result in more extensive and frequent
warranty claims than anticipated, which could have a material adverse impact on
our operating results for the periods in which such additional costs
materialize.
RESULTS OF OPERATIONS
Color Imaging's net sales were $5.4 million and $16.0 million for the three and
nine months ended September 30, 2003, a decrease of approximately 19% and 28%
from the three and nine months ended September 30, 2002. The net sales by
product category were as follows:
% Increase
(Dollars in thousands) 2003 % (Decrease) 2002 %
---------- ----- ---------- ---------- -----
Three Months
- ------------
Product Category:
Cartridges and bottles
Copier finished products $ 3,166 59% (24%) $ 4,158 63%
Printer finished products 773 14% (11%) 869 13%
---------- ---------- ----------
3,939 73% (22%) 5,027 76%
Bulk toner and parts 1,422 27% (13%) 1,627 24%
---------- ---------- ----------
Total net revenue $ 5,361 100% (19%) $ 6,654 100%
========== ========== ==========
Nine Months
- ----------
Product Category:
Cartridges and bottles
Copier finished products $ 9,059 56% (30%) $12,975 58%
Printer finished products 2,596 16% (_5%) 2,746 12%
---------- ---------- ----------
11,655 72% (26%) 15,721 70%
Bulk toner and parts 4,394 28% (33%) 6,565 30%
---------- ---------- ----------
Total net revenue $16,049 100% (28%) $22,286 100%
========== ========== ==========
13
The following table sets forth certain information derived from the Company's
unaudited interim statements of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ ------
(PERCENTAGE OF NET SALES)
Net sales 100 100 100 100
Cost of sales 74 82 74 84
Gross profit 26 18 26 16
Administrative expenses 8 5 8 4
Research and development 5 4 6 3
Sales and marketing 8 5 7 4
Operating income 4 4 5 4
Interest expense 1 1 1 1
Depreciation and amortization 8 1 5 2
Income before taxes 5 3 5 2
Provision for income taxes 2 1 2 1
Income from continuing operations 3 2 3 2
Loss from discontinued operations,
net of income taxes - -2 - -1
Net income 3 0 3 1
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
NET SALES. Our net sales decreased by $1.3 million, or 19%, to $5.4 million for
the three months ended September 30, 2003, from $6.7 million for the three
months ended September 30, 2002. Net sales made in the United States were $3.2
million, a decrease of $0.3 million, or 9%, from $3.5 million made in the
comparable period in 2002. Net sales made outside of the United States decreased
by $1.0 million, or 31%, for the quarter compared to the same quarter of 2002.
The decrease in net sales for the quarter compared to that of a year ago made
both inside and outside of the United States was primarily the result of
decreased sales to our two largest customers. Of the $5.4 million in net sales,
$3.9 million, or 73%, were attributable to our copier and printer finished
products, compared to 76% for the comparable period in 2002, while the net sales
of bulk toner and parts increased to 27% of net sales for the three months ended
September 30, 2003 compared to 24% for the comparable period in 2002. Net sales
to our two largest customers decreased as a percentage of our total sales to 42%
for the three months ended September 30, 2003, from 66% for the comparable
period in 2002.
COST OF GOODS SOLD. Cost of goods sold decreased by $1.5 million, or 27%, to
$4.0 million from $5.5 million for the three months ended September 30, 2003 for
the comparable period in 2002, primarily as the result of the decrease in net
sales and secondarily from reduced costs of manufacturing. Cost of goods sold as
a percentage of net sales decreased by 8 percentage points from 82% for the
three months ended September 30, 2002 to 74% for the three months ended
September 30, 2003, primarily as the result of reduced sales derived from
certain very low margin products previously sold to our largest customer that
have been discontinued and a larger percentage of sales being derived from sales
of products with higher gross margins.
GROSS PROFIT. As a result of the above factors, gross profit increased to $1.4
million in the three months ended September 30, 2003 from $1.2 million in the
three months ended September 30, 2002, or by $.2 million, while net sales for
the same period decreased by $1.3 million. Gross profit as a percentage of net
sales increased by 8 percentage points from 18% to 26% for the three months
ended September 30, 2003, as compared to the corresponding period of the prior
year. The increase in the percentage of gross profit resulted primarily from
reduced sales derived from certain very low margin products previously sold to
our largest customer that have been discontinued and a larger percentage of
sales being derived from sales of products with higher gross margins.
OPERATING EXPENSES. Operating expenses increased $.3 million, or 28%, to $1.2
million in the three months ended September 30, 2003 from $.9 million in the
three months ended September 30, 2002. General and administrative, selling and
R&D expenses increased, as a percentage of net sales, to 21% in the three months
ended September 30, 2003 from 14% in the three months ended September 30, 2002
14
as the result of the decrease in net sales for the quarter and higher
expenditures in all categories. General and administrative expenses increased
approximately 37%, or $.1 million to $.4 million for the three months ended
September 30, 2003 from the comparable period in 2002, largely resulting from a
$50,000 provision for the Company's bonus plan and the opening of the California
office. Selling expenses increased by $.1 million, or 25%, in the three months
ended September 30, 2003 compared to the three months ended September 30, 2002.
Selling expenses increased primarily as a result of one-time costs associated
with the introduction of several new copier products, increased manufacturer's
representative costs and conference expenses. Research and development expenses
increased by $.05 million, or 21%, to $.3 million in the three months ended
September 30, 2003, primarily as the result of increased expenditures for
testing and qualifying toner products and the recruitment and relocation of our
vice president of technology. We expect to continue to increase research and
development expenditures in an effort to develop and bring to market more new
products before our competition, while also reformulating certain product
formulas to manufacture a greater percentage of our products on our more
efficient production equipment.
OPERATING INCOME. As a result of the above factors, primarily the 28% increase
in operating expenses, operating income decreased by $.1 million, or 26%, to a
profit of $.2 million in the three months ended September 30, 2003 from $.3
million in the three months ended September 30, 2002.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $57,000 in the three
months ended September 30, 2003 from the three months ended September 30, 2002.
The decrease was primarily the result of reduced interest bearing debt levels.
OTHER INCOME. Other income increased by $66,000 from other expense of $9,000 to
income of $57,000 in the three months ended September 30, 2003 from the three
months ended September 30, 2002, primarily as the result of Euro exchange gains.
INCOME TAXES. As the result of our profit from continuing operations in the
three months ended September 30, 2003, we recorded an income tax provision of
$100,000 for the period, while the income tax provisions were $89,000 for the
three months ended September 30, 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
NET SALES. Our net sales decreased by $6.3 million, or 28%, to $16.0 million for
the nine months ended September 30, 2003, from $22.3 million for the nine months
ended September 30, 2002. Net sales made in the United States were $9.5 million,
a decrease of $4.8 million, or 33%, from $14.3 million made in the comparable
period in 2002. Net sales made outside of the United States decreased by $1.5
million, or 19%, to $6.5 million for the nine months ended September 30, 2003
compared to the same nine months of 2002. The decrease in net sales for the nine
months ended September 30, 2003, compared to that of a year ago resulted
primarily from reduced sales to our two largest customers. Of the $16.0 million
in net sales, $11.7 million, or 72%, were attributable to our finished products
for use in copiers and printers, while $4.3 million, or 28%, were derived from
the sale of bulk toners and parts. The revenue decrease for the nine months
ended September 30, 2003 compared to the same period in 2002 for finished
products and bulk toners and parts for use in copiers and laser printers from
2002 to 2003 was 26% and 33%, respectively, reflecting the decreased sales from
our two largest customers.
COST OF GOODS SOLD. Cost of goods sold decreased by $7.0 million, or 37%, to
$11.8 million from $18.8 million for the nine months ended September 30, 2003
from the comparable period in 2002. Cost of goods sold as a percentage of net
sales decreased by 10 percentage points from 84% for the nine months ended
September 30, 2002 to 74% for the nine months ended September 30, 2003,
primarily as the result of reduced sales derived from certain very low margin
products previously sold to our largest customer that have been discontinued and
larger percentage of sales being derived from sales of products with higher
gross margins.
GROSS PROFIT. As a result of the above factors, gross profit increased to $4.2
million in the nine months ended September 30, 2003 from $3.5 million in the
nine months ended September 30, 2002, or $.7 million and 20%, while net sales
for the same period decreased by $6.3 million, or 28%. Gross profit as a
percentage of net sales increased by 10 percentage points from 16% to 26% for
the nine months ended September 30, 2003, as compared to the corresponding
period of the prior year. The increase in the percentage of gross profit
resulted primarily from reduced sales derived from certain very low margin
products previously sold to our largest customer that have been discontinued and
a larger percentage of sales being derived from sales of products with higher
gross margins.
OPERATING EXPENSES. Operating expenses increased $.7 million or 28% to $3.4
million in the nine months ended September 30, 2003 from $2.7 million in the
nine months ended September 30, 2002. As a percentage of net sales general and
15
administrative, selling and R&D expenses, was 21% and 12%, respectively, for the
nine months ended September 30, 2003 and 2002. The increase in operating
expenses as a percentage of net sales was largely the result of the decrease in
net sales for the nine months ended September 30, 2003, and increased expenses
in each operating expense category in support of the changes being made in the
operations of the Company. General and administrative expenses increased
approximately 31%, or $313,000 to $1,312,000 for the nine months ended September
30, 2003 from the comparable period in 2002, largely resulting from the
provision of $140,000 for a bonus program, increased professional expenses for
compliance with changing from SEC regulation SB to S-K reporting and the
repurchase of securities issued in our private placement completed in 2001, and
payroll for a staff addition. Selling expenses increased by $231,000, or 24%, in
the nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002. Selling expenses increased primarily as the result of
increased advertising and promotion expenses and payroll for sales and customer
support staff increases. Research and development expenses increased by
$231,000, or 24%, to $1,195,000 in the nine months ended September 30, 2003,
primarily as the result of increased expenditures for product testing and
qualification and expenses in connection with the hiring and relocation of our
vice president of technology. We expect to continue to increase research and
development expenditures in an effort to develop and bring to market more new,
rigorously tested, products before our competition, while also reformulating
certain product formulas to manufacture a greater percentage of our products on
our more efficient production equipment.
OPERATING INCOME. As a result of the above factors, operating income decreased
by $22,000, to a profit of $836,000 in the nine months ended September 30, 2003
from $858,000 in the nine months ended September 30, 2002.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $113,000 in the nine
months ended September 30, 2003 from the nine months ended September 30, 2002.
The decrease was primarily the result of reduced interest bearing debt levels.
OTHER INCOME. Other income increased by $146,000 from income of $20,000 to
income of $166,000 in the nine months ended September 30, 2003 from the nine
months ended September 30, 2002, primarily due to Euro exchange gains.
INCOME TAXES. As the result of our increased profit from continuing operations
for the nine months ended September 30, 2003, our provision for taxes increased
from $251,000 in the nine months ended September 30, 2002 to $345,000 for the
period ended September 30, 2003.
RESULTS OF DISCONTINUED OPERATIONS
The following table sets forth, for the periods indicated, selected information
relating to the discontinued operations of Logical Imaging Solutions that has
been derived from our unaudited consolidated statements of operations.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Loss) from discontinued operations:
Before income taxes $ -- $(146,244) $ -- $(406,570)
Income tax provision (benefit) -- (48,000) -- (145,244)
------------ ------------ ------------ ------------
Net (loss) from discontinued operations $ -- $ (98,244) $ -- $(261,326)
============ ============ ============ ============
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, and December 31, 2002, our working capital and current
ratio was approximately $6.8 million and $1.8 million and 2.63 to 1 and 1.29 to
1, respectively. The substantial increase in our working capital and current
ratio at September 30, 2003, compared to December 31, 2002, was primarily due to
the net proceeds we received for the public sale on Form SB-2 of our common
stock.
Cash flows used by continuing operating activities were $185,000 in the nine
months ended September 30, 2003 compared to $737,000 provided by continuing
operations in the nine months ended September 30, 2002. The cash flows used by
continuing operating activities in the nine months ended September 30, 2003
increased primarily due to the increase in inventory to support the introduction
of our new all-in-one imaging cartridges and copier products.
16
Cash flows used in investing activities were $388,000 in the nine months ended
September 30, 2003, compared to $527,000 in the nine months ended September 30,
2002. The decrease in cash used in investing activities in the nine months ended
September 30, 2003, was entirely attributable to decreased capital expenditures
in connection with our most recent factory expansion.
We have a $1.5 million revolving line of credit and borrowing availability as
amended, with our bank with an outstanding balance as of September 30, 2003 of
$0, bearing interest at the one-month Libor interest rate in effect two business
days before the first day of the month plus 2.50%. As of September 30, 2003, the
interest rate was the one-month Libor rate of 1.12% plus 2.50% (3.62%). This
revolving line of credit has a June 30, 2004 expiration date. Under the line of
credit, we are permitted to borrow up to 75% of eligible accounts receivable and
50 percent of eligible inventories (up to a maximum of $750,000 and not to
exceed 50 percent of the total outstanding). We have granted the bank a security
interest in all of our assets as security for the repayment of the line of
credit. The bank agreement contains various covenants which we are required to
maintain, and as of September 30, 2003, we were in compliance with these
covenant requirements. Cash flows provided by financing activities, after the
repayment of $2,125,000 of debt and $1,022,000 reduction to the line of credit
for the nine months ended September 30, 2003 were $2,473,000, resulting
primarily from the $5,900,000 in net proceeds received for the public sale of
our common stock to an affiliate. Cash flows provided by financing activities
for the same nine month period ended September 30, 2002, were $186,000, derived
from $1,000,000 in proceeds from related party borrowings used primarily for the
repayment of $957,000 of debt.
On April 18, 2003, Color Imaging established a stock repurchase program under
which Color Imaging's common stock, with an aggregate market value up to the
lesser of $1 million or 1 million shares, may be acquired in the open market or
through private or other transactions. Through September 30, 2003, Color Imaging
has repurchased some 30,500 shares our common stock, which have yet to be
certificated and cancelled, at a cost of $19,945.
We believe that existing cash balances, cash generated by operating activities,
and $1.5 million of funds available under our credit facility will be sufficient
to finance our operating and investing activities for at least the next 12
months, which will include expenditures of approximately $200,000 for
manufacturing and research and development equipment, approximately $100,000 for
a significant upgrade to our accounting and manufacturing computer system, the
obligation to purchase approximately $70,000 of our common stock from a
stockholder, and the repurchase of our stock under the stock repurchase program
of up to the lesser of $1,000,000 or 1,000,000 shares of our common stock.
Notwithstanding the foregoing, we have asked our bank to increase our line of
credit by $1.5 million to a total commitment of $3.0 million for the purpose of
issuing letter(s) of credit up to an aggregate of $1.5 million for the
importation of toner products beginning January 1, 2004.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS
RISK FACTORS
RISKS RELATED TO OUR BUSINESS:
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CUSTOMERS.
For the nine months ended September 30, 2003, two customers accounted for
approximately 46% of our net sales. We do not have contracts with these
customers and all of the sales to them are made through purchase orders. While
our products typically go through the customer's required qualification process,
which we believe gives us an advantage over other suppliers, this does not
guarantee that the customer will continue to purchase from us. The loss of
either of these customers, including through an acquisition, other business
combination or the loss by them of business from their customers could have a
substantial and adverse effect on our business. We have in the past, and may in
the future, lose one or more major customers or substantial portions of our
business with one or more of our major customers. If we do not sell products or
services to customers in the quantities anticipated, or if a major customer
reduces or terminates its relationship with us, market perception of our
products and technology, growth prospects, and financial condition and results
of operation could be harmed.
OUR RELIANCE ON SALES TO A FEW MAJOR CUSTOMERS AND GRANTING CREDIT TO THOSE
CUSTOMERS PLACES US AT FINANCIAL RISK.
As of September 30, 2003, receivables from two customers comprised 36% of
accounts receivable. A concentration of our receivables from a small number of
customers places us at risk should these receivables become uncollectable. If
any one or more of our major customers is unable to pay us it could adversely
affect our results of operations and financial condition. Color Imaging attempts
to manage this credit risk by performing credit checks, requiring significant
partial payments prior to shipment where appropriate, and actively monitoring
collections.
17
APPROXIMATELY 30% OF OUR BUSINESS DEPENDS ON A SUPPLIER APPROVED BY ONE OF OUR
CUSTOMERS.
Some of our products incorporate technologies that are available from a
particular supplier that has been approved by one of our customers.
Approximately 30% of our sales for the nine months ended September 30, 2003,
were derived from products limited to a specific supplier. For the nine months
ended September 30, 2003, we purchased 40% of our supplies from that same
supplier. We do not have a written agreement with this or any other supplier. We
rely on purchase orders. Should we be unable to obtain the necessary materials
from this supplier, product shipments could be prevented or delayed, which could
result in a loss of sales. If we are unable to fulfill existing orders or accept
new orders because of a shortage of materials, we may lose revenues and risk
losing customers.
IF OUR CRITICAL SUPPLIERS FAIL TO DELIVER SUFFICIENT QUANTITIES OF MATERIALS OR
PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER IT COULD NEGATIVELY AFFECT OUR
BUSINESS.
We use a wide range of materials in the production of our products, and we use
numerous suppliers to supply materials and certain finished products. We
generally do not have guaranteed supply arrangements with our suppliers. Because
of the variability and uniqueness of customers' orders, we do not maintain an
extensive inventory of materials for manufacturing or resale. Key suppliers
include providers of special resins, toners and our injection molder affiliate
that provides plastic bottles, cartridges and related components designed to
avoid the intellectual property rights of others.
Although we make reasonable efforts to ensure that raw materials, toners and
certain finished products are available from multiple suppliers, this is not
always possible; accordingly, some of these materials are being procured from a
single supplier or a limited group of suppliers. Many of these suppliers are
outside the United States, resulting in longer lead-times for many important
materials, which could cause delays in meeting shipments to our customers. We
have sought, and will continue to seek, to minimize the risk of production
interruptions and shortages of key materials and products by:
o selecting and qualifying alternative suppliers for key materials and
products;
o monitoring the financial stability of key suppliers; and
o maintaining appropriate inventories of key materials and products.
There can be no assurance that results of operations will not be materially and
adversely affected if, in the future, we do not receive in a timely and
cost-effective manner a sufficient quantity of raw materials, toners or finished
products to meet our production or customer delivery requirements.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO UTILIZE AVAILABLE MANUFACTURING
CAPACITY.
From 1999 through 2000, we expanded our manufacturing capacity by acquiring new
manufacturing equipment and moving to a larger location. We intend to continue
to expand capacity by placing in service additional manufacturing equipment
during 2003. To fully utilize these new additions to the factory, new
formulations for toner have to be developed specifically for manufacture on this
new equipment or orders for larger quantities of existing toners must be
obtained. While we have been successful in developing formulas for new equipment
in the past and increasing sales of many of our existing toner products, our
continued success will be dependent on our ability to develop additional
formulations or increase our sales from existing formulations and manufacture
the toners with the new equipment to achieve a reduction in production costs. We
cannot assure you that we will be successful in developing all of the
formulations needed in the future or that we will be able to manufacture toner
at a lower production cost on a regular basis or that such products will achieve
market acceptance. If we are not successful in increasing the sales of our
manufactured products, or if our existing sales from manufactured products
decline, our business will be materially and adversely affected.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP, OR ACQUIRE FROM
THIRD PARTIES, INTELLECTUAL PROPERTY OR PRODUCTS THAT WE CAN COMMERCIALIZE AND
THAT ACHIEVE MARKET ACCEPTANCE.
Our success depends in part on our ability to develop proprietary toner formulas
and manufacturing processes, obtain copyrights and trademarks, maintain trade
secret protection and operate without infringing the proprietary rights of
others. Future claims of intellectual property infringement could prevent us
from obtaining technology of others and could otherwise adversely affect our
operating results, cash flows, financial position or business, as could expenses
incurred enforcing intellectual property rights against others or defending
against claims that our products infringe the intellectual property rights of
others.
18
Success in the aftermarket imaging industry depends, in part, on developing
consumable products that are compatible with the printers, photocopiers and
facsimile machines made by the OEMs, and that have a selling price less than
that of like consumable supplies offered by the OEM. For example, if the OEMs
introduce chemical toners with better imaging characteristics and higher yields,
microprocessor chips that communicate between the toner cartridge and the
device, or introduce products using patented or other proprietary technologies,
then the aftermarket industry has to respond with ongoing development programs
to offer compatible products that emulate the OEMs' without infringing upon the
OEM's intellectual property.
Technical innovations are inherently complex and require long development cycles
and appropriate professional staffing. Our future business success depends on
our ability, and that of critical suppliers, to develop and introduce new
products that successfully address the changing technologies of the OEMs, meet
the customer's needs and win market acceptance in a timely and cost-effective
manner. If we do not develop and introduce products compatible with the OEM's
technologies in a timely manner in response to changing market conditions or
customer requirements, our business could be seriously harmed.
The challenges we face in implementing our business model include establishing
market acceptance of existing products and successfully developing or acquiring
new product lines that achieve market acceptance. We must successfully
commercialize the products that are currently being developed, such as our color
and magnetic character recognition toner for printers and black text and color
toners for new digital copiers and continue to acquire from third parties parts,
materials and finished product that can be integrated into finished products or
sold as our products. While we have successfully developed toners in the past
and are in the late stages of developing and testing several new toners, we have
not commercialized many of the toners that are under development. While we have
in the past acquired from third parties materials and products that we have been
successful in selling, there can be no assurance that parts, materials or
products for new products will be available or will achieve market acceptance.
If we fail to successfully commercialize products we develop or acquire from
third parties, or if these products fail to achieve market acceptance, our
financial condition and results of operation would be seriously harmed.
OUR BUSINESS MIGHT BE ADVERSELY AFFECTED BY OUR DEPENDENCE ON FOREIGN BUSINESS.
We sell a significant amount of product to customers outside of the United
States. International sales accounted for 41%, 37%, 24% and 10% of net sales for
the nine months ended September 30, 2003, and in the years ended December 31,
2002, 2001 and 2000, respectively. We expect that shipments to international
customers will continue to account for a material portion of net sales. During
the nine months ended September 30, 2003, our sales were made to customers
outside the United States as follows:
o Europe/Eastern Europe - 21%
o Mexico - 12%
o Asia/Southeast Asia - 4%
o Other - 4%
Most of our products sold internationally, including those sold to our larger
international customers, are on open account, giving rise to the added costs of
collection in the event of non-payment. Further, should a product shipped
overseas be defective, Color Imaging would experience higher costs in connection
with a product recall or return and replacement.
Most of our products are priced in U.S. dollars, but because we began selling
products in Europe denominated in Euros during 2001, fluctuations in the Euro
could also cause our products there to become less affordable or less
competitive or we may sell some products at a loss to otherwise maintain
profitable business from a customer. We recorded a gain of $123,900 for the nine
months ended September 30, 2003. We recorded a gain of $2,900 and a charge of
$1,900 during the years ended December 31, 2002 and 2001, respectively, as a
result of foreign currency transactions.
While our business has not been materially affected in the past by foreign
business or currency fluctuations, because of our significant dependence on
international revenues, our operating results could be negatively affected by a
continued or additional decline in the economies of any of the countries or
regions in which we do business. Periodic local or international economic
downturns, trade balance issues, changes to duties, tariffs or environmental
regulations, political instability and fluctuations in interest and currency
exchange rates could negatively affect our business and results of operations.
We cannot assure you that these factors will not have a material adverse effect
on our international sales and would, as a result, adversely impact our results
of operation and financial condition.
19
OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED IF WE ARE UNABLE TO RECOUP
OUR INVESTMENT IN RESEARCH AND DEVELOPMENT.
The rapid change in technology in our industry requires that we continue to make
investments in research and development in order to not only develop
technologies that function like the OEMs' and do not infringe on the OEMs'
intellectual property rights, but we must also enhance the performance and
functionality of our products and to keep pace with competitive products and
satisfy customer demands for improved performance, features, functionality and
costs. There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development. Research and development costs
typically are incurred before we confirm the technical feasibility and
commercial viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these products at prices that are favorable to us. Our business could be
seriously harmed if we are unable to sell our products at favorable prices or if
our products are not accepted by the market in which we operate.
OUR INTELLECTUAL PROPERTY PROTECTION IS LIMITED.
We do not rely on patents to protect our proprietary rights. We do rely on a
combination of laws such as trade secrets and contractual restrictions such as
confidentiality agreements to protect proprietary rights. Despite any
precautions we have taken:
o laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies; and
o policing unauthorized use of our products is difficult, expensive and
time-consuming and we might not be able to determine the extent of this
unauthorized use.
Therefore, there can be no assurance that we can meaningfully protect our rights
in such unpatented proprietary technology or that others will not independently
develop substantially equivalent proprietary products or processes or otherwise
gain access to the proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technology could enable
third parties to benefit from our technology without paying us which could
significantly harm our business.
WE DEPEND ON THE EFFORTS AND ABILITIES OF CERTAIN SENIOR MANAGEMENT AND OTHER
KEY PERSONNEL TO CONTINUE OUR OPERATIONS AND GENERATE REVENUES.
Our success depends to a significant extent on the continued services of senior
management and other key personnel. While we do have employment, non-compete and
confidentiality agreements with executive officers and certain other key
individuals, employment agreements may be terminated by either party upon giving
the required notice. The loss of the services of any of our executive officers
or other key employees could harm our business. Our success also depends on our
ability to attract, retain and motivate highly skilled employees. Competition
for qualified employees in the industries in which we operate is intense. If we
fail to hire and retain a sufficient number of qualified employees, our business
will be adversely affected.
WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUE AND BE UNABLE TO
MAINTAIN OUR CLIENT RELATIONSHIPS IF WE LOSE OUR PRODUCTION CAPACITY.
We manufacture all of the products we sell in our existing facility in Norcross,
Georgia. If our existing production facility becomes incapable of manufacturing
products for any reason, we may be unable to meet production requirements, we
may lose revenue and we may not be able to maintain our relationships with our
customers. Without our existing production facility, we would have no other
means of manufacturing products until we were able to restore the manufacturing
capability at our facility or develop an alternative manufacturing facility.
Although we carry business interruption insurance to cover lost revenue and
profits in an amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact on
relations with our existing customers resulting from our inability to produce
products for them.
COMPLIANCE WITH GOVERNMENT REGULATIONS MAY CAUSE US TO INCUR UNFORESEEN
EXPENSES.
Our black text, color and magnetic character toner supplies and manufacturing
operations are subject to domestic and international laws and regulations,
particularly relating to environmental matters that impose limitations on the
discharge of pollutants into the air, water and soil and establish standards for
treatment, storage and disposal of solid and hazardous wastes. In addition, we
are subject to regulations for storm water discharge, and as a requirement of
the State of Georgia have developed and implemented a Storm Water Pollution
20
Prevention Plan. We are also required to have a permit issued by the State of
Georgia in order to conduct various aspects of our business. Compliance with
these laws and regulations has not in the past had a material adverse affect on
our capital expenditures, earnings or competitive position. There can be no
assurance, however, that future changes in environmental laws or regulations, or
in the criteria required to obtain or maintain necessary permits, will not have
a material adverse affect on our operations.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AS A RESULT OF MANY FACTORS.
Our quarterly operating results fluctuate due to various factors. Some of these
factors include the mix of products sold during the quarter, the availability
and costs of raw materials or components, the costs and benefits of new product
introductions, and customer order and shipment timing. Because of these factors,
our quarterly operating results are difficult to predict and are likely to vary
in the future.
RISKS RELATING TO OUR INDUSTRY:
WE OPERATE IN A COMPETITIVE AND RAPIDLY CHANGING MARKETPLACE.
There is significant competition in the toner and consumable imaging products
industry in which we operate. In addition, the market for digital color printers
and copiers and related consumable products is subject to rapid change and the
OEM technologies are becoming increasingly difficult barriers to market entry.
Many competitors, both OEMs and other after market firms, have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. These competitors
may be able to devote substantially more resources to developing their business
than we can. Our ability to compete depends upon a number of factors, including
the success and timing of product introductions, marketing and distribution
capabilities and the quality of our customer support. Some of these factors are
beyond our control. In addition, competitive pressure to develop new products
and technologies could cause our operating expenses to increase substantially.
THE IMAGING SUPPLIES INDUSTRY IS COMPETITIVE AND WE ARE RELATIVELY SMALL IN SIZE
AND HAVE FEWER RESOURCES IN COMPARISON WITH MANY OF OUR COMPETITORS.
Our industry includes large original equipment manufacturers of printing and
photocopying equipment and the related imaging supplies, as well as other
manufacturers and resellers of aftermarket imaging supplies, with substantial
resources to support customers worldwide. Our future performance depends, in
part, upon our ability to continue to compete successfully worldwide. All of the
original equipment manufacturers and many of our other competitors are
diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products, some of which compete with the
products that we offer. These competitors may bundle their products in a manner
that may discourage customers from purchasing our products. In addition, we face
competition from smaller emerging imaging supply companies whose strategy is to
provide a portion of the products and services that we offer. Loss of
competitive position could impair our prices, customer orders, revenues, gross
margins, and market share, any of which would negatively affect our operating
results and financial condition. Our failure to compete successfully with these
other companies would seriously harm our business. There is risk that larger,
better-financed competitors will develop and market more advanced products than
those that we currently offer or may be able to offer, or that competitors with
greater financial resources may decrease prices thereby putting us under
financial pressure. The occurrence of any of these events could have a negative
impact on our revenues.
OUR PRODUCTS HAVE SHORT LIFE CYCLES AND ARE SUBJECT TO FREQUENT PRICE
REDUCTIONS.
The markets in which we operate are characterized by rapidly evolving and
increasingly difficult technologies, frequent new product introductions and
significant price competition. Consequently, our products have short life
cycles, and we must frequently reduce prices in response to product competition.
Our financial condition and results of operations could be adversely affected if
we are unable to manufacture new and competitive products in a timely manner.
Our success depends on our ability to develop and manufacture technologically
advanced products, price them competitively, and achieve cost reductions for
existing products. Technological advances require sustained research and
development efforts, which may be costly and could cause our operating expenses
to increase substantially.
OUR FINANCIAL PERFORMANCE DEPENDS ON OUR ABILITY TO SUCCESSFULLY MANAGE
INVENTORY LEVELS, WHICH IS AFFECTED BY FACTORS BEYOND OUR CONTROL.
Our financial performance depends in part on our ability to manage inventory
levels to support the needs of new and existing customers. Our ability to
21
maintain appropriate inventory levels depends on factors beyond our control,
including unforeseen increases or decreases in demand for our products and
production and supply difficulties. Demand for our products can be affected by
product introductions or price changes by competitors or by us, the life cycle
of our products, or delays in the development or manufacturing of our products.
Our operating results and ability to increase the market share of our products
may be adversely affected if we are unable to address inventory issues on a
timely basis.
RISKS RELATING TO OWNING OUR COMMON STOCK:
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN APPROXIMATELY 42% OF THE OUTSTANDING
SHARES OF COMMON STOCK, ALLOWING THESE STOCKHOLDERS TO CONTROL MATTERS REQUIRING
APPROVAL OF THE STOCKHOLDERS.
As a result of such ownership by our officers and directors, other investors
will have limited control over matters requiring approval by the stockholders,
including the election of directors. Such concentrated control may also make it
difficult for the stockholders to receive a premium for their shares of our
common stock in the event we enter into transactions that require stockholder
approval. In addition, certain provisions of Delaware law could have the effect
of making it more difficult or more expensive for a third party to acquire, or
of discouraging a third party from attempting to acquire control of us.
EXERCISE OF WARRANTS AND OPTIONS WILL DILUTE EXISTING STOCKHOLDERS AND COULD
DECREASE THE MARKET PRICE OF OUR COMMON STOCK.
As of October 27, 2003, we had issued and outstanding 12,925,005 shares of
common stock and 935,337 outstanding warrants and 970,000 outstanding options to
purchase additional shares of common stock, inclusive of 116,668 shares of our
common stock and warrants to purchase 233,336 shares of our common stock that
have been repurchased pursuant to a repurchase agreement and will be cancelled
upon their receipt from escrow. Further, subject to cancellation upon
certification, are 30,500 shares that we repurchased in the market pursuant to
our stock repurchase program. The existence of the remaining warrants and
options may adversely affect the market price of our common stock and the terms
under which we obtain additional equity capital.
WE MAY FACE POTENTIAL REGULATORY ACTION OR LIABILITY IN CONNECTION WITH OUR 2001
PRIVATE PLACEMENT.
Our issuance of common stock and warrants in a private placement which was
completed in 2001 could subject us to potential adverse consequences, including
securities law liability and the voiding of contracts entered into in connection
with the private placement. If our activities or the activities of other parties
in the 2001 private placement are deemed to be inconsistent with securities laws
under Section 29 of the Securities Exchange Act of 1934 or our activities or the
activities or the activities of other parties are deemed to be inconsistent with
the broker dealer registration provisions of Section 15(a) of the Exchange Act:
o we may be able to void our obligation to pay transaction-related fees
in connection with the private placement and we may receive
reimbursement for fees already paid;
o persons with whom we have entered into securities transactions that
are subject to these transaction-related fees may have the right to
void these transactions; and
o we may be subject to regulatory action.
Due to the inherent uncertainties involved with the interpretation of securities
laws, we are unable to predict the following: the validity of any potential
liability in connection with our private placement, the outcome of any
regulatory action or potential liability or the outcome of voiding transactions
in connection with the private placement. The defense of any regulatory action
or litigation and any adverse outcome could be costly and could have a material
adverse effect on our financial position and results of operations and could
divert management attention.
OUR COMMON STOCK IS LISTED ON THE OVER-THE-COUNTER (OTC) BULLETIN BOARD, WHICH
MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECREASE.
Because our common stock is listed on the OTC Bulletin Board, the liquidity of
our common stock is impaired, not only in the number of shares that are bought
and sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media, if any, of us. As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
22
OUR STOCK PRICE MAY BE VOLATILE AND AN INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. These factors
include, but are not limited to:
o progress of our products through development and marketing;
o announcements of technological innovations or new products by us or
our competitors;
o government regulatory action affecting our products or competitors'
products in both the United States and foreign countries;
o developments or disputes concerning patent or proprietary rights;
o actual or anticipated fluctuations in our operating results;
o the loss of key management or technical personnel;
o the loss of major customers or suppliers;
o the outcome of any future litigation;
o changes in our financial estimates by securities analysts;
o fluctuations in currency exchange rates;
o general market conditions for emerging growth and technology
companies;
o broad market fluctuations;
o recovery from natural disasters; and
o economic conditions in the United States or abroad.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE THE EFFECT OF MAKING IT MORE
EXPENSIVE OR MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE, OR TO ACQUIRE CONTROL,
OF US.
Our certificate of incorporation makes it possible for our board of directors to
issue preferred stock with voting or other rights that could impede the success
of any attempt to change control of us. Our certificate of incorporation and
bylaws eliminate cumulative voting which may make it more difficult for a
minority stockholder to gain a seat on our board of directors and to influence
board of directors' decision regarding a takeover. Delaware Law prohibits a
publicly held Delaware corporation from engaging in certain business
combinations with certain persons, who acquire our securities with the intent of
engaging in a business combination, unless the proposed transaction is approved
in a prescribed manner. This provision has the effect of discouraging
transactions not approved by our board of directors as required by the statute
which may discourage third parties from attempting to acquire us or to acquire
control of us even if the attempt would result in a premium over market price
for the shares of common stock held by our stockholders.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of our
public filings or press releases or in any oral statements made by us or any of
our officers or other persons acting on our behalf. The important factors that
could affect forward-looking statements are subject to change, and we disclaim
any obligation or duty to update or modify these forward-looking statements.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements may be identified by the use of forward-looking
terms such as "believes," "expects," "may", "will," "should" or "anticipates" or
by discussions of strategy that involve risks and uncertainties. From time to
time, we have made or may make forward-looking statements, orally or in writing.
These forward-looking statements include statements regarding our ability to
borrow funds from financial institutions or affiliates, to engage in sales of
our securities, our intention to repay certain borrowings from cash flow, the
ability to expand capacity by placing in service additional manufacturing
equipment during 2003, our expected acquisition of business or technologies, our
expectation that shipments to international customers will continue to account
for a material portion of net sales, anticipated future revenues, our
23
introduction of new products and our increasing our sales from all-in-one
imaging, toner and drum cartridges, and digital copier, color and magnetic
character recognition toner products during 2003, the prospective effects of
having discontinued the Logical Imaging Solutions operations and having opened a
sales office and warehouse on the west coast, sales, operations, demand,
technology, products, business ventures, major customers, major suppliers,
retention of key officers, management or employees, competition, capital
expenditures, credit arrangements and other statements regarding matters that
are not historical facts, involve predictions which are based upon a number of
future conditions that ultimately may prove to be inaccurate. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Forward-looking
statements are made based upon management's current expectations and beliefs
concerning future developments and their potential effects upon our business. We
cannot predict whether future developments affecting us will be those
anticipated by management, and there are a number of factors that could
adversely affect our future operating results or cause our actual results to
differ materially from the estimates or expectations reflected in such
forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
Market risk is the risk of loss to future earnings, to fair values or to future
cash flows that may result from changes in the price of a financial instrument.
The value of a financial instrument may change as a result of changes in
interest rates, exchange rates, commodity prices, equity prices and other market
changes. Market risk is attributed to all market sensitive financial
instruments, including long-term debt.
We do not hold any investments or assets outside of the United States. However,
we are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates.
We estimate that about 95% of our transactions are denominated in U.S. dollars,
excepting those sales in Euros to a few customer's in Europe, including our
second largest customer's European operations. Accordingly, beginning in 2001,
we are subject to foreign currency risk with respect to future costs or cash
flows from our sales in Euros. We have adjusted our prices annually with our
customer to reflect the change in the exchange rate and do not expect to be
subject to material foreign currency risk, accordingly, with respect to those
sales. As a result, to date, we have not entered into any foreign currency
forward exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange. We incurred a
net foreign currency transaction gain of $123,907 in the nine months ended
September 30, 2003, and we incurred a net foreign currency transaction gain of
$2,858 and a loss of $1,877 in the years ended December 31, 2002 and 2001,
respectively. Our contract pricing for our products sold in Euros is currently
at the rates of 0.96 and 1.00 Euros relative to the U.S. dollar. A 10% change in
the value of the Euro relative to the United States dollar would cause
approximately an $8,000 foreign currency translation adjustment in an average
month, a type of other comprehensive income (loss), which would be a direct
adjustment to stockholders' equity.
Our revolving line of credit bears interest based on interest rates tied to the
LIBOR rate, which may fluctuate over time based on economic conditions. As a
result, we are subject to market risk for changes in interest rates and could be
subjected to increased or decreased interest payments if market rates fluctuate
and we are in a borrowing mode. At September 30, 2003, there were no amounts
outstanding under the line of credit agreement and, accordingly, a sustained
increase in the reference rate of 1% would not cause our annual interest expense
to change.
Our investment policy requires investments with high credit quality issuers and
or over night repurchase agreements with our bank. Investments we make will
principally consist of U.S. government and government agency obligations and
investment-grade, interest-bearing corporate debt securities with varying
maturity dates of five years or less, or the overnight purchase of securities
held in our bank's investment portfolio. Because of the credit criteria of our
investment policies, the primary market risk associated with these investments
is interest rate risk. We do not use derivative financial instruments to manage
interest rate risk or to speculate on future changes in interest rates. We had
approximately $1,419,000 invested in securities, which are available for sale,
at September 30, 2003, and we experienced a net asset value loss of $5,695 as
the result of the recent interest rate change.
Management believes that a reasonable change in raw material prices could have a
material impact on future earnings or cash flows, because we generally are not
able to offset increases to our costs with higher prices for our products.
24
ITEM 4. Controls and Procedures
a) On October 24, 2003, our Chief Executive Office, President and Chief
Financial Officer participated in a meeting during which there was an evaluation
of our disclosure controls and procedures as of September 30, 2003. Based on
such evaluation, they believe such controls and procedures are effective.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that its Disclosure Controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control system, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdown can occur because of simple error or mistake. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based upon the Company's Disclosure Controls evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, subject to
the limitations noted above, the Company's Disclosure Controls are effective to
give reasonable assurance that the information required to be disclosed by the
Company in its periodic reports is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure and is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
b) Our Chief Executive Officer, President and Chief Financial Officer are
involved in ongoing evaluations of internal controls. On October 24, 2003, in
anticipation of the filing of this Form 10-Q, they reviewed our internal
controls and have determined, based on such review, that there have been no
significant changes in our internal controls or in other factors that would
significantly affect our internal controls during the quarter ended September
30, 2003.
PART II
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
On January 23, 2003, the Company's registration statement on Form SB-2,
registering up to 7 million shares of the Company's common stock, was declared
effective (Registration Statement No. 333-76090), and the offering was commenced
by the Company's officers and directors. On March 13, 2003, the Company
completed the public sale of 4,500,000 shares of the Company's common stock at a
price of $1.35 per share, whereby the Company received $6,075,000 in gross
proceeds from an affiliate, and the Company terminated the offering before the
sale of all 7 million of registered shares. From the effective date of the
Company's registration statement through March 31, 2003, the Company incurred
total expenses for professional fees and printing of $30,129 in connection with
the issuance and distribution of the Company's common stock. The net proceeds
received by the Company, after expenses of $30,129, was $6,044,871. None of the
aforementioned expenses were direct or indirect payments to directors, officers,
their associates or persons owning ten (10) percent or more of the common stock
of the Company.
25
Our intended uses of the $6,075,000 of proceeds received from the public sale of
our common stock, and our uses through September 30, 2003, are listed below in
descending order of priority:
Purpose: Amount Used Reallocated Remaining
- ------------------- ------------ ------------ ------------ ------------
Accounts payable and other corporate
and offering expenses . . . . . . . . . . . . . . $ 1,000,000 $ (312,585) $ 0 $ 687,415
To retire debt (1) . . . . . . . . . . . . . . . . $ 350,000 $ (324,302) $ (25,698) $ 0
To retire debt (2) . . . . . . . . . . . . . . . . $ 1,050,000 $ (956,883) $ (93,117) $ 0
To retire debt (3) . . . . . . . . . . . . . . . . $ 0 $ (235,000) $ 235,000 $ 0
To acquire capital assets. . . . . . . . . . . . . $ 1,500,000 $ (121,230) $ 0 $1,378,770
To repurchase our stock $ 0 $ (19,945) $ 1,000,000 $ 980,055
For other general corporate purposes
including working capital . . . . . . . . . . . . $ 2,175,000 $ (945,000) $(1,116,185) $ 113,815
------------ ------------ ------------ ------------
Total: $ 6,075,000 $(2,914,945) $3,160,055
Pending application:
- -------------------
Short-term investments . . . . . . . . . . . . . . $1,660,055
Pay down of revolving line of credit . . . . . . . $1,500,000
- ----------------
(1) On November 30, 2000, we entered into a loan for $500,000 with a 5-year
term, secured by specific manufacturing equipment, maturing November 30,
2004, with General Electric Capital Corporation for the purchase of toner
manufacturing equipment. The interest rate is 10.214% and the monthly
principal and interest payments were $10,676.39.
(2) On June 24, 1999, we entered into a loan for $1,752,000 with a 7-year term,
secured by our business assets, maturing June 24, 2006, with SouthTrust
Bank for the refinancing of obligations owing the bank for the acquisition
of equipment and that due under a previous working capital line of credit.
The interest rate is 7.90% per annum and the monthly principal and interest
payments were $27,205.00.
(3) On July 24, 1999, as amended, we entered into a borrowing arrangement under
a revolving line of credit in the maximum amount of $2.5 million. During
March 2003 we temporarily used $1,735,000 of our proceeds from our public
offering on Form SB-2 to pay down the line of credit to $0, which at that
time had an interest rate of 3.8375%. On June 16, 2003, we renewed and
restructured the line of credit with the bank, reducing the maximum
availability to $1.5 million and permanently retiring $235,000.
During March 2003, using proceeds from the offering on Form SB-2, the Company
retired debt owed to General Electric Capital Corporation and SouthTrust Bank,
and to the extent proceeds were not required in the amounts outlined for those
purposes, they have been reallocated to be used for general corporate purposes.
During March 2003, pending application of the proceeds from the offering on Form
SB-2, the Company paid down its line of credit with the bank by the then
outstanding principal balance of $1,735,000. On June 16, 2003, with the renewal
of our line of credit with SouthTrust Bank, we permanently reduced our revolving
line of credit to $1,500,000; and, as a result, we retired $235,000 of that debt
with our bank.
On April 18, 2003, the Company established a stock repurchase program under
which the Company may purchase on the open market the lesser of the aggregate
value of $1,000,000 or 1,000,000 shares in compliance with Rule 10b-18, and we
have reallocated proceeds for this program. From July through September 30,
2003, under the repurchase program the Company has repurchased 30,500 shares of
our common stock on the open market at an average price of $0.65. Approximately
$980,000 remains available for future common stock repurchases.
Pending application, we have retained the balance of the net proceeds in a
deposit account with the bank and an investment account with a securities firm
related to the bank.
No direct or indirect payments to directors, officers, their associates or
persons owing ten (10) percent or more of the Company's common stock were made
with proceeds from the Company's offering on Form SB-2
On March 4, 2003, the Company completed the repurchase from a stockholder of
12,939 shares of the Company's common stock together with warrants to purchase
25,878 shares of the Company's common stock at an exercise price of $2.00 per
share for $25,878. The shares and warrants were originally sold in the Company's
26
private placement that was completed in December 2001, and the shares and
warrants repurchased by the Company were cancelled.
On February 27, 2003, the Company entered into an agreement with a stockholder
to repurchase 150,000 shares of common stock and warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $2.00 per share.
Under the agreement, the stockholder has a one-time right to cancel the sale of
the common stock and warrants not yet paid for by the Company upon written
notice to the Company. Upon receipt of such notice, the Company is not obligated
to purchase the remaining common stock and warrants. The agreement provides that
the Company is to pay $2.00 for each common share and warrant to purchase two
common shares of the Company's common stock. The shares and warrants are to be
repurchased in approximately equal installments over nine months, beginning in
March and ending in November 2003. From March 24, 2003 through September 30,
2003, the Company repurchased 116,668 of the Company's common shares and
warrants to purchased 233,336 common shares, paying $233,336. The shares and
warrants repurchased by the Company are held in escrow, pending the completion
of the repurchase in November 2003, or its earlier cancellation, at which time
they will be cancelled.
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
27
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
----------- -----------
2.1 Merger Agreement and Plan of Reorganization dated May 16,
2000, by and between Advatex Associates, Inc., Logical
Imaging Solutions Acquisition Corp., Color Imaging
Acquisition Corp., Logical Imaging Solutions, Inc., and
Color Image, Inc., incorporated by reference to the
Registrant's Form 8-K filed on July 17, 2000.
2.2 Amendment No. 1 to the Merger Agreement and Plan of
Reorganization dated June 15, 2000, incorporated by
reference to the Registrant's Form 8-K filed on July 17,
2000
2.3 Amendment No. 2 to the Merger Agreement and Plan of
Reorganization dated June 26, 2000, incorporated by
reference to the Registrant's Form 8-K filed on July 17,
2000
2.4(1) Share Exchange Agreement dated as of September 11, 2002
between Color Imaging, Inc., Logical Imaging Solutions,
Inc., Digital Color Print, Inc., and the shareholders of
Digital Color Print, Inc., incorporated by reference to
Exhibit 2.1 to the Registrant's Form 8-K filed September 26,
2002.
2.5 Amendment No. 1 to Share Exchange Agreement dated as of
September 20, 2002 between Color Imaging, Inc., Logical
Imaging Solutions, Inc., Digital Color Print, Inc., and the
shareholders of Digital Color Print, Inc., incorporated by
reference to Exhibit 2.2 to the Registrant's Form 8-K filed
September 26, 2002.
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 to the Registration statement on Form SB-2 filed
July 15, 2002.
3.2 Bylaws, incorporated by reference to the Registrant's Form
10-QSB for the quarter ended March 31, 2002.
4.1 Stock Purchase Agreement between the Company and Wall Street
Consulting Corp. dated October 30, 2001, incorporated by
reference to Exhibit 4.1 to the Registration statement on
Form SB-2 filed May 31, 2002.
4.2 Promissory Note of Wall Street Consulting Corp. dated
October 30, 2001, incorporated by reference to Exhibit 4.2
to the Registration statement on Form SB-2 filed May 31,
2002.
4.3 Form of Warrant issued to Selling Stockholders, incorporated
by reference to Exhibit 4.3 to the Registration statement on
Form SB-2 filed November 28, 2001.
4.4 Development Authority of Gwinnett County, Georgia Industrial
Development Trust Indenture dated June 1, 1999, incorporated
by reference to Exhibit 4.27 to the Registration statement
on Form SB-2 filed May 31, 2002.
4.5 Loan Agreement between the Company, Kings Brothers LLC and
the Development Authority of Gwinnett County, Georgia dated
June 1, 1999, incorporated by reference to Exhibit 4.28 to
the Registration statement on Form SB-2 filed May 31, 2002.
4.6 Joint Debtor Agreement dated June 28, 2000 by and among
Color Image, Inc., Kings Brothers, LLC, Dr. Sueling Wang,
Jui-Chi Wang, Jui-Kung Wang, and Jui-Hung Wang, incorporated
by reference to Exhibit 4.28 to the Registration statement
on Form SB-2 filed February 11, 2002.
4.7 First Amendment to Joint Debtor Agreement dated January 1,
2001 by and among Color Imaging, Kings Brothers, LLC, Dr.
Sueling Wang, Jui-Chi Wang, Jui-Kung Wang, and Jui-Hung
Wang, incorporated by reference to Exhibit 4.29 to the
Registration statement on Form SB-2 filed February 11, 2002.
4.8 $500,000 Promissory Note between Color Imaging and Sueling
Wang dated March 14, 2002, incorporated by reference to
Exhibit 4.34 to the Registration statement on Form SB-2
filed April 11, 2002.
4.9 $500,000 Promissory Note between Color Imaging and Jui Hung
Wang dated August 21, 2002, incorporated by reference to
Exhibit 4.50 to the Registration statement on Form SB-2
filed October 2, 2002.
4.10 $100,000 Promissory Note between Color Imaging and Jui Chi
Wang dated August 21, 2002, incorporated by reference to
Exhibit 4.51 to the Registration statement on Form SB-2
filed October 2, 2002.
28
Exhibit No. Description
----------- -----------
4.11 First Note Modification Agreement between Sueling Wang and
Color Imaging dated August 27, 2002, incorporated by
reference to Exhibit 4.52 to the Registration statement on
Form SB-2 filed October 2, 2002.
4.12 Amended and restated $1,500,000 revolving note between Color
Imaging and SouthTrust Bank dated June 16, 2003,
incorporated by reference to Exhibit 4.12 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
4.13 Amended and restated loan and security agreement between
Color Imaging and SouthTrust Bank dated June 16, 2003,
incorporated by reference to Exhibit 4.13 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003
10.1* Employment Agreement between Color Imaging and Dr. Sueling
Wang dated June 28, 2000, incorporated by reference to
Exhibit 10.2 to the Registration statement on Form SB-2
filed November 28, 2001.
10.2* Employment Agreement between the Company and Morris E. Van
Asperen dated June 28, 2000, incorporated by reference to
Exhibit 10.3 to the Registration statement on Form SB-2
filed November 28, 2001.
10.3* Employment Agreement amendment between the Company and
Morris E. Van Asperen dated July 14, 2003, incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.4* Deferred Compensation Agreement Amendment between Charles R.
Allison and Color Imaging, Inc., December 27, 2002,
incorporated by reference to Exhibit 10.11 to the
Registrant's Form 10-K for the year ended December 31, 2002.
10.5* Amendment to Deferred Compensation Agreement between Color
Imaging and Charles R. Allison dated June 27, 2003,
incorporated by reference to Exhibit 10.5 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.6 Lease Agreement between Color Imaging and Kings Brothers LLC
dated April 1, 1999, incorporated by reference to Exhibit
10.5 to the Registration statement on Form SB-2 filed
November 28, 2001.
10.7 Amendment No. 1 to Lease Agreement between the Company and
Kings Brothers LLC dated April 1, 1999, incorporated by
reference to Exhibit 10.6 to the Registration statement on
Form SB-2 filed November 28, 2001.
10.8 Commercial Lease Agreement Amendment between Kings Brothers
LLC and Color Imaging, Inc. dated February 5, 2003,
incorporated by reference to Exhibit 10.13 to the
Registrant's Form 10-K for the year ended December 31, 2002
10.9 Form of Warrant between Digital Color Print, Inc. and Color
Imaging, Inc., incorporated by reference to Exhibit 10.10 to
the Registration statement on Form SB-2 filed November 13,
2002.
10.10 Purchase and Sale and Release Agreement between Michael
Edson and Color Imaging, Inc. dated February 27, 2003,
incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-K for the year ended December 31, 2002
10.11 Purchase and Sale and Release Agreement between Stephen
Chromik and Color Imaging, Inc. dated February 27, 2003,
incorporated by reference to Exhibit 10.15 to the
Registrant's Form 10-K for the year ended December 31, 2002
10.12 Form of Indemnification Agreement, incorporated by reference
to the post effective Amendment No. 1 to Form SB-2 filed
April 1, 2003.
10.13* 2003 Stock Incentive Plan, incorporated by reference to
Annex 1 to the Registrant's Definitive Proxy Statement on
Schedule 14A filed on May 5, 2003
10.14+ Marketing and License Agreement between General Plastic
Industrial Co., Ltd. and Color Imaging, Inc. dated as of
June 1, 2003
31.1+ Chief executive officer's certification pursuant to Section
302 of the Sarbanes- Oxley Act of 2002
31.2+ Chief financial officer's certification pursuant to Section
302 of the Sarbanes- Oxley Act of 2002
32.1+ Chief executive officer's certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2+ Chief financial officer's certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ------------------------
+ Filed herewith.
* Management contract or compensatory plan.
(1) Pursuant to Rule 601(b)(2), the schedules and exhibits to this Agreement
shall not be filed. A list of the schedules and exhibits is contained on the
last page of the Agreement. The Registrant agrees to furnish supplementally a
copy of any of the omitted schedules and exhibits to the Securities and Exchange
Commission upon request.
29
(b) REPORTS ON FORM 8-K
None.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COLOR IMAGING, INC.
/S/ JUI-KUNG WANG
--------------------------------------
October 24, 2003 Jui-Kung Wang, PhD
Chief Executive Officer
/S/ MORRIS E. VAN ASPEREN
--------------------------------------
Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
31
1682559