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, 2004
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 Identification No.)
incorporation or organization)
4350 Peachtree Industrial Blvd, Suite 100
Norcross, GA 30071
- ----------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(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 26 2004, there were 12,699,005 shares outstanding of Common Stock.
COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2004
(Unaudited) and December 31, 2003(Audited)...........................3
Condensed Statements of Operations (Unaudited)
for the Three and Nine Months ended
September 30, 2004 and 2003..........................................4
Condensed Statements of Cash Flows (Unaudited)
for the Nine Months ended
September 30, 2004 and 2003..........................................5
Notes to Interim Unaudited Condensed Financial
Statements ..........................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risks.........25
Item 4. Controls and Procedures.............................................25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ..................................................27
Item 2. Changes in Securities and Use of Proceeds...........................27
Item 3. Defaults Upon Senior Securities.....................................29
Item 4. Submission of Matters to a Vote of Security Holders.................29
Item 5. Other information ..................................................29
Item 6. Exhibits and Reports on Form 8-K....................................29
Signatures....................................................................31
Exhibits
2
PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC.
CONDENSED BALANCE SHEETS
30-Sep-04 31-Dec-03
- ASSETS - (Unaudited) (Audited)
--------------- ---------------
CURRENT ASSETS:
Cash $ 1,929,272 $ 2,213,830
Accounts receivable - net of allowance for doubtful accounts
of $100,361 and $67,839 for 2004 and 2003, respectively 2,794,657 1,941,404
Inventories 5,242,745 5,624,328
Related party portion of IDR bond - current 92,664 87,912
Other current assets 190,990 114,721
--------------- ---------------
TOTAL CURRENT ASSETS 10,250,328 9,982,195
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,696,597 6,973,834
--------------- ---------------
OTHER ASSETS:
Related party portion of IDR bond 554,764 647,428
Other assets 31,858 291,978
--------------- ---------------
586,622 939,406
--------------- ---------------
$ 17,533,547 $ 17,895,435
=============== ===============
- LIABILITIES & STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Revolving credit line $ -- $ --
Accounts payable 2,231,082 2,413,695
Current portion of notes payable 5,953 5,612
Current portion of notes payable - related parties 168,538 343,736
Current portion of bonds payable 390,000 370,000
Other current liabilities 231,527 393,579
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,027,100 3,526,622
--------------- ---------------
LONG TERM LIABILITIES:
Notes payable 7,000 11,509
Notes payable - related parties -- 120,102
Bonds payable 2,335,000 2,725,000
Deferred tax liability 563,450 292,700
--------------- ---------------
LONG TERM LIABILITIES 2,905,450 3,149,311
--------------- ---------------
TOTAL LIABILITIES 5,932,550 6,675,933
--------------- ---------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000,000 shares;
12,699,005 and 12,730,505 shares issued and outstanding
on September 30, 2004 and December 31, 2003, respectively. 126,990 127,305
Additional paid-in capital 12,685,288 12,708,368
Treasury stock, at cost, 5,800 shares ( 2,656) --
Accumulated deficit (1,208,625) (1,616,171)
--------------- ---------------
11,600,997 11,219,502
--------------- ---------------
$ 17,533,547 $ 17,895,435
=============== ===============
See accompanying notes.
3
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- --------------------------
30-SEP-04 30-SEP-03 30-SEP-04 30-SEP-03
------------ ------------ ------------ ------------
SALES $ 5,678,893 $ 5,360,703 $16,949,248 $16,048,697
C0ST OF SALES 4,356,515 3,993,199 12,694,680 11,822,528
------------ ------------ ------------ ------------
GROSS PROFIT 1,322,378 1,367,504 4,254,568 4,226,169
------------ ------------ ------------ ------------
OPERATING EXPENSES
Administrative 300,363 418,924 1,039,396 1,311,715
Research & development 287,258 286,407 888,360 883,888
Sales & marketing 583,487 439,441 1,787,589 1,195,061
------------ ------------ ------------ ------------
1,171,108 1,144,772 3,715,345 3,390,664
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 151,270 222,732 539,223 835,505
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income 49,215 57,216 208,645 165,740
Financing expenses (21,235) (28,146) (68,322) (138,409)
------------ ------------ ------------ ------------
27,980 29,070 140,323 27,331
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 179,250 251,802 679,546 862,836
PROVISION FOR INCOME TAXES 71,900 100,000 272,000 345,000
------------ ------------ ------------ ------------
NET INCOME $ 107,350 $ 151,802 $ 407,546 $ 517,836
============ ============ ============ ============
INCOME
PER COMMON SHARE - BASIC
Basic $ .01 $ .01 $ .03 $ .04
Diluted $ .01 $ .01 $ .03 $ .04
------------ ------------ ------------ ------------
$ .01 $ .01 $ .03 $ .04
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 12,700,308 12,838,170 12,707,484 11,710,487
Assumed conversion -- 9,091 -- 5,515
------------ ------------ ------------ ------------
12,700,308 12,847,261 12,707,484 11,716,002
============ ============ ============ ============
See accompanying notes
4
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30
(UNAUDITED)
2004 2003
------------- ------------
Cash flows from operating activities:
Net income from continuing operations $ 407,546 $ 517,836
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 443,892 433,778
Deferred income taxes 270,750 349,000
Allowance for doubtful accounts 32,522 1,334
(Increase) decrease in:
Accounts receivable and other receivables (885,775) (857)
Inventories 381,583 (1,249,194)
Prepaid expenses and other assets 183,851 267,968
Due from related party - IDR bond 87,912 83,160
(Decrease) in:
Accounts payable and accrued liabilities (344,665) (588,333)
------------- ------------
Net cash provided by (used in)
operations 577,616 (185,308)
------------- ------------
Cash flows (used in) investing activities:
Capital expenditures (166,655) (387,606)
------------- ------------
Net cash (used in)
investing activities (166,655) (387,606)
------------- ------------
Cash flows from financing activities:
Net (payments) under line of credit -- (1,022,470)
Net proceeds from sale of common stock -- 5,900,140
Repurchase of common shares and warrants (26,051) (279,202)
Principal payments on related party borrowings (295,300) (440,022)
Principal payments of long-term debt (374,168) (1,685,000)
------------- ------------
Net cash (used in) provided by
financing activities (695,519) 2,473,446
------------- ------------
Net (decrease) increase in cash (284,558) 1,900,532
Cash at beginning of year 2,213,830 128,501
------------- ------------
Cash at end of period $ 1,929,272 $ 2,029,033
============= ============
See accompanying notes
5
COLOR IMAGING, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals
and adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
2004 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2004.
NOTE 2. COMMON STOCK AND EQUIVALENTS
During the third quarter ended September 30, 2004, the Company repurchased in
the open market 5,800 shares of the Company's common stock at an average price
of $0.46 per share. For the nine months ended September 30, 2004, the Company
repurchased in the open market 37,300 shares of the Company's common stock at an
average price of $0.70 per share. As of October 17, 2004, all of the shares
repurchased by the Company through June 30, 2004, were cancelled and retired by
the Company's transfer agent, while the 5,800 shares repurchased by the Company
during the third quarter have not yet been cancelled and retired by the
Company's transfer agent.
On April 1, 2004 the Company granted options to an officer to purchase 100,000
shares of the Company's common stock at an exercise price of $.73 per share.
Options to purchase 20,000 shares of the Company's common stock vested
immediately and the remainder vest at the rate of 20,000 per year beginning on
the first anniversary date of the grant and continuing annually thereafter and
expire five years from their respective date of vesting. On May 18, 2004, the
Company granted 335,000 options to officers, 50,000 options to non-employee
directors and 80,000 options to employees at an exercise price of $0.54.
One-half of the options granted vested immediately and the remainder vest
equally upon the next two anniversary dates of the grant and expire five years
from their respective date of vesting.
In accordance with the provisions of SFAS No. 148, the Company has elected to
continue applying the intrinsic value approach under APB No. 25 in accounting
for its stock-based compensation plans. Accordingly, the Company does not
recognize compensation expense for stock options when the exercise price at the
grant date is equal to or greater than the fair market value of the stock at
that date. The Company generally recognizes compensation expense only when it
grants options with a discounted exercise price, at which time any resulting
compensation expense is recognized ratably over the associated service period,
which is generally the option vesting term.
The following table illustrates the effect on net income and net income per
share as if the fair value based method had been applied to all outstanding and
vested awards in each period:
NINE MONTHS SEPTEMBER 30,
2004 2003
------------ -------------
Net income, as reported $ 407,546 $ 517,836
Less: Pro forma stock based
compensation expense - net of tax 80,758 56,635
------------ -------------
Pro forma net income $ 326,788 $ 461,201
============ =============
Basic Earnings per share:
As reported $ 0.03 $ 0.04
Pro forma $ 0.03 $ 0.04
Diluted Earnings per share:
As reported $ 0.03 $ 0.04
Pro forma $ 0.03 $ 0.04
The fair value of each option was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the periods ended September 30, 2004 and 2003, respectively:
expected volatility of 2.4 and .9, respectively; risk free interest rate of 2.5%
and 2.7%, respectively; and expected lives of 2 to 7 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the average vesting period of the options.
6
NOTE 2. COMMON STOCK AND EQUIVALENTS (CONTINUED)
In computing the number of options exercisable, shares of common stock subject
to options or warrants that are currently exercisable or will become exercisable
within 60 days of the date of this report are deemed outstanding. The following
is a summary of total outstanding and exercisable options and stock warrants at
September 30, 2004:
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted-Average
Range of Exercise Weighted-Average Remaining Weighted-Average
Prices Number Exercise Price Contractual Life Number Exercise Price
------------------- ----------- ------------------ ------------------ ----------- ------------------
Options $0.45-$2.75 1,420,000 $1.58 3.08 years 1,042,500 $1.88
Warrants $2.00 100,000 $2.00 0.78 years 100,000 $2.00
------------------ ------------------ ----------- ------------------
Options and warrants 1,520,000 $1.61 3.60 years 1,142,500 $1.89
================== ==================
NOTE 3. INVENTORIES
Inventories consisted of the following components as of September 30, 2004 and
December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
Raw materials $ 1,255,898 $ 631,960
Work-in-process 1,739,290 1,715,684
Finished goods 2,323,801 3,374,773
Obsolescence allowance (76,244) (98,089)
------------------ -----------------
Total $ 5,242,745 $ 5,624,328
================== =================
NOTE 4. CHANGES TO BORROWING ARRANGEMENTS
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance as of September 30, 2004 of $0, bearing interest at the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50%. As of September 30, 2004, the interest rate was the
one-month Libor rate of 1.84% plus 2.50% (4.34%). This revolving line of credit
has a June 30, 2005 expiration date.
Under the line of credit, the Company is permitted to borrow up to 75% of
eligible accounts receivable and 50% of eligible inventories (up to a maximum of
$750,000 and not to exceed 50% of the total outstanding). On February 6, 2004,
the Bank issued an irrevocable standby letter of credit in the amount of $1.5
million for the benefit of a non-affiliated foreign supplier. The letter of
credit has an expiration date of June 30, 2005. The Company has granted the Bank
a security interest in all of the Company's assets as security for the repayment
of the line of credit and the obligations under the letter of credit. The Bank
agreement also contains various covenants that the Company is required to
maintain, and as of September 30, 2004, the Company was in compliance with these
covenants.
NOTE 5. EMPLOYMENT AGREEMENTS:
On April 1, 2004, the Company hired and entered into a two year employment
agreement with the Senior Vice President of Marketing and Sales, providing the
employee with an annual salary of $150,000, the lesser of three months severance
or the remainder of the term of the agreement if terminated by the Company
without cause and granting the employee options to purchase 100,000 shares of
the Company's common stock. On April 19, 2004, upon the hiring of the Senior
Vice President of Marketing and Sales, the Executive Vice President and Chief
Financial Officer's responsibilities and duties were changed and the employment
agreement between the Company and the Executive Vice President and Chief
Financial Officer was amended, reducing annual salary from $151,190 to $120,000
and providing for a one-half of one percent (0.5%) commission on only the net
sales of 100% new all-in-one products of the Company. On May 28, 2004, the
duties and responsibilities of the Vice President of Technology were changed to
encompass certain research and development projects and technical sales, and his
title was changed to Vice President of Technical Sales and his $100,000 annual
salary is to be reduced in equal amounts over four months until reaching $80,000
per annum.
NOTE 6. SIGNIFICANT CUSTOMERS
In the three and nine month periods ended September 30, 2004, one customer
accounted for 23% and 27% of net sales. The Company does not have a written or
oral contract with this customer. All sales are made through purchase orders.
Accounts receivable from this customer at September 30, 2004, was $302,649.
7
NOTE 7. SIGNIFICANT SUPPLIERS
In the three and nine month periods ended September 30, 2004 the Company
purchased 22% and 37% of its raw materials, components and supplies from one
supplier in connection with sales to its largest customers. At September 30,
2004, the accounts payable to this supplier was $614,846.
On February 6, 2004, the Company caused its Bank to issue an irrevocable standby
letter of credit in the amount of $1.5 million for the benefit of this
non-affiliated foreign supplier. The letter of credit has an expiration date of
June 30, 2005.
NOTE 8. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving the development and manufacture of products used in electronic
printing. All of the Company's assets are domestic. The sales to unaffiliated
customers by geographic region from continuing operations for the nine-month
periods ended September 30 are as follows:
2004 2003
------------- -------------
Sales to Unaffiliated Customers:
United States $ 9,162,553 $ 9,534,055
Europe/Eastern Europe 4,226,258 3,436,261
Mexico 2,186,368 1,896,999
Asia/Southeast Asia 879,303 618,688
South America 165,305 346,022
Others 329,461 216,672
------------- -------------
Total $16,949,248 $16,048,697
============= =============
NOTE 9. RELATED PARTY TRANSACTIONS:
(A) LEASE:
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from which the Company leases its Norcross,
Georgia, plant. The real property lease agreement between the Company and Kings
Brothers, LLC, was entered into on April 1, 1999, and was amended on February 5,
2003, extending the expiration date from March 31, 2009 to March 31, 2013. The
rental payments for the nine months ended September 30, 2004 and 2003 were
$408,546 and $398,583, respectively.
(B) INDUSTRIAL DEVELOPMENT REVENUE BOND
On June 1, 1999, the Development Authority of Gwinnett County (the Authority),
issued $4,100,000 of industrial development revenue bonds on behalf of the
Company and Kings Brothers, LLC. The 1.76% revenue bonds, 2.76% inclusive of the
1% letter of credit fee, as of September 30, 2004, are payable in varying annual
principal and monthly interest payments through July 2019. The bond is secured,
as amended on April 7, 2003, by specific equipment assets of the Company and by
real property owned by Kings Brothers, LLC. Two related financial institutions
hold the bonds, along with the line of credit and term loan.
A loan agreement between the Authority and the Company and Kings Brothers, LLC
allows funds to effectively pass through the Authority to the Company. The
majority of the proceeds, $3,125,872, were used by the Company to relocate,
purchase and install certain manufacturing equipment, while $974,128 was used by
Kings Brothers, LLC to pay down the mortgage on the real property leased to the
Company. The Company and the Related Party are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and the Kings Brothers, LLC, each has agreed to be responsible to the
other for their share of the bond obligations and that any party causing an act
of default shall be responsible for 100% of the bond obligations. The amount for
which Kings Brothers, LLC is responsible to the Company is reflected in current
and other assets of the Company. Kings Brothers, LLC amounts owed to the
Authority are secured by a lien on the real property leased by the Company and
by a personal guarantee, as amended, executed by Director and President of the
Company, Sueling Wang. At this time, the Company believes that the Kings
Brothers, LLC portion of the bond is fully collectible. As of September 30,
2004, the bond principal outstanding was $2,725,000 and the portion due from
Kings Brothers, LLC was $647,428.
8
(C) PURCHASES:
The Company purchased from an affiliate for the three and nine months ended
September 30, 2004, $1,302,457 and $2,896,248 of all in one cartridges and empty
injection molded cartridges for use in copiers and laser printers. Accounts
payable to the affiliate at September 30, 2004, was $1,310,229.
NOTE 9. RELATED PARTY TRANSACTIONS (C0NTINUED):
(D) MARKETING AND LICENSE AGREEMENT:
On June 1, 2003, the Company entered into a Marketing and Licensing Agreement
with its foreign affiliate. Per the Marketing and Licensing Agreement the
affiliate agrees to indemnify and hold harmless the Company for any costs and
expenses arising from any defective licensed product, and/or any recalled
licensed product including litigation arising therefrom. Further the affiliate
agrees to credit the Company for product cost, shipping and related expenses
arising from any defective licensed product, and/or any recalled licensed
product. Effective April 1, 2004, the parties agreed to amend the Marketing and
Licensing Agreement to reduce the costs of the product to the Company and to
include a royalty payment by the Company to the affiliate based on the net
profit realized upon the sale of the products, after certain marketing expenses
of the Company.
(E) NOTES PAYABLE:
On March 14, 2002, the Company borrowed $500,000 from director, Sueling Wang, on
an unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and was evidenced in writing. On September 2, 2002, the note was
modified to extend the term to March 1, 2005, provide for a $100,000 principal
payment, decrease the interest rate to 6% per annum, provide for interest only
payments through February 28, 2003, and 24 monthly payments of principal with
interest extra beginning on April 1, 2003, in the amount of $7,500. The Company
borrowed the $500,000 to meet a supplier commitment for product. Principal and
interest paid Sueling Wang on the note from January 1 through September 30,
2004, was $67,500 and $906, respectively. As of September 30, 2004 the principal
outstanding was $37,500.
On August 21, 2002, the Company borrowed $100,000 from director, Jui-Chi Wang,
on an unsecured basis. The loan bears interest at the rate of 6% per annum,
matures on March 1, 2005 and is evidenced in writing. The Company borrowed this
amount in order to repay $100,000 borrowed from director Sueling Wang on March
14, 2002. The note is interest only through February 28, 2003, and then is fully
amortizing over 24 months with principal and interest payments payable monthly
beginning April 1, 2003 in the amount of $4,434. Principal and interest paid
Jui-Chi Wang on the note from January 1 through September 30, 2004 was $37,967
and $1,939, respectively. As of September 30, 2004 the principal outstanding was
$21,840.
On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, matures on March 1, 2005 and is
evidenced in writing. The Company borrowed this amount in order to make a
principal payment due on its industrial development bond in the approximate
amount of $255,000, for the acquisition of capital equipment in the approximate
amount of $125,000 and for general corporate purposes. The note is interest only
through February 28, 2003, and then is fully amortizing over 24 months with
principal and interest payments payable monthly beginning April 1, 2003 in the
amount of $22,170. Principal and interest paid Jui-Hung Wang on the note from
January 1 through September 30, 2004 was $189,834 and $9,693, respectively. As
of September 30, 2004 the principal outstanding was $109,198.
(F) COMMON STOCK
On March 6, 2003, the Company received from Chi Fu Investment Co Ltd $6,075,000
of subscription proceeds for the public sale of 4,500,000 of its common shares
at a price of $1.35 per share in its offering on Form SB-2 filed with the
Securities and Exchange Commission. Chi Fu Investment Co Ltd is a wholly owned
subsidiary of the Company's affiliate, General Plastic Industrial Co., Ltd, and
as of September 30, 2004, Company directors Jui-Hung Wang, Jui-Chi Wang,
Jui-Kung Wang, Sueling Wang and Yi Jen Wang each owned 8.0%, 8.4%, 1.8%, 0.4%
and 2.4%, respectively, of General Plastic Industrial Co., Ltd.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussions should be read in conjunction with our condensed
financial statements and the related notes thereto.
BACKGROUND
On June 28, 2000, Color Imaging, formerly known as Advatex Associates, Inc.
merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and Logical
Imaging Solutions and Color Image became wholly-owned subsidiaries of Advatex.
On December 31, 2000, Color Image was merged with and into Color Imaging. On
September 30, 2002, we divested Logical Imaging Solutions in exchange for 1.7
million shares of our common stock and warrants to purchase up to 15% of the
common stock of Digital Color Print or Logical Imaging Solutions. As the result
of our disposing of Logical Imaging Solutions, Inc. we no longer offer printing
systems to commercial printers nor the support services and consumables related
thereto. As a further result of Color Imaging's divestiture of Logical Imaging
Solutions, our investments in the furthering of Logical Imaging Solutions'
technologies and carrying its operations have ceased. Significantly, since the
merger on June 28, 2000, Color Imaging had invested approximately $2.35 million
in the operations of Logical Imaging Solutions and the development of its
technologies.
COLOR IMAGING, INC.
Since 1989, Color Imaging has developed, manufactured and marketed products used
in electronic printing. Color Imaging formulates and manufactures black text and
specialty toners, including color and magnetic character recognition toners for
numerous laser printers, facsimile machines and analog and digital photocopiers.
Color Imaging's toners permit the printing of a wide range of user-selected
colors and also the full process color printing of cyan, yellow, magenta and
black. Magnetic character recognition toners enable the printing of magnetic
characters that are required for the high-speed processing of checks and other
financial documents. Color Imaging also supplies other consumable products used
in electronic printing and photocopying, including toner cartridges, cartridge
components, photoreceptors and imaging drums.
Color Imaging has continually expanded its product line and manufacturing
capabilities. This expansion, including expansion through sourcing from
strategic partners, has led to the creation over the years of hundreds of
different black text, color, magnetic character recognition and specialty toner
formulations, including aftermarket toners and imaging products for printers and
facsimile machines manufactured by Brother(TM), Canon(TM), Delphax(TM), Hewlett
Packard(TM), IBM(TM), Lexmark(TM), Sharp(TM), Xerox(TM), Minolta(TM), Mita(TM),
Panafax(TM), Pentax(TM), Pitney Bowes(TM), Epson(TM), Fuji-Xerox(TM),
Toshiba(TM), Kyocera(TM), Okidata(TM), and Panasonic(TM). Color Imaging also
manufactures and/or markets toners for use in Ricoh(TM), Lanier(TM),
Gestetner(TM), Savin(TM), Sharp(TM), Xerox(TM), Canon(TM), Minolta(TM),
Konica(TM), and Toshiba(TM) copiers. Color Imaging markets branded products
directly to OEMs and its aftermarket products worldwide to distributors and
re-manufacturers of laser printer toner cartridges and to OEM, distributors and
dealers of copier products.
STRATEGY
Our strategy for growing revenue and operating profit is to expand, including
through strategic acquisition(s), our printer and copier products business. The
key elements of our strategy are (1) increasing vertical integration by
supplying complete toner and cartridge devices, (2) capitalizing on our research
and development expertise of producing specialty, color and digital copier and
or multifunctional device toners, (3) exploiting the efficiencies associated
with the investment made in manufacturing facilities, (4) expanding our sources
for products from strategic suppliers that we can add value to or resell and
that complement our product lines, (5) adding offices/warehouses to improve
distribution to customers in the United States and Europe and (6) broadening our
sales channels.
GOALS AND FOCUS FOR THE NEXT FIVE YEARS
We are of the belief that to remain a public company and offer our stockholders
both attractive value and liquidity we should have sales of at least $100
million to $150 million per year, earnings before interest, income taxes,
depreciation and amortization of $15 million to $20 million and move our stock
to a major exchange. We are prepared to grow our Company both internally through
the introduction of uniquely competitive products as well as through mergers and
or acquisitions, even though such an event could mean a change in our management
or control. We have met with a specialist of the American Stock Exchange and
explored the possibility of listing with American Stock Exchange when our sales,
profitability and outlook are such that we would benefit from a major exchange
listing. In the alternative, we have not ruled out the possibility of going
private or being taken private in a merger or acquisition, should that
eventuality be deemed to be in the best interest of our stakeholders.
10
LAST FIVE YEARS
We expanded manufacturing capacity four-fold and improved production efficiency,
raised capital in a private placement and public offering, divested ourselves of
an unprofitable subsidiary in which we had invested $2.3 million and have
substantially moved away from low margin (commodity-like) bulk laser toner and
parts products to finished copier and laser printing products, increasing sales
and margins. While margins may decrease in the near terms from the introduction
and success of lower margin all in one products, we expect margins overall to
continue to improve as more of our color copier products are sold. For the year
ended December 31, 2001, our sales reached $30 million, with our three largest
customers accounting for 70% (some $21 million) of those sales, and by the end
of 2004 we expect these customers to account for only about $6.5 million of our
net sales, down some $14.5 million or 70% from 2001. The products sold to these
customers were primarily analog copier toners and developers, and our sales to
these customers of these products have rapidly declined for several reasons,
including as the products are discontinued in the market. As a result of the
decreasing sales to our largest customers, our total sales declined during 2002
and 2003, and our sales to these customers for the nine months ended September
30, 2004 have declined to approximately 32% of our $17 million of sales.
Challenged to replace the sales lost from our largest customers, we introduced
new products and expanded our sales channels. In 2003 we were the first to
introduce aftermarket, full-color, Segment 3-4, networked copier/printer/MFP
toner products and will expand it from one product (4 toners) in 2003 to as many
as 10-12 (40 or more toners) during 2004. To our knowledge we are still the only
source for these full-color toner products worldwide, other than the OEMs.
During 2003 we also introduced 100% new complicated toner cartridges, generally
referred to as all-in-one ("AIO") imaging, toner or drum cartridges with their
becoming 10% of sales so far in 2004, and will be introducing other such
products and selected color AIO products during 2004. As a result, we stemmed
the pattern of declining sales in 2004.
PRODUCTS
Our primary product focus is full-color, 100% new, finished products for
multifunctional printers/devices ("MFPs"), copiers and printers. In particular,
we are concentrating on work group/networked solutions segments, complicated all
in one cartridges and selected specialty toner products for certain industrial
applications and for the printing of magnetic characters on checks and or
financial documents. In 1999 approximately 10% of the Company's sales were
derived from finished products, while, at this time, nearly 80% of the Company's
sales are derived from finished products.
Both the 100% new AIO and full-color products are important for increasing
sales, while the largest contribution to improved profitability will come from
our full-color ("business color") finished toner products, without competition
from others except the OEMs, for the "sweet-spot" of digital multi-functional
copiers/printers. In addition, we continue to develop and offer other niche
specialty products like MICR and toners for industrial applications.
WHY 100% NEW PRODUCTS AND PRODUCT TRENDS
While remanufactured or refurbished ("remanufactured") toner cartridges for use
in printers generally have 30% of the market in units and 25% in dollar value
and are just now being introduced for use in copiers, remanufactured cartridges
have a perception with the users from past experience of being of inferior
quality even though they offer a cost savings. The quality of the some 2,500
remanufacturers in the U.S. is, by its nature, inconsistent and certain
cartridges cannot be readily remanufactured due to the technology utilized by
the OEMs. Contributing to the perception of poorer quality for these products is
the fact that remanufacturers will not always replace all of the worn parts in a
particular cartridge. The dilemma is that if too few parts are changed the
cartridge could fail prematurely or not deliver the required print quality,
while changing all of the parts subject to wear not only increases the cost of
the product but also can result in more variation in print performance to that
of the OEM. While users may save 25% or more by using a remanufactured
cartridge, as a result of past and existing quality issues remanufactured
product have consistently enjoyed only a 30% share of the market, leaving 70% of
the users buying 100% new product from the OEM. Other factors contributing the
users opting for the OEM, or new product, over remanufactured includes the
inconsistent availability of remanufactured cartridges and market confusion from
the marketing of remanufactured cartridges as compatible, remanufactured,
refurbished, new drum, 100% new parts, other descriptions, and a wide range of
prices, all of which leave the user wondering what is being purchased.
Increasingly, the OEMs have moved to prevent aftermarket companies from
supplying alternatives to their product. The OEMs accomplish this by increasing
the technological barriers with patents, chemical toners and computer chips, and
a few have used licensing arrangements (prebate programs) for their product
(Lexmark and recently Dell Computers) to make the remanufacture of their
cartridges illegal. In addition, recycle programs designed to get the OEM's
cartridge back from the user, effectively keeping it away from remanufacturers,
are growing worldwide. While recycle programs are touted as being protective of
the environment, their effect is to reduce competition from remanufacturers by
taking cartridges off the market. On the other hand, a 100% new product priced
lower than the OEM and competitively with remanufactured cartridges, redesigned
so as not to infringe on the OEM's intellectual property, is not subject to many
of the above mentioned problems. Further, with our improved financial strength,
significant trade support from our affiliated foreign supplier and expected
profitability of our color products, we believe we will not need additional
financial resources to realize our goals, excepting, perhaps, the needs that may
arise should we be successful in identifying and completing a merger or
acquisition.
11
MARKETING AND SALES
While we have changed our product mix from almost entirely bulk toners and parts
to now primarily finished products, we have also expanded our sales channels
over the last five years from almost solely unfinished printer products sold to
domestic remanufacturers, and a few distributors serving them, to distributors
and dealers worldwide of finished copier and printer products, including
acquiring large private label arrangements (OEM and distributor). As a result
our international sales have increased from approximately 10% to more than 50%
of our total sales. We accomplished this by not only acquiring significant
corporate account relationships, but by also implementing a worldwide
manufacturer's representative program, recruiting industry experienced and
successful executives for technical sales and marketing. To improve distribution
in the western United States, we opened a sales office/warehouse in Los Angeles,
California late in 2003. Now that our California office has surpassed its
breakeven point in sales, we are actively recruiting experienced sales managers
with whom we can open additional sales offices with warehouses in the northeast
and Texas, and we have begun exploring arrangements to have distribution in
Europe to better support our customers there. Also during 2003 we obtained our
first retail customers who are reselling our products in not only retail store
locations but also on the internet. During 2005 we plan to substantially
increase sales by adding as customers one or more large national office product
retailers.
STOCKHOLDER VALUE, LIQUIDITY AND MERGERS OR ACQUISITIONS
Many of our stockholders invested in our private placement that closed in 2001
at prices up to $2.00 per share and in 2003 our public offering of 4,500,000
shares of our common stock at $1.35 per share. We believe that these and our
other stockholders are expecting a return on their investment and a more liquid
market for our stock. In 2002 we divested ourselves of a subsidiary that was
losing money and had required investments by us of some $2.35 million. Its new
owner acquired several hundred thousand shares of our common stock in an
exchange thereafter and it and its management sold these shares in the market
during 2003 and 2004, contributing to the decline in our stock price of from
over $2.00 per share to the low of $0.35. Though the divestiture of the
subsidiary, the completion of our public offering and our improved operations
significantly improved the financial condition of the Company, and with cash on
hand at September 30, 2004 of $1.9 million ($0.15 per common share), our stock
price languishes and on October 14 closed at $0.48. With the belief that our
common shares were undervalued and represented a good use of some of the
Company's working capital, in 2002 our Board of Directors approved through
September 30, 2004, the repurchase of up to the lesser of $1 million or 1
million shares of our common stock. This year our Board of Directors approved
the extension of our stock repurchase program to September 30, 2005, and from
inception through September 30, 2004, the Company has repurchased 81,800 of the
Company's common shares at a cost of approximately $55,000 and at an average
price of $0.67.
We continue to be interested in making our Company more successful, more
quickly, through a successful acquisition or merger. In that regard our criteria
generally acceptable merger/acquisition candidates include:
- An experienced and capable management team that would remain.
- A sound and improving financial condition with sales of from $25
million to $75 million and earnings before interest, income
taxes, depreciation and amortization of from $4 million to $15
million.
- Products that would complement ours and offer unique competitive
advantages.
- Sales channels to include office product superstores, contract
stationers, corporate accounts, copy product distributers or
dealers.
- Distribution not only in the United States but preferably in
Europe as well.
- A core value and excellent reputation for high quality.
Our management realizes that an acquisition or merger with a company like that
described above could mean changes to both the existing management of our
Company, control over the Company's operations and, among other things, whether
or not the Company is the surviving entity or remains a public company. With
approximately 75% of our common shares controlled by directors, officers,
affiliates and or their family members, management believes that these
stockholders and others could be persuaded to vote for the completion of a
merger or acquisition that was expected to increase in the future both
stockholder value and liquidity.
At this time there are no definitive proposals for a transaction, though we
continue to seek out and engage in discussions with prospective merger or
acquisition candidates. There can be no assurance that any transaction will be
completed.
RECENT DEVELOPMENTS
Last year the Company successfully introduced 100% new color toner cartridges
for use in Ricoh's AP3800c copier, a 28 page per minute networked full-color
copier. During the quarter ended September 30, 2004, the Company introduced
color toner cartridges for Ricoh's CL5000 and CL7000 printers as well as its
1224/1232 and 2232/2238 color copiers. These Ricoh cartridges are also used by
Lanier, Gestetner, Savin and by InfoTech in Europe. During the fourth quarter
2004 the Company plans to introduce 100% new color toner cartridges for the
Ricoh CL3000 printer and the Minolta 2002/3102 copiers. The same Minolta
cartridges are also used by Konica, Kyocera Mita and Imagistics. Additionally
during the fourth quarter 2004 the Company plans to introduce color toner
cartridges for the Okidata C5100/C5300 and toners for use by remanufacturers for
use in the Okidata C5000, C7000 and C9000 series of printers and Canon's C3200
copier and HP's 9500 color printer.
12
Through September 30, 2004, the Company's net sales for 100% new all-in-one
products were:
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- ----------- -----------
2004 $ 158,311 $ 657,771 $ 919,197 N/A
2003 $ -- $ -- $ 64,414 $ 64,457
As of September 30, 2004, the backlog of the Company for these products was
$227,854.
OVERVIEW
The following discussion and analysis should be read in conjunction with our
financial data and our Financial Statements and notes appearing elsewhere in
this report.
Net sales for the three months ended September 30, 2004, increased by
approximately $318,000, or 6%, to $5.7 million compared to 2003. Net sales for
nine months ended September 30, 2004 increased by approximately $901,000, or 6%,
to $17.0 million compared to 2003. Net sales in 2004 increased primarily due to
increased sales from the Company's copier and all-in-one products, more than
offsetting the decline in sales from the sales of our two largest customers to
approximately $5,392,000 for the nine months ended September 30, 2004, compared
to approximately $7,431,000 for the same periods in 2003, a decrease of
approximately 27%. Sales to these customers consist primarily of analog copier
products, and as a result are expected to decline over time. In the three and
nine month periods ended September 30, 2004, our net sales were primarily
generated from the sale of finished consumable products for photocopying
machines and electronic printers and comprised approximately 80% and 79% of net
sales, respectively. For the three and nine month periods ended September 30,
2003, our net sales from the sale of finished products comprised approximately
78% and 73% of net sales, respectively.
Net sales made outside of the United States for the three and nine month periods
ended September 30, 2004, were approximately $2.5 and $7.8 million,
respectively, or 44% and 46% of total sales, and increased by approximately $0.3
million, or 14%, and $1.3 million, or 19%, over the same periods in 2003. This
increase in international sales resulted primarily from the increase in sales of
our color copier and all in one products to customers other than our two largest
customers.
The following table reflects the consolidated new orders, net of cancellations,
revenues and backlog as of the beginning and end of the three and nine months
ended September 30, 2004, 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
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
Three Months September 30, 2004:
Copier Products $ 1,813 $ 4,673 $ 5,285 $ 1,201
Printer Products 377 485 394 468
-------- -------- -------- --------
Total $ 2,190 $ 5,158 $ 5,679 $ 1,669
======== ======== ======== ========
(IN THOUSANDS OF DOLLARS)
Nine Months September 30, 2004:
Copier Products $ 1,896 $ 12,945 $ 13,640 $ 1,201
Printer Products 575 3,202 3,309 468
-------- -------- -------- --------
Total $ 2,471 $ 16,147 $ 16,949 $ 1,669
======== ======== ======== ========
13
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
A critical accounting policy is one that is both important to the portrayal of
Color Imaging's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its financial
statements.
VALUATION ALLOWANCE FOR ACCOUNTS RECEIVABLE. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. These allowances are based on historical experience,
credit evaluations and specific customer collection issues we have identified.
Since our accounts receivable are often concentrated in a relatively few number
of customers, a significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results.
INVENTORY VALUATION. Our inventories are recorded at the lower of standard cost
or the current estimated market value. As with any manufacturer or wholesaler,
economic conditions, cyclical customer demand, product introductions or pricing
changes of our competitors and changes in purchasing or distribution can affect
the carrying value of inventory. Demand for our products has fluctuated
significantly and may do so in the future, which could result in an increase in
the cost of inventory or an increase in excess inventory quantities on hand. As
circumstances warrant, we record lower of cost or market inventory adjustments.
In some instances these adjustments can have a material effect on the financial
results of an annual or interim period. In order to determine such adjustments,
we evaluate the age, inventory turns, estimated fair value and, in the case of
toner products, whether or not they can be reformulated and manufactured into
other products, and record any adjustment if estimated fair value is below cost.
Through periodic review of each of our inventory categories and by offering
markdown or closeout pricing, we regularly take steps to sell off slower moving
inventory to eliminate or lessen the effect of any lower of cost or market
adjustment. If assumptions about future demand or actual market conditions are
less favorable than those projected by management, write-downs of inventory
could be required, and there can be no assurance that future developments will
not necessitate further write-downs.
VALUATION OF LONG-LIVED ASSETS. We periodically evaluate whether events and
circumstances have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of our long-lived assets, such as our
investment in our toner manufacturing equipment. We have approximately $8.1
million invested in such equipment and plant improvements, with a carrying value
of $6.2 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.
14
RESULTS OF OPERATIONS
Color Imaging's net sales were $5.7 million and $16.9 million for the three and
nine months ended September 30, 2004, an increase of approximately 6% from both
the three and nine months ended September 30, 2003. The net sales by product
category were as follows:
% Increase
(Dollars in thousands) 2004 % (Decrease) 2003 %
------------ ------------ ------------ ------------ ------------
Three Months
------------
Product Category:
Cartridges and bottles
Copier finished products $ 4,146 73% 31% $ 3,166 59%
Printer finished products 394 7% (49) 773 14%
------------ ------------ ------------
4,540 80% 15 3,939 73%
Bulk toner and parts 1,139 20% (20) 1,422 27%
------------ ------------ ------------
Total net revenue $ 5,679 100% 5 $ 5,361 100%
============ ============ ============
Nine Months
----------
Product Category:
Cartridges and bottles
Copier finished products $ 11,913 70% 31 $ 9,059 56%
Printer finished products 1,486 9 (43) 2,596 16%
------------ ------------ ------------
13,399 79 15 11,655 73%
Bulk toner and parts 3,550 21 (19) 4,394 27%
------------ ------------ ------------
Total net revenue $ 16,949 100% 6 $ 16,049 100%
============ ============ ============
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,
2004 2003 2004 2003
------ ------ ------ ------
(PERCENTAGE OF NET SALES)
Net sales 100 100 100 100
Cost of sales 77 74 75 74
Gross profit 23 26 25 26
Administrative expenses 5 8 6 8
Research and development 5 5 5 6
Sales and marketing 10 8 11 7
Operating income 3 4 3 5
Interest expense - 1 - 1
Depreciation and amortization 3 8 3 5
Income before taxes 3 5 4 5
Provision for income taxes 1 2 2 2
Net income 2 3 2 3
15
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
NET SALES. Our net sales increased by $0.3 million, or 6%, to $5.7 million for
the three months ended September 30, 2004, from $5.4 million for the three
months ended September 30, 2003. Net sales made in the United States were $3.2
million for the three months ended September 30, 2004 and for the comparable
period in 2003. Net sales made outside of the United States increased by $0.3
million, or 14%, for the quarter compared to the same quarter of 2003. While net
sales for the quarter compared to that of a year ago made inside of the United
States was approximately the same, sales of copier and all in one products
increased while sales from laser and MICR products to customers other than our
two largest customers decreased. The increase in net sales for the quarter
compared to that of year ago made outside of the United States was primarily the
result of increased sales from copier and all in one products to customers other
than our two largest customers. Of the $5.6 million in net sales, $4.5 million,
or 80%, were attributable to our copier, all in one and printer finished
products, compared to 71% for the comparable period in 2003, while the net sales
of bulk toner and parts declined from 27% of net sales for the three months
ended September 30, 2003 compared to 20% for the comparable period in 2004. Net
sales to our two largest customers decreased as a percentage of our total sales
to 32% for the three months ended September 30, 2004, from 41% for the
comparable period in 2003.
COST OF GOODS SOLD. Cost of goods sold increased by $0.4 million, or 9%, to $4.4
million from $4.0 million for the three months ended September 30, 2004 for the
comparable period in 2003, primarily as the result of the increase in net sales
and secondarily from selling all in one products at lower margins. Cost of goods
sold as a percentage of net sales increased by 3 percentage points from 74% for
the three months ended September 30, 2003 to 77% for the three months ended
September 30, 2004, primarily as the result more of our net sales being derived
from lower margin all-in-one and analog copier products.
GROSS PROFIT. As a result of the above factors, gross profit was $1.3 million in
both the three months ended September 30, 2004 and 2003, while net sales for the
same period increased by $0.3 million, or 6%. Gross profit as a percentage of
net sales decreased by 3 percentage points from 26% to 23% for the three months
ended September 30, 2004, as compared to the corresponding period of the prior
year. The decrease in the percentage of gross profit resulted primarily from
more of our sales being derived from lower margin all-in-one and analog copier
products.
OPERATING EXPENSES. Operating expenses increased $26,000, or 2%, to $1,171,000
in the three months ended September 30, 2004 from $1,145,000 in the three months
ended September 30, 2003. General and administrative, selling and R&D expenses
decreased, as a percentage of net sales, to 20% in the three months ended
September 30, 2004 from 21% in the three months ended September 30, 2003 as a
result of the increase in net sales for the quarter and lower expenditures in
general and administrative expenses. General and administrative expenses
decreased approximately 28%, or $119,000 to $300,000 for the three months ended
September 30, 2004 from the comparable period in 2003, largely resulting from
decreased professional fees in connection with complying with the change in SEC
reporting requirements from Regulation SB to S-K and bonus and salary related
expenses. Selling expenses increased by $144,000, or 33%, in the three months
ended September 30, 2004 compared to the three months ended September 30, 2003.
Selling expenses increased primarily as a result of increased sales costs in
connection with the opening of our California office, the hiring of a senior
vice president for marketing and sales earlier this year, appointing a vice
president for technical sales and increased manufacturer's representative
expenses. Research and development expenses decreased by $1,000, or less than
1%, to $287,000 in the three months ended September 30, 2004, from the
comparable period in 2003.
OPERATING INCOME. As a result of the above factors, primarily the 3% decrease in
gross profit and the 2% increase in operating expenses, operating income
decreased by $72,000, or 32%, to income of $151,000 in the three months ended
September 30, 2004 from $223,000 in the three months ended September 30, 2003.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $7,000 in the three
months ended September 30, 2004 from the three months ended September 30, 2003.
The decrease was primarily the result of reduced interest bearing debt levels.
OTHER INCOME. Other income decreased by $8,000, or 14%, from income of $57,000
to income of $49,000 in the three months ended September 30, 2004 from the three
months ended September 30, 2003, primarily as the result of decreased Euro
exchange gains.
INCOME TAXES. As the result of our income from continuing operations in the
three months ended September 30, 2004, we recorded an income tax provision of
$71,900 for the period, while the income tax provisions were $100,000 for the
three months ended September 30, 2003.
16
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
NET SALES. Our net sales increased by $0.9 million, or 6%, to $17 million for
the nine months ended September 30, 2004, from $16 million for the nine months
ended September 30, 2003. Net sales made in the United States were $9.2 million,
a decrease of $0.4 million, or 4%, from $9.5 million made in the comparable
period in 2003. Net sales made outside of the United States increased by $1.3
million, or 20%, to $7.8 million for the nine months ended September 30, 2004
compared to the same nine months of 2003. The increase in net sales for the nine
months ended September 30, 2004, compared to that of a year ago resulted
primarily from the sale of our color copier and all-in-one products. Of the $17
million in net sales for the nine months ended September 30, 2004, $13.4
million, or 79%, were attributable to our finished products for use in copiers
and printers, while $3.6 million, or 21%, were derived from the sale of bulk
toners and parts. Of the $16 million in net sales for the nine months ended
September 30, 2003, $11.7 million, or 73%, were attributable to our finished
products for use in copiers and printers, while $4.3 million, or 27%, were
derived from the sale of bulk toners and parts.
COST OF GOODS SOLD. Cost of goods sold increased by $0.9 million, or 7%, to
$12.7 million from $11.8 million for the nine months ended September 30, 2004
from the comparable period in 2003. Cost of goods sold as a percentage of net
sales increased by 1 percentage point from 74% for the nine months ended
September 30, 2003 to 75% for the nine months ended September 30, 2004,
primarily as the result of the sales derived from lower margin all-in-one
products.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$29,000, or 1%, to $4,255,000 in the nine months ended September 30, 2004 from
$4,226,000 for the comparable period in 2003. Gross profit as a percentage of
net sales decreased by 1 percentage point from 26% to 25% for the nine months
ended September 30, 2004, as compared to the corresponding period of the prior
year. The decrease in the percentage of gross profit resulted primarily from
increased sales derived from lower margin all-in-one products.
OPERATING EXPENSES. Operating expenses increased $324,000 or 10% to $3.7 million
in the nine months ended September 30, 2004 from $3.4 million in the nine months
ended September 30, 2003. As a percentage of net sales general and
administrative, selling and R&D expenses, was 22% and 21%, respectively, for the
nine months ended September 30, 2004 and 2003. The increase in operating
expenses as a percentage of net sales was largely the result of the increased
selling and marketing expenses for the nine months ended September 30, 2004.
General and administrative expenses decreased approximately 21%, or $273,000 to
$1,039,000 for the nine months ended September 30, 2004 from the comparable
period in 2003, largely resulting from decreased 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
having made no provision for a bonus program in 2004. Selling expenses increased
by $593,000, or 50%, in the nine months ended September 30, 2004 compared to the
nine months ended September 30, 2003. Selling expenses increased primarily as
the result of expenses in connection with the California sales office opened at
the end of 2003 and the increased salary related expenses for newly appointed
sales executives and increased manufacturer's representative expenses. Research
and development expenses increased by $4,000, or 1%, in the nine months ended
September 30, 2004.
OPERATING INCOME. As a result of the above factors, primarily the 1% decrease in
gross profit and the 50% increase in sales and marketing expenses, operating
income decreased by $297,000, to income of $539,000 in the nine months ended
September 30, 2004 from $836,000 in the nine months ended September 30, 2003.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $70,000 in the nine
months ended September 30, 2004 from the nine months ended September 30, 2003,
or 51%. The decrease was primarily the result of reduced interest bearing debt
levels.
OTHER INCOME. Other income increased by $43,000 from income of $166,000 to
income of $209,000 in the nine months ended September 30, 2004 from the nine
months ended September 30, 2003, primarily as the result of Euro exchange gains.
INCOME TAXES. As the result of our decreased profit from operations for the nine
months ended September 30, 2004, our provision for taxes decreased from $345,000
in the nine months ended September 30, 2003 to $272,000 for the period ended
September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, and December 31, 2003, our working capital and current
ratio was approximately $7.2 million and $6.5 million and 3.39 to 1 and 2.83 to
1, respectively. Our working capital and current ratio have increased primarily
from the net proceeds we received from the public sale of our common stock
during March 2003 and our continuing profitability.
Cash provided by operating activities was $578,000 in the nine months ended
September 30, 2004 compared to $185,000 used by operations in the nine months
ended September 30, 2003. The cash provided by operating activities in the nine
months ended September 30, 2004 increased primarily due to the decrease in
inventories.
Cash used in investing activities was $167,000 in the nine months ended
September 30, 2004, compared to $388,000 in the nine months ended September 30,
2003. The decrease in cash used in investing activities in the nine months ended
September 30, 2004, was entirely attributable to decreased capital expenditures
in connection with the acquisition and installation of new factory equipment.
17
The Company has a $1.5 million revolving line of credit, as amended, with an
outstanding balance as of September 30, 2004 of $0, bearing interest at the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50%. As of September 30, 2004, the interest rate was the
one-month Libor rate of 1.84% plus 2.50% (4.34%). This revolving line of credit
has a June 30, 2005 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 Bank agreement also contains various covenants that the Company is required
to maintain, and as of September 30, 2004, the Company was in compliance with
these covenants. If the Company fails to meet these covenants in future periods,
the line of credit and letter of credit facilities may become unavailable to the
Company, and the Bank may have the right to accelerate the payment of any
outstanding amounts.
Cash used in financing activities were $696,000, primarily for the repayment of
related party debt and the July 1st principal reduction to the IDR bond, for the
nine months ended September 30, 2004 compared to cash provided by financing
activities of $2,473,000 for the same period in 2003, resulting largely from the
$5,900,000 in net proceeds received for the public sale of our common stock to
an affiliate.
On April 18, 2003, the Company 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 October 18, 2004, the Company has
repurchased 81,800 shares of our common stock for approximately $55,000, or for
an average price of $0.67 per share.
We believe that existing cash balances, cash expected to be generated by
operating activities, and funds available under our credit facility will be, in
the aggregate, sufficient to finance our operating and investing activities for
at least the next 12 months, which will include expenditures not to exceed
approximately $500,000 for manufacturing, $150,000 for research and development
equipment, $175,000 potentially for computer software upgrades to accommodate
electronic data interchange, the repurchase of our stock under the stock
repurchase program of up to the lesser of $1,000,000 or 1,000,000 shares of our
common stock and any advances made by our bank on our behalf under our
off-balance sheet arrangement of $1.5 million for a standby letter of credit
issued to a non-affiliated foreign supplier.
OFF BALANCE SHEET ARRANGEMENTS
On February 6, 2004, our Bank issued on our behalf an irrevocable standby letter
of credit in the amount of $1.5 million for the benefit of a non-affiliated
foreign supplier. The letter of credit has an expiration date of June 30, 2005,
and guarantees the payment of moneys owed the supplier for materials purchased
from them by the Company on terms from N30 to N120. At September 30, 2004, the
Company's accounts payable to this supplier was $614,846. The Company has
granted the Bank a security interest in all of the Company's assets as security
for the repayment of the line of credit and the obligations under the letter of
credit.
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, 2004, two customers accounted for
approximately 32% 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, 2004, receivables from two customers comprised 16% of
accounts receivable. A concentration of our receivables from a small number of
customers places us at risk should these receivables become uncollectible. If
any one or more of our major customers is unable to pay us it could adversely
affect our results of operations and financial condition. Color Imaging attempts
to manage this credit risk by performing credit checks, requiring significant
partial payments prior to shipment where appropriate, and actively monitoring
collections.
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APPROXIMATELY 32% OF OUR BUSINESS DEPENDS ON A FOREIGN SUPPLIER APPROVED BY TWO
OF OUR CUSTOMERS TO WHOM WE HAVE ISSUED A LETTER OF CREDIT.
Some of our products incorporate technologies that are available from a
particular foreign supplier that has been approved by one of our customers.
Approximately 32% of our sales for the nine months ended September 30, 2004 were
derived from products limited to a specific foreign supplier. For the nine
months ended September 30, 2004, we purchased 37% of our supplies from that same
foreign supplier. We do not have a written agreement with this or any other
supplier. We rely on purchase orders. To secure the payment of moneys due this
same foreign supplier we have caused our bank to issue a standby letter of
credit in the amount of $1.5 million, expiring June 30, 2005. Should we be
unable to obtain the necessary materials from this foreign supplier, including
as a result of our not being able to modify, extend or renew the letter of
credit upon expiry, product shipments could be prevented or delayed, which could
result in a loss of sales. If we are unable to fulfill existing orders or accept
new orders because of a shortage of materials, we may lose revenues and risk
losing customers.
IF OUR CRITICAL SUPPLIERS FAIL TO DELIVER SUFFICIENT QUANTITIES OF MATERIALS OR
PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER IT COULD NEGATIVELY AFFECT OUR
BUSINESS.
We use a wide range of materials in the manufacture of our products, and we use
numerous suppliers to supply materials and certain finished products. We
generally do not have guaranteed supply arrangements with our suppliers. Because
of the variability and uniqueness of customers' orders, we do not maintain an
extensive inventory of materials for manufacturing or resale. Key suppliers
include providers of special resins, toners and toner related products,
including those from our largest supplier who is also foreign, and our injection
molder affiliate that provides plastic bottles, cartridges and related
components designed to avoid the intellectual property rights of others.
Although we make reasonable efforts to ensure that raw materials, toners and
certain finished products are available from multiple suppliers, this is not
always possible; accordingly, some of these materials are being procured from a
single supplier or a limited group of suppliers. Many of these suppliers are
outside the United States, including our largest supplier, resulting in longer
lead-times for many important materials, which could cause delays in meeting
shipments to our customers. We have sought, and will continue to seek, to
minimize the risk of production interruptions and shortages of key materials and
products by:
o selecting and qualifying alternative suppliers for key materials and products;
o monitoring the financial stability of key suppliers; and o maintaining
appropriate inventories of key materials and products.
There can be no assurance that results of operations will not be materially and
adversely affected if, in the future, we do not receive in a timely and
cost-effective manner a sufficient quantity of raw materials, toners or finished
products to meet our production or customer delivery requirements.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO UTILIZE AVAILABLE MANUFACTURING
CAPACITY.
From 1999 through 2000, we expanded our manufacturing capacity by acquiring new
manufacturing equipment and moving to a larger location. Thereafter we further
expanded our capacity by placing in service additional manufacturing equipment
during 2002 and 2003, and we continue to make investments in and acquire and
install new factory equipment. To fully utilize these new additions to the
factory, new formulations for toner have to be developed specifically for
manufacture on this new equipment or orders for larger quantities of existing
toners must be obtained. While we have been successful in developing formulas
for new equipment in the past and increasing sales of many of our existing toner
products, our continued success will be dependent on our ability to develop
additional formulations or increase our sales from existing formulations and
manufacture the toners with the new equipment to achieve a reduction in
production costs. We cannot assure you that we will be successful in developing
all of the formulations needed in the future or that we will be able to
manufacture toner at a lower production cost on a regular basis or that such
products will achieve market acceptance. If we are not successful in increasing
the sales of our manufactured products, or if our existing sales from
manufactured products declines, our business will be materially and adversely
affected.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP, OR USE OR HAVE
ACCESS TO THIRD PARTIES', INTELLECTUAL PROPERTY OR PRODUCTS THAT WE CAN
COMMERCIALIZE AND THAT ACHIEVE MARKET ACCEPTANCE.
Our success depends in part on our ability to develop proprietary toner formulas
and manufacturing processes, maintain trade secret protection and operate
without infringing the proprietary rights of others. Future claims of
intellectual property infringement could prevent us from obtaining products
incorporating the technology of others and could otherwise adversely affect our
operating results, cash flows, financial position or business, as could expenses
incurred enforcing intellectual property rights against others or defending
against claims that our products or those acquired from others infringe the
intellectual property rights of another.
Success in the aftermarket imaging industry depends, in part, on developing
consumable products that are compatible with the printers, photocopiers and
facsimile machines made by the OEMs, and that have a selling price less than
that of like consumable supplies offered by
19
the OEM. For example, if the OEMs introduce chemical toners with better imaging
characteristics and higher yields, microprocessor chips that communicate between
the toner cartridge and the device, or introduce products using patented or
other proprietary technologies, then the aftermarket industry has to respond
with ongoing development programs to offer compatible products that emulate the
OEMs' without infringing upon the OEM's intellectual property.
Technical innovations are inherently complex and require long development cycles
and appropriate professional staffing. Our future business success depends on
our ability, and that of critical suppliers, to develop and introduce new
products that successfully address the changing technologies of the OEMs, meet
the customer's needs and win market acceptance in a timely and cost-effective
manner. If we do not develop and introduce products compatible with the OEM's
technologies in a timely manner in response to changing market conditions or
customer requirements, our business could be seriously harmed.
The challenges we face in implementing our business model include establishing
market acceptance of existing products and successfully developing or acquiring
new products for resale that achieve market acceptance, as well as obtaining
additional channels through which to sell various products. 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
all-in-one cartridges, 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, or that we will be
successful in increasing our sales to large regional, national or international
retailers. If we fail to successfully commercialize products we develop or
acquire for resale from third parties, or if these products fail to achieve
market acceptance, our financial condition and results of operation would be
seriously harmed.
OUR BUSINESS MIGHT BE ADVERSELY AFFECTED BY OUR DEPENDENCE ON FOREIGN BUSINESS.
We sell a significant amount of product to customers outside of the United
States. International sales accounted for 46% and 41% of net sales in the nine
months ended September 30, 2004 and 2003, respectively. We expect that shipments
to international customers will continue to account for a material portion of
net sales. During the nine month period ended September 30, 2004, our sales were
made to customers outside the United States as follows:
o Europe (including Eastern Europe) - 25%
o Mexico - 13%
o Asia/Southeast Asia - 5%
o Other - 3%
Most of our products sold internationally, including those sold to our larger
international customers, are on open account, giving rise to the added costs of
collection in the event of non-payment. On foreign customer accounts other than
those we feel are credit worthy and justify open credit terms with us, we
mitigate the risk of non-payment and collection of foreign accounts receivable
by obtaining foreign credit insurance on those customers who qualify. Further,
should a product shipped overseas be defective, the Company would experience
higher costs in connection with a product recall or return and replacement.
Most of our sales are priced in U.S. dollars, but because we began selling
products in Europe denominated in Euros during 2001, fluctuations in the Euro
could also cause our products there to become less affordable or less
competitive or we may sell some products at a loss to otherwise maintain
profitable business from a customer. We recorded gains of approximately $143,000
and $124,000 during the nine month periods ended September 30, 2004 and 2003,
respectively, as a result of foreign currency transactions.
While our business has not been materially affected in the past by foreign
business or currency fluctuations, because of our increasing dependence on
international revenues, our operating results could be negatively affected by a
continued or additional decline in the economies of any of the countries or
regions in which we do business. Periodic local or international economic
downturns, trade balance issues, changes to duties, tariffs or environmental
regulations, political instability and fluctuations in interest and currency
exchange rates could negatively affect our business and results of operations.
We cannot assure you that these factors will not have a material adverse effect
on our international sales and would, as a result, adversely impact our results
of operation and financial condition.
OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED IF WE ARE UNABLE TO RECOUP
OUR INVESTMENT IN RESEARCH AND DEVELOPMENT.
The rapid change in technology in our industry requires that we continue to make
investments in research and development in order to not only develop
technologies that function like the OEMs' and do not infringe on the OEMs'
intellectual property rights, but we must also enhance the performance and
functionality of our products and keep pace with competitive products and
satisfy customer demands for
20
improved performance, features, functionality and costs. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that we will be able to secure the financial resources necessary
to fund future development. Research and development costs typically are
incurred before we confirm the technical feasibility and commercial viability of
a product, and not all development activities result in commercially viable
products. In addition, we cannot ensure that these products or enhancements will
receive market acceptance or that we will be able to sell these products at
prices that are favorable to us. Our business could be seriously harmed if we
are unable to sell our products at favorable prices or if the market in which we
operate does not accept our products.
OUR INTELLECTUAL PROPERTY PROTECTION IS LIMITED.
We do not rely on patents to protect our proprietary rights. We do rely on a
combination of laws such as trade secrets and contractual restrictions such as
confidentiality agreements to protect proprietary rights. Despite any
precautions we have taken:
o laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies; and o policing unauthorized use of our products is difficult,
expensive and time-consuming and we might not be able to determine the extent of
this unauthorized use.
Therefore, there can be no assurance that we can meaningfully protect our rights
in such unpatented proprietary technology or that others will not independently
develop substantially equivalent proprietary products or processes or otherwise
gain access to the proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technology could enable
third parties to benefit from our technology without paying us, which could
significantly harm our business.
WE DEPEND ON THE EFFORTS AND ABILITIES OF CERTAIN SENIOR MANAGEMENT AND OTHER
KEY PERSONNEL TO CONTINUE OUR OPERATIONS AND GENERATE REVENUES.
Our success depends to a significant extent on the continued services of senior
management and other key personnel. While we do have confidentiality agreements
with executive officers and certain other key individuals, we have few
employment agreements and they may be terminated by either party upon giving the
required notice. The loss of the services of any of our executive officers or
other key employees could harm our business. Our success also depends on our
ability to attract, retain and motivate highly skilled employees. Competition
for qualified employees in the industries in which we operate is intense. If we
fail to hire and retain a sufficient number of qualified employees, our business
will be adversely affected.
WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUE AND BE UNABLE TO
MAINTAIN OUR CLIENT RELATIONSHIPS IF WE LOSE OUR PRODUCTION CAPACITY.
We manufacture all of the products we sell in our existing facility in Norcross,
Georgia. If our existing production facility becomes incapable of manufacturing
products for any reason, we may be unable to meet production requirements, we
may lose revenue and we may not be able to maintain our relationships with our
customers. Without our existing production facility, we would have no other
means of manufacturing products until we were able to restore the manufacturing
capability at our facility or develop an alternative manufacturing facility.
Although we carry business interruption insurance to cover lost revenue and
profits in an amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact on
relations with our existing customers resulting from our inability to produce
products for them.
OUR ACQUISITION STRATEGY MAY PROVE UNSUCCESSFUL.
We intend to pursue acquisitions of businesses or technologies that management
believes complement or expand the existing business. Acquisitions of this type
involve a number of risks, including the possibility that the operations of any
businesses that are acquired will be unprofitable or that management attention
will be diverted from the day-to-day operation of the existing business. An
unsuccessful acquisition could reduce profit margins or otherwise harm our
financial condition, by, for example, impairing liquidity and causing
non-compliance with lending institution's financial covenants. In addition, any
acquisition could result in a dilutive issuance of equity securities, our going
private, the incurrence of debt or the loss of key employees. Certain benefits
of any acquisition may depend on the taking of one-time or recurring accounting
charges that may be material. We cannot predict whether any acquisition
undertaken by us will be successfully completed or, if one or more acquisitions
are completed, whether the acquired assets will generate sufficient revenue to
offset the associated costs or other adverse effects. We are exploring the
possibility of a strategic merger. Any such merger could result in a change in
control of the Company. There can be no assurance that any merger or acquisition
could be successfully completed. In addition, the Company could incur expenses
in exploring a merger or acquisition transactions which are not completed.
21
COMPLIANCE WITH GOVERNMENT REGULATIONS MAY CAUSE US TO INCUR UNFORESEEN
EXPENSES.
Our black text, color and magnetic character toner supplies and manufacturing
operations are subject to domestic and international laws and regulations,
particularly relating to environmental matters that impose limitations on the
discharge of pollutants into the air, water and soil and establish standards for
treatment, storage and disposal of solid and hazardous wastes. In addition, we
are subject to regulations for storm water discharge, and as a requirement of
the State of Georgia have developed and implemented a Storm Water Pollution
Prevention Plan. We are also required to have a permit issued by the State of
Georgia in order to conduct various aspects of our business. Compliance with
these laws and regulations has not in the past had a material adverse affect on
our capital expenditures, earnings or competitive position. There can be no
assurance, however, that future changes in environmental laws or regulations, or
in the criteria required to obtain or maintain necessary permits, will not have
a material adverse affect on our operations.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AS A RESULT OF MANY FACTORS.
Our quarterly operating results fluctuate due to various factors. Some of these
factors include the mix of products sold during the quarter, the availability
and costs of raw materials or components, the costs and benefits of new product
introductions, and customer order and shipment timing. Because of these factors,
our quarterly operating results are difficult to predict and are likely to vary
in the future.
DUE TO INHERENT LIMITATIONS, THERE CAN BE NO ASSURANCE THAT OUR SYSTEM OF
DISCLOSURE AND INTERNAL CONTROLS AND PROCEDURES WILL BE SUCCESSFUL IN PREVENTING
ALL ERRORS OR FRAUD, OR IN MAKING ALL MATERIAL INFORMATION KNOWN IN A TIMELY
MANNER TO THE APPROPRIATE MANAGEMENT.
Though we have concluded with reasonable assurance that our books, records and
accounts are kept in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets, transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, receipts and expenditures and access to assets
is permitted in accordance with authorizations of management and directors of
the Company, we do not have internal auditors and we depend on a small staff
with which it is sometimes difficult to segregate certain duties or to document
our practices in policies and procedures. Further, notwithstanding management's
conclusions, the effectiveness of a system of disclosure and internal controls
and procedures is subject to certain inherent limitations, including cost and
staffing limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls and fraud. Due
to such inherent limitations, there can be no assurance that any system of
disclosure or internal controls and procedures will be successful in preventing
all errors or fraud, or in making all material information known in a timely
manner to the appropriate management.
RISKS RELATING TO OUR INDUSTRY:
WE OPERATE IN A COMPETITIVE AND RAPIDLY CHANGING MARKETPLACE.
There is significant competition in the toner and consumable imaging products
industry in which we operate. In addition, the market for digital color printers
and copiers and related consumable products is subject to rapid change and the
OEM technologies are becoming increasingly difficult barriers to market entry.
Many competitors, both OEMs and other after market firms, have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. These competitors
may be able to devote substantially more resources to developing their business
than we can. Our ability to compete depends upon a number of factors, including
the success and timing of product introductions, marketing and distribution
capabilities and the quality of our customer support. Some of these factors are
beyond our control. In addition, competitive pressure to develop new products
and technologies could cause our operating expenses to increase substantially.
THE IMAGING SUPPLIES INDUSTRY IS COMPETITIVE AND WE ARE RELATIVELY SMALL IN SIZE
AND HAVE FEWER RESOURCES IN COMPARISON WITH MANY OF OUR COMPETITORS.
Our industry includes large original equipment manufacturers of printing and
photocopying equipment and the related imaging supplies, as well as other
manufacturers and resellers of aftermarket imaging supplies, with substantial
resources to support customers worldwide. Our future performance depends, in
part, upon our ability to continue to compete successfully worldwide. All of the
original equipment manufacturers and many of our other competitors are
diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products, some of which compete with the
products that we offer. These competitors may bundle their products in a manner
that may discourage customers from purchasing our products. In addition, we face
competition from smaller emerging imaging supply companies whose strategy is to
provide a portion of the products and services that we offer. Loss of
competitive position could impair our prices, customer orders, revenues, gross
margins, and market share, any of which would negatively affect our operating
results and financial condition. Our failure to compete successfully with these
other companies would seriously harm our business. There is risk that larger,
better-financed competitors will develop and market more advanced products than
those that we currently offer or may be able to offer, or that competitors with
greater financial resources may decrease prices thereby putting us under
financial pressure. The occurrence of any of these events could have a negative
impact on our revenues.
22
OUR PRODUCTS HAVE SHORT LIFE CYCLES AND ARE SUBJECT TO FREQUENT PRICE
REDUCTIONS.
Rapidly evolving and increasingly difficult technologies, frequent new product
introductions and significant price competition characterize the markets in
which we operate. Consequently, our products have short life cycles, and we must
frequently reduce prices in response to product competition. Our financial
condition and results of operations could be adversely affected if we are unable
to manufacture new and competitive products in a timely manner. Our success
depends on our ability to develop and manufacture technologically advanced
products, price them competitively, and achieve cost reductions for existing
products. Technological advances require sustained research and development
efforts, which may be costly and could cause our operating expenses to increase
substantially.
OUR FINANCIAL PERFORMANCE DEPENDS ON OUR ABILITY TO SUCCESSFULLY MANAGE
INVENTORY LEVELS, WHICH IS AFFECTED BY FACTORS BEYOND OUR CONTROL.
Our financial performance depends in part on our ability to manage inventory
levels to support the needs of new and existing customers. Our ability to
maintain appropriate inventory levels often depends on factors beyond our
control, including unforeseen increases or decreases in demand for our products
and production and supply difficulties. Demand for our products can be affected
by product introductions or price changes by competitors or by us, the life
cycle of our products, or delays in the development or manufacturing of our
products. Our operating results and ability to increase the market share of our
products may be adversely affected if we are unable to address inventory issues
on a timely basis.
RISKS RELATING TO OWNING OUR COMMON STOCK:
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN APPROXIMATELY 28% OF THE OUTSTANDING
SHARES OF COMMON STOCK, AND AN AFFILIATE OWNS 35% OF OUR COMMON STOCK, ALLOWING
THESE STOCKHOLDERS TO CONTROL MATTERS REQUIRING APPROVAL OF THE STOCKHOLDERS.
As a result of such ownership, and potential increased ownership, by our
officers and directors, other investors will have limited control over matters
requiring approval by the stockholders, including the election of directors.
Such concentrated control may also make it difficult for the stockholders to
receive a premium for their shares of our common stock in the event we enter
into transactions that require stockholder approval. In addition, certain
provisions of Delaware law could have the effect of making it more difficult or
more expensive for a third party to acquire, or of discouraging a third party
from attempting to acquire control of us.
EXERCISE OF WARRANTS AND OPTIONS WILL DILUTE EXISTING STOCKHOLDERS AND COULD
DECREASE THE MARKET PRICE OF OUR COMMON STOCK.
As of October 20, 2004, we had issued and outstanding 12,699,005 shares of
common stock, 100,000 warrants and 1,420,000 options to purchase additional
shares of common stock. The existence of the remaining warrants and options may
adversely affect the market price of our common stock and the terms under which
we obtain additional equity capital.
WE MAY FACE POTENTIAL REGULATORY ACTION OR LIABILITY IN CONNECTION WITH OUR 2001
PRIVATE PLACEMENT.
Our issuance of common stock and warrants in a private placement which was
completed in 2001 could subject us to potential adverse consequences, including
securities law liability and the voiding of contracts entered into in connection
with the private placement. If our activities or the activities of other parties
in the 2001 private placement are deemed to be inconsistent with securities laws
under Section 29 of the Securities Exchange Act of 1934 or our activities or the
activities or the activities of other parties are deemed to be inconsistent with
the broker dealer registration provisions of Section 15(a) of the Exchange Act:
o we may be able to void our obligation to pay transaction-related fees in
connection with the private placement and we may receive reimbursement for
fees already paid;
o persons with whom we have entered into securities transactions that are
subject to these transaction-related fees may have the right to void these
transactions; and
o we may be subject to regulatory action.
Due to the inherent uncertainties involved with the interpretation of securities
laws, we are unable to predict the following: the validity of any potential
liability in connection with our private placement, the outcome of any
regulatory action or potential liability or the outcome of voiding transactions
in connection with the private placement. The defense of any regulatory action
or litigation and any adverse outcome could be costly and could have a material
adverse effect on our financial position and results of operations and could
divert management attention.
23
OUR COMMON STOCK IS LISTED ON THE OVER-THE-COUNTER (OTC) BULLETIN BOARD, WHICH
MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECREASE.
Because our common stock is listed on the OTC Bulletin Board, the liquidity of
our common stock is impaired, not only in the number of shares that are bought
and sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media, if any, of us. As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
OUR STOCK PRICE MAY BE VOLATILE AND AN INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. These factors
include:
o progress of our products through development and marketing;
o announcements of technological innovations or new products by us or our
competitors;
o government regulatory action affecting our products or competitors'
products in both the United States and foreign countries;
o developments or disputes concerning patent or proprietary rights;
o actual or anticipated fluctuations in our operating results;
o the loss of key management or technical personnel;
o the loss of major customers or suppliers;
o the outcome of any future litigation;
o changes in our financial estimates by securities analysts;
o fluctuations in currency exchange rates;
o general market conditions for emerging growth and technology companies;
o broad market fluctuations;
o recovery from natural disasters; and
o economic conditions in the United States or abroad.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE THE EFFECT OF MAKING IT MORE
EXPENSIVE OR MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE, OR TO ACQUIRE CONTROL
OF, US.
Our certificate of incorporation makes it possible for our board of directors to
issue preferred stock with voting or other rights that could impede the success
of any attempt to change control of us. Our certificate of incorporation and
bylaws eliminate cumulative voting, which may make it more difficult for a
minority stockholder to gain a seat on our board of directors and to influence
board of directors' decision regarding a takeover. Delaware Law prohibits a
publicly held Delaware corporation from engaging in certain business
combinations with certain persons, who acquire our securities with the intent of
engaging in a business combination, unless the proposed transaction is approved
in a prescribed manner. This provision has the effect of discouraging
transactions not approved by our board of directors as required by the statute
which may discourage third parties from attempting to acquire us or to acquire
control of us even if the attempt would result in a premium over market price
for the shares of common stock held by our stockholders.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of our
public filings or press releases or in any oral statements made by us or any of
our officers or other persons acting on our behalf. The important factors that
could affect forward-looking statements are subject to change, and we disclaim
any obligation or duty to update or modify these forward-looking statements.
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements may be identified by the use of forward-looking
terms such as "believes," "expects," "may", "will," "should" or "anticipates" or
by discussions of strategy that involve risks and uncertainties. From time to
time, we have made or may make forward-looking statements, orally or in writing.
These forward-looking statements include statements regarding our ability to
borrow funds from financial institutions or affiliates, to engage in sales of
our securities, our intention to repay certain borrowings from future sales of
our securities or cash flow, the ability to expand capacity by placing in
service additional manufacturing equipment and making use of that capacity, our
expected acquisition of business or technologies, our plans for broadening our
sales channels and the outlets for our products, our expectation that shipments
to international customers will continue to account for a material portion of
net sales, anticipated future revenues, our introduction of new products and our
increasing our sales from all in one cartridges, digital copier, color and
magnetic character recognition toner products, sales, our expectations for
operations, demand, technology, products, business ventures, major customers,
major suppliers, retention of key officers, management or
24
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. These factors include the "Risk Factors"
discussed above.
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 96% of our transactions are denominated in U.S. dollars,
excepting those sales in Euros to a few customers 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 recognized
a net foreign currency transaction gain of $143,000 in the nine months ended
September 30, 2004, and we recognized a net foreign currency transaction gain of
$149,000, $2,858 and a loss of $1,877 in the years ended December 31, 2003, 2002
and 2001, respectively. Our contract pricing for our products sold in Euros is
currently at the rates of 1.00 and 1.17 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, 2004, there were no amounts
outstanding under the line of credit agreement and, accordingly, a sustained
increase in the reference rate of 1% would not cause our annual interest expense
to change.
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 $784,000 in overnight repurchase arrangements with our bank and
$440,000 invested in short-term securities, which are available for sale, at
September 30, 2004. We received dividends of approximately $5,300 and $25,300
for the three and nine months ended September 30, 2004, while recording a net
asset value decrease of approximately $500 and $11,200 for the quarter and nine
months ended September 30, 2004, respectively.
Management believes that a reasonable change in raw material prices could have a
material impact on future earnings or cash flows, because we generally are not
able to offset increases to our costs with higher prices for our products.
ITEM 4. CONTROLS AND PROCEDURES
a) On October 22, 2004, our Chief Executive Officer and Chief Financial Officer
participated in a meeting during which there was an evaluation of our disclosure
controls and procedures as of September 30, 2004. Based on such evaluation, they
believe such controls and procedures are effective.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that its Disclosure Controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been
25
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 and Chief Financial Officer are involved in
ongoing evaluations of internal controls. On October 22, 2004, in anticipation
of the filing of this Form 10-Q, they reviewed our internal controls and have
determined, based on such review, that, there have been no significant changes
in our internal controls or in other factors that would significantly affect our
internal controls during the quarter ended September 30, 2004.
26
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 23, 2003, the Company's registration statement on Form SB-2,
registering up to 7 million shares of the Company's common stock, was declared
effective (Registration Statement No. 333-76090), and the offering was commenced
by the Company's officers and directors. On March 13, 2003, the Company
completed the public sale of 4,500,000 shares of the Company's common stock at a
price of $1.35 per share, whereby the Company received $6,075,000 in gross
proceeds from an affiliate, and the Company terminated the offering before the
sale of all 7 million of registered shares. The net proceeds received by the
Company, after expenses of $174,416, was $5,900,584. None of the aforementioned
expenses were direct or indirect payments to directors, officers, their
associates or persons owning ten (10) percent or more of the common stock of the
Company.
On April 18, 2003, the Company established a stock repurchase program under
which the Company may purchase on the open market the lesser of the aggregate
value of $1,000,000 or 1,000,000 shares in compliance with Rule 10b-18, and we
have reallocated proceeds for this program. Though management is authorized to
repurchase the Company's common stock in the aggregate amount of $1,000,000, due
to the limitations imposed by Rule 10b-18 and the limited number of shares
repurchased to date in accordance therewith, the use of proceeds per Form SB-2
as reflected herein is based upon no more than $500,000 being expended for this
purpose.
Our intended uses, as reallocated, of the $6,075,000 of proceeds received from
the public sale of our common stock, and our uses through September 30, 2004,
are listed below in descending order of priority:
Purpose: Amount Used Reallocated Remaining
------------------------------------------ ----------- ------------ ------------ -----------
Accounts payable and other corporate
and offering expenses . . . . . . . . . . $ 1,000,000 $ (115,042) $ (884,958) $ 0
To retire debt (1) . . . . . . . . . . . . $ 350,000 $ (324,301) $ (25,699) $ 0
To retire debt (2) . . . . . . . . . . . . $ 1,050,000 $ (956,883) $ (93,117) $ 0
To retire debt (3) . . . . . . . . . . . . $ 0 $ (235,000) $ 235,000 $ 0
To reduce IDR Bond debt (4). . . . . . . . $ 0 $ (548,928) $ 846,264 $ 297,336
To acquire capital assets. . . . . . . . . $ 1,500,000 $ (318,774) $ 0 $ 1,181,226
To repurchase our stock (5). . . . . . . . $ 0 $ (54,886) $ 500,000 $ 445,114
For other general corporate purposes
including working capital . . . . . . . . $ 2,175,000 $ (986,072) $ (577,490) $ 611,438
----------- ------------ -----------
Total: $ 6,075,000 $(3,539,886) $ 2,535,114
Pending application:
-------------------
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,035,114
Pay down of revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500,000
----------------
(1) On November 30, 2000, we entered into a loan for $500,000 with a 5-year
term, secured by specific manufacturing equipment, maturing November 30, 2004,
with General Electric Capital Corporation for the purchase of toner
manufacturing equipment. The interest rate is 10.214% and the monthly principal
and interest payments were $10,676.39.
(2) On June 24, 1999, we entered into a loan for $1,752,000 with a 7-year term,
secured by our business assets, maturing June 24, 2006, with SouthTrust Bank for
the refinancing of obligations owing the bank for the acquisition of equipment
and that due under a previous working capital line of credit. The interest rate
is 7.90% per annum and the monthly principal and interest payments were
$27,205.00.
(3) On July 24, 1999, as amended, we entered into a borrowing arrangement under
a revolving line of credit in the maximum amount of $2.5 million. During March
2003 we temporarily used $1,735,000 of our proceeds from our public offering on
Form SB-2 to pay down the line of credit to $0, which at that time had an
interest rate of 3.8375%. On June 16, 2003, we renewed and restructured the line
of credit with the bank, reducing the maximum availability to $1.5 million and
permanently retiring $235,000.
(4) On June 1, 1999, the Development Authority of Gwinnett County (the
Authority), issued $4,100,000 of industrial development revenue bonds on behalf
of the Company and Kings Brothers, LLC. The 1.09% revenue bonds, 2.09% inclusive
of the 1% letter of credit fee, as of June 30, 2004, are payable in varying
annual principal and monthly interest payments through July 2019. The bond is
secured, as amended on April 7, 2003, by specific equipment assets of the
Company and by real property owned by Kings Brothers, LLC. A loan agreement
between the Authority and the Company and Kings Brothers, LLC allows funds to
effectively pass through the Authority to the Company. The majority of the
proceeds, $3,125,872, were used by the Company to relocate, purchase and install
certain manufacturing equipment, while $974,128 was used by Kings Brothers, LLC
to pay down the mortgage on the real property leased to the Company. The Company
and the Related Party are jointly obligated to repay any outstanding debt. As of
September 30, 2004, the bond principal outstanding was $2,725,000 and the
portion due from Kings Brothers, LLC was $647,428. The $846,264 of principal to
27
be repaid under the IDR bond, as reallocated hereinabove, is the Company's share
of the bond principal due and payable on the 1st of July 2003, 2004 and 2005,
respectively.
(5) From July 2003 through September 30, 2004, under the repurchase program the
Company has repurchased 81,800 shares of our common stock on the open market for
$54,886, or at an average price of $0.67. There remains $945,114 available for
future common stock repurchases under the authorization of the board of
directors and $445,114 as allocated by management hereinabove.
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.
The Company's share of the principal payment due under the IDR Bond on July 1,
2003, in the amount of $266,840 has been paid, and as of September 30, 2004,
$282,088 was paid on the IDR bond debt due July 1, 2004. The above table
reflects the July 1, 2003 and 2004 payments on the IDR bond. The Company's share
of the principal payment due under the IDR bond on July 1, 2005, is $297,336.
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 owning ten (10) percent or more of the Company's common stock were made
with proceeds from the Company's offering on Form SB-2
ISSUER MARKET PURCHASES OF EQUITY SECURITIES
On April 18, 2003, the Company established a stock repurchase program under
which the Company may purchase on the open market the lesser of the aggregate
value of $1,000,000 or 1,000,000 shares in compliance with Rule 10b-18 until
September 30, 2005, as extended by the board of directors during the annual
meeting held on May 18, 2004, and we have reallocated proceeds for this program.
From July 2003 through December 31, 2003, under the repurchase program the
Company repurchased 44,500 shares of our common stock on the open market at an
average price of $065. From January 1 through September 30, 2004, under the
repurchase program the Company has repurchased 37,300 shares of our common stock
on the open market at an average price of $0.70. Since the inception of the
repurchase program the Company has repurchased 81,800 shares of our common stock
for $54,866 and at an average price of $0.67. There remains $945,134 available
for future common stock repurchases, as authorized by the board of directors.
-----------------------------------------------------------------------------------------------------------
ISSUER (MARKET) PURCHASE OF EQUITY SECURITIES
-----------------------------------------------------------------------------------------------------------
Maximum Number
Total Number of (or Approximate
Shares Purchased Dollar Value) of
Total Number Average Price as Part of Publicly Shares that May Be
of Shares Paid per Announced Plans Purchased Under the
Period Purchased Share ($) or Programs Plans or Programs
-------------------- -------------------- -------------------- -------------------- --------------------
During 2003 44,500 0.65 44,500
During 2004
-------------------
January 7,000 0.72 7,000
February 3,500 0.76 3,500
March 7,000 0.77 7,000
April 7,000 0.78 7,000
May 7,000 0.70 7,000
June 0 -- 0
July 0 -- 0
August 2,900 0.45 2,900
September 2,900 0.47 2,900
-------------------- -------------------- -------------------- --------------------
Total 2004 37,300 0.70 37,300 1,000,000
-------------------- -------------------- -------------------- --------------------
Total 81,800 0.67 81,800 1,000,000
28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6 -EXHIBITS
(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.
29
Exhibit
No. Description
--------- --------------
4.4 Development Authority of Gwinnett County, Georgia Industrial
Development Trust Indenture dated June 1, 1999, incorporated by
reference to Exhibit 4.27 to the Registration statement on Form
SB-2 filed May 31, 2002.
4.5 Loan Agreement between the Company, Kings Brothers LLC and the
Development Authority of Gwinnett County, Georgia dated June 1,
1999, incorporated by reference to Exhibit 4.28 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.6 Joint Debtor Agreement dated June 28, 2000 by and among Color
Image, Inc., Kings Brothers, LLC, Dr. Sueling Wang, Jui-Chi Wang,
Jui-Kung Wang, and Jui-Hung Wang, incorporated by reference to
Exhibit 4.28 to the Registration statement on Form SB-2 filed
February 11, 2002.
4.7 First Amendment to Joint Debtor Agreement dated January 1, 2001
by and among Color Imaging, Kings Brothers, LLC, Dr. Sueling
Wang, Jui-Chi Wang, Jui-Kung Wang, and Jui-Hung Wang,
incorporated by reference to Exhibit 4.29 to the Registration
statement on Form SB-2 filed February 11, 2002.
4.8 $500,000 Promissory Note between Color Imaging and Sueling Wang
dated March 14, 2002, incorporated by reference to Exhibit 4.34
to the Registration statement on Form SB-2 filed April 11, 2002.
4.9 $500,000 Promissory Note between Color Imaging and Jui Hung Wang
dated August 21, 2002, incorporated by reference to Exhibit 4.50
to the Registration statement on Form SB-2 filed October 2, 2002.
4.10 $100,000 Promissory Note between Color Imaging and Jui Chi Wang
dated August 21, 2002, incorporated by reference to Exhibit 4.51
to the Registration statement on Form SB-2 filed October 2, 2002.
4.11 First Note Modification Agreement between Sueling Wang and Color
Imaging dated August 27, 2002, incorporated by reference to
Exhibit 4.52 to the Registration statement on Form SB-2 filed
October 2, 2002.
4.12 Amended and restated $1,500,000 revolving note between Color
Imaging and SouthTrust Bank dated June 16, 2003, incorporated by
reference to Exhibit 4.12 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
4.13 Amended and restated loan and security agreement between Color
Imaging and SouthTrust Bank dated June 16, 2003, incorporated by
reference to Exhibit 4.13 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
4.14 Amendment to Loan Documents between Color Imaging and SouthTrust
Bank dated June 29, 2004, incorporated by reference to Exhibit
4.14 to the Registrant's Form 10-Q for the quarter ended June 30,
2004.
31.1+ Chief executive officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2+ Chief financial officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1+ Chief executive officer's certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2+ Chief financial officer's certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ------------------------
+ Filed herewith.
* Management contract or compensatory arrangement or plan.
(1) Pursuant to Rule 601(b)(2), the schedules and exhibits to this Agreement
shall not be filed. A list of the schedules and exhibits is contained on the
last page of the Agreement. The Registrant agrees to furnish supplementally a
copy of any of the omitted schedules and exhibits to the Securities and Exchange
Commission upon request.
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 26, 2004 Jui-Kung Wang
Chief Executive Officer
/S/ MORRIS E. VAN ASPEREN
--------------------------------------
Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
31