UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Commission file number 0-18450
COLOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3453420
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
4350 Peachtree Industrial Blvd, Suite 100
Norcross, GA 30071
(Address of Principal Executive Offices) (Zip Code)
(770) 840-1090
(770) 242-3494 Facsimile
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required by file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (4,601,011shares) was approximately $2,070,455 at June 30, 2004
(the last business of day of the most recently completed second fiscal quarter)
based on the closing price of our common stock of $0.45.
The number of common shares outstanding as of February 18, 2005 was 12,690,305.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS.............................................................3
ITEM 2 PROPERTIES..........................................................19
ITEM 3 LEGAL PROCEEDINGS...................................................19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................19
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS'
MATTERS AND ISSUER PURCHASES OF EQUITY............................20
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA................................24
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........32
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................33
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................53
ITEM 9A CONTROLS AND PROCEDURES.............................................53
ITEM 9B OTHER INFORMATION...................................................53
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................54
ITEM 11 EXECUTIVE COMPENSATION..............................................56
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......59
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................59
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES..............................61
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES.............................62
SIGNATURES..........................................................65
PART I
ITEM 1. BUSINESS
OVERVIEW
Since 1989, Color Imaging, Inc. ("Color Imaging") has developed, manufactured
and marketed products used in electronic printing. Color Imaging formulates and
manufactures black text and specialty toners, including color and magnetic
character recognition toners for numerous laser printers, facsimile machines and
analog and digital photocopiers. Color Imaging's toners permit the printing of a
wide range of user-selected colors and also the full process color printing of
cyan, yellow, magenta and black. Magnetic character recognition toners enable
the printing of magnetic characters that are required for the high-speed
processing of checks and other financial documents. Color Imaging also supplies
other consumable products used in electronic printing and photocopying,
including toner cartridges and imaging drums.
Color Imaging has continually expanded its product line and manufacturing
capabilities. This expansion has led to the creation and marketing of black
text, color, magnetic character recognition and specialty toner formulations,
including aftermarket toners and imaging products for printers and facsimile
machines manufactured by Brother(TM), Canon(TM), Fuji-Xerox(TM), Hewlett
Packard(TM), Lexmark(TM), Kyocera(TM), Minolta(TM), Okidata(TM). Color Imaging
also manufactures and/or markets toners for use in Canon(TM), Gestetner(TM),
Kyocera/Mita(TM), Konica(TM), Lanier(TM), Minolta(TM), Ricoh(TM), Savin(TM),
Sharp(TM), Toshiba(TM), Xerox(TM) copiers. Color Imaging also offers product
enhancements, including imaging supplies that enable standard laser printers to
print magnetic character recognition data. Color Imaging markets branded
products directly to OEMs and its aftermarket products worldwide to distributors
and re-manufacturers of laser printer toner cartridges and to dealers and
distributors of copier products.
Color Imaging's business is derived from a single segment, imaging supplies and
related consumables, used in copiers, printers and facsimile machines. The
percentage of our net sales derived from finished products, both manufactured
and purchased from others for resale, for the years ended December 31, 2004,
2003 and 2002 were 80% 72% and 77%, respectively, while our sales of bulk toners
and parts for the same periods were 20%, 28% and 23%, respectively. While we
sell bulk toners, we believe that the net sales of finished products will
continue to be the majority of our net sales. Sales to our two largest customers
will continue to decline and were approximately 29% of 2004 net sales and are
expected to be about 13% of 2005 net sales. These two customers both have, in
the past, elected to produce themselves some of the products formerly
manufactured by us, and since many of the products are older analog copier
toners and developers whose sales in the marketplace are declining in general,
the Company only expects to continue to sell these products to these two
customers through the end of 2005. For the 2004 year, one unrelated
distributor/customer of imaging supplies accounted for approximately 24% of net
sales from continuing operations. For the 2003 year, two unrelated
distributors/customers of imaging supplies accounted for 19% and 14% of net
sales from continuing operations. For the 2002 year, these same two unrelated
distributors/customers of imaging supplies accounted for 47% and 20% of net
sales from continuing operations. The Company does not have a written or oral
contract with any of these customers. All sales are made through purchase
orders.
BACKGROUND
Color Imaging, formerly known as Advatex Associates, Inc., was incorporated in
Delaware in 1987. On May 16, 2000, Advatex, Logical Acquisition Corp., Color
Acquisition Corp., Logical Imaging Solutions, Inc. and Color Image, Inc. entered
into a Merger Agreement and Plan of Reorganization pursuant to which Logical
Acquisition Corp. merged with and into Logical Imaging Solutions and Color
Acquisition Corp. merged with and into Color Image. Pursuant to the Merger
Agreement, stockholders of Logical Imaging Solutions and Color Image exchanged
their shares for shares of common stock of Advatex. Logical Imaging Solutions
stockholders converted their shares into shares of common stock of Advatex at
the ratio of 1.84843 shares of common stock of Advatex for each one share of
Logical Imaging Solutions. Color Image stockholders converted their shares into
shares of common stock of Advatex at the ratio of 15 shares of common stock of
Advatex for each one share of Color Image. Following the conversion of shares by
Logical Imaging Solutions and Color Image stockholders, stockholders of Logical
Imaging Solutions and Color Image owned approximately 85% of the outstanding
shares of common stock of Advatex and stockholders of Advatex before the merger
owned approximately 15% and Logical Imaging Solutions and Color Image became
wholly-owned subsidiaries of Advatex. The purpose of the merger was to combine
Color Image's toner and consumable expertise and manufacturing plant with
Logical Imaging Solutions' advanced printing system capabilities to offer a
wider product range and ensure product supply for Logical Imaging Solutions'
Solution Series printing systems. Management also anticipated that the merger
with a company that was subject to the Securities Exchange Act of 1934 would
also permit the reorganized business to offer shares to other acquisition
candidates, in lieu of cash.
On July 7, 2000, pursuant to a vote of our stockholders, we changed our name to
Color Imaging, Inc. On December 31, 2000, Color Image, Inc. was merged with and
into Color Imaging. On September 11, 2002, we entered into a share exchange
agreement with Digital Color Print, Inc. and four of our directors to divest our
wholly owned subsidiary, Logical Imaging Solutions, Inc. On September 30, 2002,
the share exchange transaction was completed and Color Imaging disposed of its
wholly-owned subsidiary, Logical Imaging Solutions, Inc., in a common stock
share exchange with Digital Color Print, Inc., which is owned by four former
directors. Since its founding in 1993, Logical Imaging Solutions, Inc.'s
development efforts have focused on creating a high-speed digital variable data
printing system for commercial printing applications that combines software,
hardware and consumable products not only for black text for image printing but
also in color. See "Discontinued Operations", and Note 3 of Notes to Financial
Statements.
3
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 first quarter
2005 the Company plans to introduce 100% new color toner cartridges for the
Ricoh CL3000 printer, Okidata C5100/C5300 printer, Konica/Minolta C350 "Bizhub,"
Kyocera/Mita C2230, Imagistics cm3520 and the Minolta 2002/3102 copiers. The
Minolta 2002/3102 cartridges are also used by Konica, Kyocera/Mita and
Imagistics. Additionally, toners for use by remanufacturers will be available
for the HP9500 color printer and the Canon 3200 color copier.
Through December 31, 2004, the Company's net sales for 100% new all-in-one
products were:
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL
----------- ----------- ----------- ----------- ----------- -----------
2004 $ 158,311 $ 657,771 $ 919,197 $ 772,064 $ 2,507,343
2003 $ -- $ -- $ 64,414 $ 64,457 $ 128,871
As of December 31, 2004, the backlog of the Company for these products was
$106,778.
MARKET OVERVIEW AND INDUSTRY
Color Imaging's market for imaging products is the installed base of electronic
printing devices: laser printers and facsimile machines and analog and digital
copiers. Color Imaging competes within this market with products supplied by the
OEM manufacturers and with other suppliers of aftermarket imaging products.
Additional products in this category include enhancement products that extend
the capabilities of the OEM's product, such as magnetic character recognition
toners that enable the printing of magnetic characters on checks and other
financial documents. We market our products worldwide and regionally primarily
to distributors of imaging products who sell to dealers and large end-users. To
a lesser extent, we sell to OEMs, re-manufacturers and a few dealers directly.
We believe the trends in the electronic printing and photocopying industry, and
of original equipment manufacturers of these devices, are (1) the introduction
of products utilizing digital and color printing technologies as opposed to
analog and black text printing, (2) offering business color printing solutions
at a cost per page that are increasingly competitive, (3) reduce the selling
price of their devices while increasing their printing speed, functionality and
networkability, (4) increase the technological barriers through the use of
specialized toners (chemical toners incorporating polyesters and proprietary raw
materials), patents and microprocessors (machine readable microchips with
internet connectivity for supplies management), (5) endeavor to control the
market for consumable supplies through the use of OEMs' technologies as barriers
to market entry for re-manufacturers of these products or manufacturers of like,
new, aftermarket products and (6) utilizing prebate (license arrangements) and
recycling programs to reduce the number of OEM cartridges available for
remanufacture in the aftermarket. Over time, we believe that digital printers
and photocopy machines that print at speeds of up to 100 pages per minute will
merge into one device, delivering multifunctional capability and color printing,
that are net-workable at both lower prices and operating costs to the end user.
Consumables for these devices will become increasingly difficult to
remanufacture and for full-color machines take longer to bring to market,
thereby reducing the market share of re-manufacturers and increasing the
opportunity of increased market share for newly manufactured finished product
and for color toner aftermarket suppliers, such as Color Imaging. In our
experience, new aftermarket consumable products are typically 25% cheaper than
OEM's consumables with like functionality - a savings to the consumer. Seeing
that the aftermarket has increasingly gained acceptance as product quality has
steadily improved, we believe that Color Imaging is positioning itself to take
advantage of these trends.
Color Imaging's solution is, through its own technological capability and that
of strategic suppliers, to develop and introduce compatible, newly manufactured,
aftermarket products, ahead of other aftermarket competitors, at a price
significantly below that of the OEM and make these products increasingly
available through distribution channels closer to the end-user.
GROWTH STRATEGY
Our strategy for growing revenue and operating profit is to expand, including
through strategic acquisition(s), our printer and copier products business. The
key elements of our strategy are (1) increasing vertical integration by
supplying complete toner and cartridge devices, (2) capitalizing on our research
and development expertise of producing specialty, color and digital copier and
or multifunctional device toners, (3) exploiting the efficiencies associated
with the investment made in manufacturing facilities, (4) expanding our sources
for products from strategic suppliers that we can add value to or resell that
complement our product lines, (5) expanding into new geographic markets to
customers in the United States and Europe, and (6) broadening our sales
channels.
Color Imaging's development of new toner products is focused on providing an
aftermarket product for electronic printing devices that achieves a high level
of market acceptance. Color Imaging endeavors to offer equivalent toner products
with equal or better quality at lower prices than the OEM's toner product.
4
Color Imaging is committed to increasing the value added of its toner products
to the end user by providing not only the toners but also the toner cartridge or
canister that is compatible with the OEM's equipment. Color Imaging believes
that by developing toner cartridge and canister devices for specific electronic
printing or copying machines, and integrating those devices with compatible
toners, the market for Color Imaging's toner products will expand. Color Imaging
believes that this approach will also result in increased gross margins.
Color Imaging will continue to emphasize its high margin specialty toner
capability, primarily color toners, while providing lower margin MICR and black
text toners in commodity bulk to a few customers. The bulk quantity of MICR
black text toners is currently being offered to maximize the efficiencies of
Color Imaging's manufacturing plant. The availability of this complete research
and development and manufacturing facility allows for the continued expansion of
specialty, particularly color, toner products.
During 2005, Color Imaging expects to increase its sales of higher margin
digital, color toners and substantially increase the sales of new all-in-one,
toner and drum cartridges for certain popular personal copiers and laser
printers. The recent introduction of new color products in 2003 and 2004 and the
expansion of our sales channels is expected to help Color Imaging increase
revenues in 2005, offsetting the further loss of revenues from our two largest
customers. While the all-in-one cartridges will be at margins lower than those
realized on products utilizing our digital, color and magnetic character
recognition toners, we expect these products to contribute to improved gross and
net profitability during 2005.
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 $10 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.
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
margins. 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 during 2004 these customers account for only about $6.3 million of
our net sales, down some $14.7 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 have declined.
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 expanded it from one product (4 toners) in 2003 to 4 (16
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 11% of
sales 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, some 80% of the Company's
sales are derived from finished products.
Both the full-color products and 100% new AIO 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.
5
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, and they are, 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.
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 approximately
45% 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, and we are actively
recruiting experienced sales executives with whom we can penetrate other large
dealer accounts throughout the United States. 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 the sales of our color copier products by obtaining more large dealer
customers for these products across the United States.
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, our stock price
languishes and on February 4, 2005, closed at $0.52. 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. During 2004 our Board of Directors approved
the extension of our stock repurchase program to September 30, 2005, and from
inception through December 31, 2004, the Company has repurchased 84,700 of the
Company's common shares at a cost of approximately $56,100 and at an average
price of $0.66.
6
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:
o An experienced and capable management team that would remain.
o 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.
o Products that would complement ours and offer unique competitive
advantages.
o Sales channels to include office product superstores, contract
stationers, corporate accounts, copy product distributers or dealers.
o Distribution not only in the United States but preferably in Europe
and worldwide as well. o 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. However, management has had preliminary
discussions with a number of potential merger candidates over the last few years
without coming to any conclusion on a transaction. The Company continues to
experience declining or level sales. Given the high cost of maintaining a public
company, management and the Board have started to explore going private as a
strategic alternative.
At this time there are no definitive proposals for a transaction, either merger
or going private, though we continue to seek out and engage in discussions with
prospective merger or acquisition candidates and have formed a special committee
of the board of directors to investigate strategic alternatives, including going
private. We have found that as a result of our being public, and if we were to
remain public, it is more difficult for a private company to be merged with us,
since they must have 3 years of audited financial statements and be in
compliance with SOX 404 by 12/31/05. There can be no assurance that any merger
or going private transaction will be completed.
Management believes the strengths of the Company in any merger or acquisition
transaction include:
o Our Company
o Liquidity and profitability with a strong and improving financial
condition.
o Sales growth now, of higher margin products, overcoming the
decline of OEM and private label distributor sales.
o 15 years of toner, particularly color and specialty products,
development and manufacturing experience.
o Capability of manufacturing conventionally some chemical toners
and relationships with some aftermarket chemical toner
manufacturers.
o Customers domestically and internationally.
o Our Products
o Full-color copier toners in production and being sold without
competition from other aftermarket suppliers.
o A license to market our affiliate's 100% new, complex cartridges,
including all in one imaging, toner and drum cartridges.
o MICR and other specialty products in addition to black text
toners.
o Our Organization
o Significant toner research and development organization and
capability.
o A sales organization made up of direct employees and
manufacturer's representatives that is increasing the Company's
direct sales to copier dealers and select distributors.
o A management team not dependent on a single key person.
o Our Affiliate
o Strong product development support from our Taiwan affiliate,
including empty cartridges and 100% new all in one printer and
copier cartridges.
o A potential partner for manufacturing in China at their assembly
and remanufacturing facility being established in Shanghai.
o Favorable trade terms given to us, resulting in significant
working capital support.
DISCONTINUED OPERATIONS
In 2002 four of our directors, Messrs. Brennan, St. Amour, Langsam and Hollander
had expressed concern over the potential restructure or reorganization of our
subsidiary, Logical Imaging Solutions, and the lack of the planned use of any
proceeds from our then pending offering on Form SB-2 for the further development
of its technology, as they were of the opinion that Logical Imaging Solutions'
business prospects demanded a greater investment. After informal discussion with
Dr. Sueling Wang and Mr. Van Asperen beginning in July 2002, they submitted an
informal proposal whereby a new company, Digital Color Print, Inc., to be
initially owned by Messrs. Brennan, St. Amour, Langsam and Hollander, would
acquire the capital stock of Logical Imaging Solutions in exchange for shares of
our common stock and warrants to purchase shares of the common stock of Logical
Imaging Solutions and/or Digital Color Print approximating up to 15% of its then
outstanding shares.
7
On September 11, 2002, an agreement was reached and was later amended on
September 20, 2002, to provide a minimum of $100,000 of cash to be on hand for
Logical Imaging Solutions, and the number of shares to be received by Color
Imaging was increased from 1.6 million to 1.7 million. In addition, Mr. Brennan
agreed that his employment agreement would be immediately terminated upon the
transaction's closing and severance of $6,057.69 per two-week period, plus
reimbursement of health and life premium costs, formerly payable through June
10, 2003 would terminate as of March 10, 2003.
After having met all of the conditions, including the approval of the majority
of the disinterested directors and having obtained a fairness opinion that
indicated the transaction was fair to Color Imaging and its stockholders
unaffiliated with Digital Color Print, the divestiture of Logical Imaging
Solutions and the share exchange was completed on September 30, 2002. Effective
upon the closing, Messrs. St. Amour, Langsam and Hollander resigned as directors
of Color Imaging. Mr. Brennan had previously resigned as a director of Color
Imaging effective September 10, 2002.
Based upon guidance provided by APB 29 in connection with accounting for
nonmonetary transactions, the 1,700,000 million shares of our common stock
exchanged for all of the shares of common stock of Logical Imaging Solutions was
valued at approximately $2.68 million: the fair value (approximating the net
book value) of Logical Imaging Solutions, after converting approximately $2.35
million of intercompany advances to capital, plus the transaction costs
incurred. The warrants that we received for approximately 15% of Logical Imaging
Solutions, or Digital Color Print, have not been assigned any value, since they
are not cashless, increase from $1.50 to $2.25 and then to $3.25 per share each
year over three years, expire after three years, are not registered for resale
and have no current market.
Following the closing of the transaction, Digital Color Print offered to
exchange shares of its common stock for shares of common stock held by our
stockholders who were, per a press release of Digital Color Print, holders of
record as of October 1, 2002. We were not and did not sponsor, encourage, or
bear any responsibility for the offering by Digital Color Print. Conditions of
the share exchange agreement included that Digital Color Print shall be solely
responsible for such offering, including compliance with all applicable laws,
and it shall not accept the tender of more than an aggregate of 2,600,000
shares, inclusive of the 1,700,000 of our common shares that Digital Color Print
exchanged for all of the common stock of Logical Imaging Solutions. If Digital
Color Print completes its intended tender offer for a total of 2.6 million
shares of our issued and outstanding common stock, inclusive of the 1.7 million
exchanged for all of the common stock of Logical Imaging solutions, it will have
up to 900,000 shares of our publicly traded shares which it could sell in the
market to fund its operations. Digital Color Print has regularly sold our common
shares it received in exchange for its shares in the market throughout 2003.
Further, the agreement provides that neither Logical Imaging Solutions nor
Digital Color Print shall take any action in connection with their offering that
could have the effect of reducing the number of our stockholders below 325. For
additional information regarding this matter, please refer to our annual report
on Form 10-K for the year ended December 31, 2002, filed with the Securities and
Exchange Commission on March 11, 2003.
PRODUCTS
Our aftermarket product net revenues for each of our fiscal years ended December
31, 2004, 2003, and 2002, by category, from continuing operations are:
Category 2004 2003 2002 Primary Product Function
- --------------------- ------------- ------------- ------------- ---------------------------------
Cartridges & Bottles
All in one $ 2,507,343 $ 128,871 $ 0 Black text imaging, toner and
drum cartridges for use in laser
printers and personal copiers
Photocopiers 13,965,474 11,796,402 16,580,635 Black text and color toners for
digital and analog photocopiers
Printers & Facsimiles 1,402,246 3,308,612 3,533,074 Black text, color, specialty and
magnetic character recognition
toners for laser and thermal
printing devices
Bulk Toner & Parts 3,959,766 5,823,716 7,886,600 Filling new or remanufactured OEM
printer or copier cartridges or
bottles and new replacement parts
------------- ------------- ------------- for printers and photocopiers
$21,834,829 $21,057,601 $28,000,309
============= ============= =============
8
RESEARCH AND DEVELOPMENT
Our research and development activities for the past several years have focused
on black text, specialty, color and magnetic character toner formulations, and
more recently polyester-based toners for full-color digital printing and
photocopying. Color Imaging is committed to increasing revenues through new
product introductions which requires research and development expenditures,
innovative designs, significant development and testing activities and
functional solutions.
For the twelve months ended December 31, 2004, our research and development
expenditures were approximately $1,172,000, or about the same as they were for
the prior year. For the twelve months ended December 31, 2003, our research and
development expenditures increased approximately $229,000, or 24%, to $1,176,000
from approximately $947,000 for the twelve months ended December 31, 2002.
It is necessary to make strategic decisions from time to time as to which
technologies will produce products with the greatest future potential.
Occasionally, a customer will ask Color Imaging to develop toner products for
their exclusive resale, and in that event the customer generally will
financially support Color Imaging's development activities. In turn, Color
Imaging also will occasionally work with suppliers to develop proprietary
technology for Color Imaging's exclusive use. These strategic relationships have
benefited us in the past, and we intend to continue to pursue such relationships
for new products.
Our chemists and consultants are focused on development of imaging products and
manufacturing systems that will increase efficiency, lower production costs or
improve the quality of our products. With certain products, we may elect to
purchase key components from third party suppliers, such as toner, bottles and
or print cartridges. We cannot predict whether we can continue to develop the
technologically advanced products required to remain competitive or that such
products will achieve market acceptance.
INTELLECTUAL PROPERTY
Color Imaging relies upon trade secrets and unpatented proprietary technology.
Color Imaging seeks to maintain the confidentiality of such information by
requiring employees, consultants and other parties to sign confidentiality
agreements and by limiting access by parties outside Color Imaging to such
information. There can be no assurance, however, that these measures will
prevent the unauthorized disclosure or use of this information or that others
will not be able to independently develop such information. Additionally, there
can be no assurance that any agreements regarding confidentiality and
non-disclosure will not be breached, or, in the event of any breach, that
adequate remedies would be available to Color Imaging.
We seek to protect technology, inventions and improvements that we consider
important through the use of trade secrets. While we do not believe that any of
our products infringe any valid claims of patents or other proprietary rights
held by third parties, there can be no assurance that these products do not
infringe any patents or other proprietary rights held by third parties. If an
infringement claim were made, the costs incurred to defend the claim could be
substantial and adversely affect us, even if we were ultimately successful in
defending the claim. If our products were found to infringe any proprietary
right of a third party, we could be required to pay significant damages or
license fees to the third party or cease production. Litigation may also be
necessary to enforce patent rights held by us, or to protect trade secrets or
techniques owned by us. Any such claims or litigation could result in
substantial costs and diversion of effort by management.
Specifically, we believe patent protection is of limited usefulness for our
technologies, because competitors have the ability (even if we had a patent) to
develop substantially equivalent technology. Therefore, we rely on trade secrets
and other unpatented proprietary technology. There can be no assurance that we
can meaningfully protect our rights in such unpatented proprietary technology or
that others will not independently develop substantially equivalent proprietary
products or processes or otherwise gain access to our proprietary technology. We
also seek to protect our trade secrets and proprietary know-how, in part, with
confidentiality agreements with employees and consultants. There can be no
assurance that the agreements will not be breached, that we will have adequate
remedies for any breach or that our trade secrets will not otherwise become
known to or independently developed by competitors.
MARKETING AND DISTRIBUTION
We market and distribute our products worldwide through both our direct sales
force and manufacturer's representatives. Color Imaging's products are marketed
primarily to distributors, OEMs, dealers and for laser and MICR products
primarily to re-manufacturers.
In the twelve months ended December 31, 2004, 2003, and 2002, net revenues
primarily generated from the sale of finished consumable products for electronic
printers and photocopying machines, comprised approximately 80%, 72% and 72% of
net sales, respectively. For the twelve months ended December 31, 2004, 2003,
and 2002, net sales to our largest imaging products customer accounted for 24%,
29% and 47%, respectively. Though our sales are on purchase orders, this
customer typically issues purchase orders three months in advance of the product
delivery date and provides us with an additional two-month rolling forecast. We
expect our sales to our largest customer to further decreased during the year
ended December 31, 2005.
9
We believe that our operations are in a single industry segment involving the
development and manufacture of products used in electronic printing. All of our
assets are domestic. Our sales to unaffiliated customers by geographic region
are as follows:
2004 2003 2002
--------------------- -------------------- --------------------
United States $ 11,922,183 55% $ 12,507,490 59% $ 17,728,982 63%
Europe/East Europe 5,539,810 25% 4,416,152 21% 5,638,161 20%
Mexico 2,488,963 11% 2,502,831 12% 2,477,862 9%
Asia/Southeast Asia 1,026,517 5% 814,387 4% 1,253,862 5%
Other 857,356 4% 816,741 4% 901,442 3%
------------ ----- ------------ ----- ------------ -----
Total $ 21,834,829 100% $ 21,057,601 100% $ 28,000,309 100%
============ ===== ============ ===== ============ =====
COMPETITION
The markets for our products are competitive and subject to rapid changes in
technology. Color Imaging in particular competes principally on the basis of
quality, flexibility, and service with a pricing strategy typically 25% lower
than that of the OEM.
Color Imaging's competitors in the toner market include large businesses with
significantly greater resources in the high-volume commodity toner market, as
well as smaller companies in the specialty, color and magnetic character toner
markets. In addition, other companies offer remanufactured toner cartridges and
printer parts that are lower priced.
Color Imaging's strategy requires that it continue to develop and market new and
innovative products at competitive prices. New product announcements by our
principal competitors, however, can have, and in the past have had, a material
adverse effect on our financial results. Such new product announcements can
quickly undermine any technological competitive edge that one manufacturer may
enjoy over another and set new market standards for quality, speed and function.
Furthermore, knowledge in the marketplace about pending new product
announcements by our competitors may also have a material adverse effect on us
inasmuch as purchasers of these products may defer purchasing decisions until
the announcement and subsequent testing of such new products.
In recent years, Color Imaging and its principal competitors, which have
significantly greater financial, marketing and technological resources than
Color Imaging, have regularly lowered prices on both printer and copier imaging
supplies and are expected to continue to do so in the future. Color Imaging is
vulnerable to these pricing pressures which, if not mitigated by cost and
expense reductions, may result in lower profitability and could jeopardize our
ability to grow or maintain market share. We expect that, as we compete more
successfully with our larger competitors, our increased market presence may
attract more frequent challenges, both legal and commercial, from our
competitors, including claims of possible intellectual property infringement.
Canon(TM), Xerox(TM) and Ricoh(TM) are the market leaders in the toner market
whose aggregate sales we believe represent approximately 75% to 85% of worldwide
toner sales. As with our other products, if pricing pressures are not mitigated
by cost and expense reductions, our ability to maintain or build market share
and profitability could be adversely affected.
Like certain of our competitors, Color Imaging is a supplier of laser printer
and MICR toners. We cannot assure you that we will be able to compete
effectively for a share of this business. In addition, we cannot assure you that
our competitors will not develop new compatible laser printer or MICR products
that may perform better or sell for less than our products. Independent
manufacturers compete for the aftermarket business under either their own brand,
private label, or both, using price, aggressive marketing programs, and flexible
terms and conditions to attract customers. Depending on the product, prices for
compatible products produced by other manufacturers are offered below our
prices, in some cases significantly below our prices.
MANUFACTURING
We operate a toner manufacturing facility in Norcross, Georgia that we moved
into during 1999 and 2000. We have made significant capital investment in this
facility to increase production capacity and improve manufacturing efficiencies
to lower processing costs of our toner products. The installation of additional
equipment was completed in the second quarter 2002, and the equipment was placed
in service during the fourth quarter of 2002. This equipment is an integral part
of our plan to further increase production capacity, improve quality and
efficiency and to significantly lower the costs of our toner products. At this
time we plan to increase our color toner manufacturing capacity during 2005. Our
goal for the last three years has been to reduce average toner product costs by
one-half, particularly for black text toner products, in response to
management's assessment of the continuing price reductions for these products in
the marketplace.
10
MATERIALS AND SUPPLIERS
We procure a wide variety of materials and components for use in our
manufacturing processes, including raw materials, such as chemicals and resins,
bottles, caps, cartridges and boxes. Although many of these materials and
components are available from multiple sources, we often utilize preferred
supplier relationships to ensure more consistent quality, cost and delivery.
Often Color Imaging's toner formulations are dependent on one or more materials
produced by only one vendor, since the formula was developed based on that
material's unique characteristics. Alternative materials exist, but the
differences in performance characteristics could require Color Imaging to modify
the original formula and/or its manufacturing processes to obtain a marketable
product based on the new material. Further, some chemicals are only available
from one supplier. Should these chemicals not be available from any one of these
suppliers, there can be no assurance that production of certain of our products
would not be disrupted. Some of our products incorporate technologies that are
available from a particular supplier that has been approved by one of our
customers. Approximately 24% and 34% of our sales for the years ended December
31, 2004 and 2003 were derived from products limited to a specific supplier. For
the years ended December 31, 2004 and 2003, we purchased approximately 34% and
43% of our materials and supplies from that same supplier. We do not have a
long-term agreement with this supplier, and the supplier may raise its prices at
any time. In the event that these materials and supplies, as well as those other
raw materials that are sourced from a single supplier, are not available to us,
our production could be disrupted. Such a disruption could materially harm our
business.
BACKLOG
Our backlog decreased approximately $520,000 or 21% to $1.95 million as of
December 31, 2004, from $2.47 million at the same date of the previous year. The
decrease in the backlog was primarily due to decreased orders from our largest
customer. While the backlog for our copier product decreased 26% as of December
31, 2004 from the same period in 2003, our backlog for printer products
decreased 5%. Since our largest customer purchases copier products from us and
generally gives us most of our orders for future delivery, and the sale of
copier products to them will continue to decline, our backlog for copier
products is expected to further decline in 2005. Our backlog decreased
approximately $718,000 or 23% to $2.5 million as of December 31, 2003, from $3.2
million at the same date of the previous year. The decrease in the backlog was
primarily due to decreased orders from our two largest customers. While the
backlog for our copier product decreased 30% as of December 31, 2003 from the
same period in 2002, our backlog for printer products increased 22%. The orders
included in our backlog are generally credit approved customer purchase orders
usually scheduled to ship in the next twelve months. Color Imaging schedules
production of its products based on order backlog, customer commitments and
forecasts and demand. However, customers may delay delivery of products or
cancel orders suddenly and without sufficient notice, subject to possible
cancellation penalties. Due to possible customer changes in delivery schedules
and cancellations of orders, and the fact that not all of our customers give us
orders for future delivery, Color Imaging's backlog at any particular date is
not necessarily indicative of actual sales for any succeeding period. Delays in
delivery schedules and/or a reduction of backlog during any particular reporting
period could have a material adverse effect on our business and results of
operations. In addition, a backlog does not provide any assurance that Color
Imaging will realize a profit from those orders or indicate in which period
revenue will be recognized. See the disclosures in Item 7 of this report for a
breakdown of our backlog and net sales by product category.
GOVERNMENT REGULATION
Color Imaging's manufacturing operations are subject to laws and regulations
relating to environmental matters that impose limitations on the discharge of
pollutants into the air, water and soil and establish standards for the
treatment, storage and disposal of solid and hazardous wastes, and Color Imaging
is required to have a permit in order to conduct various aspects of its
business. The Air Protection Branch of the State of Georgia's Department of
Natural Resources Environmental Protection Division issued a permit to Color
Imaging in 2000 to construct and operate a copier and printer toner
manufacturing facility at our headquarters. The permit is conditioned upon
compliance by us with the provisions of the Georgia Air Quality Act, and
specifically the Rules, Chapter 391-3-1, in effect. In addition to operating and
maintaining the equipment, in a manner consistent with good air pollution
control practice to minimize emissions, we must maintain records, conduct tests,
and comply with certain allowable emissions and operational limitations. The
permit is subject to revocation, suspension, modification or amendment for
cause, including evidence of our noncompliance. Compliance with these laws and
regulations in the past has not had a material adverse effect on our capital
expenditures, earnings or competitive position. However, there can be no
assurance that future changes in environmental laws, regulations or the criteria
required to obtain or maintain necessary permits will not have a material
adverse effect on us.
EMPLOYEES
As of December 31, 2004, 2003 and 2002 the Company's full and part-time
employees, including those with advanced degrees and those engaged in operations
(manufacturing and quality assurance), research and development ("R&D"), sales
and marketing or general and administrative ("SG&A") positions were as follows:
Total No. Full & Part Time No. with Advanced Degrees Number by Department
Calendar Number of ------------------------ -------------------------- ----------------------------------------
Year-end Employees Full-time Part-time PhD Masters Operations R&D SG&A
------------ ------------ ------------ ----------- ------------ ------------- ------------ ------------ ------------
2004 81 79 2 5 11 36 10 33
2003 91 91 5 9 41 11 39
2002 76 75 1 4 9 47 12 17
11
None of our employees is represented by a labor union or is covered by a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relations with employees to be good.
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 twelve months ended December 31, 2004, one customer accounted for
approximately 24% of our net sales. We do not have a contract with this customer
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 this
customer, including through an acquisition, other business combination or the
loss by them of business from their customers could have a substantial and
adverse effect on our business. We have in the past, and may in the future, lose
one or more major customers or substantial portions of our business with one or
more of our major customers. If we do not sell products or services to customers
in the quantities anticipated, or if a major customer reduces or terminates its
relationship with us, market perception of our products and technology, growth
prospects, and financial condition and results of operation could be harmed.
OUR RELIANCE ON SALES TO A FEW MAJOR CUSTOMERS AND GRANTING CREDIT TO THOSE
CUSTOMERS PLACES US AT FINANCIAL RISK.
As of December 31, 2004, receivables from one customer comprised 12% of accounts
receivable. A concentration of our receivables from a small number of customers
places us at risk should these receivables become uncollectible. If any one or
more of our major customers is unable to pay us it could adversely affect our
results of operations and financial condition. Color Imaging attempts to manage
this credit risk by performing credit checks, requiring significant partial
payments prior to shipment where appropriate, and actively monitoring
collections.
APPROXIMATELY 29% 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 two of our customers.
Approximately 29% of our sales for the twelve months ended December 31, 2004
were derived from products limited to a specific foreign supplier. For the
twelve months ended December 31, 2004, we purchased 34% 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, amended and reduced to $1 million on
January 5, 2005, that expires June 30, 2005. We expect to renew the letter of
credit prior to its expiration. 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.
12
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 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 those 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.
13
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 45% and 41% of net sales in the twelve
months ended December 31, 2004 and 2003, respectively. We expect that shipments
to international customers will continue to account for a material portion of
net sales. During the twelve month period ended December 31, 2004, our sales
were made to customers outside the United States as follows:
o Europe (including Eastern Europe) - 25%
o Mexico - 11%
o Asia/Southeast Asia - 5%
o Other - 4%
Most of our products sold internationally, including those sold to our larger
international customers, are on open account, giving rise to the added costs of
collection in the event of non-payment. On foreign customer accounts other than
those we feel are credit worthy and justify open credit terms with us, we
mitigate the risk of non-payment and collection of foreign accounts receivable
by obtaining foreign credit insurance on those customers who qualify. Further,
should a product shipped overseas be defective, 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 $154,583, $149,110 and
$2,858 during the twelve month periods ended December 31, 2004, 2003 and 2002,
respectively, as a result of foreign currency transactions.
While our business has not been materially affected in the past by foreign
business or currency fluctuations, because of our increasing dependence on
international revenues, our operating results could be negatively affected by a
continued or additional decline in the economies of any of the countries or
regions in which we do business. Periodic local or international economic
downturns, trade balance issues, changes to duties, tariffs or environmental
regulations, political instability and fluctuations in interest and currency
exchange rates could negatively affect our business and results of operations.
We cannot assure you that these factors will not have a material adverse effect
on our international sales and would, as a result, adversely impact our results
of operation and financial condition.
OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED IF WE ARE UNABLE TO RECOUP
OUR INVESTMENT IN RESEARCH AND DEVELOPMENT.
The rapid change in technology in our industry requires that we continue to make
investments in research and development in order to not only develop
technologies that function like the OEMs' and do not infringe on the OEMs'
intellectual property rights, but we must also enhance the performance and
functionality of our products and keep pace with competitive products and
satisfy customer demands for improved performance, features, functionality and
costs. There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development. Research and development costs
typically are incurred before we confirm the technical feasibility and
commercial viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these products at prices that are favorable to us. Our business could be
seriously harmed if we are unable to sell our products at favorable prices or if
the market in which we operate does not accept our products.
OUR INTELLECTUAL PROPERTY PROTECTION IS LIMITED.
We do not rely on patents to protect our proprietary rights. We do rely on a
combination of laws such as trade secrets and contractual restrictions such as
confidentiality agreements to protect proprietary rights. Despite any
precautions we have taken:
o laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies; and
o policing unauthorized use of our products is difficult, expensive and
time-consuming and we might not be able to determine the extent of this
unauthorized use.
Therefore, there can be no assurance that we can meaningfully protect our rights
in such unpatented proprietary technology or that others will not independently
develop substantially equivalent proprietary products or processes or otherwise
gain access to the proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technology could enable
third parties to benefit from our technology without paying us, which could
significantly harm our business.
14
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 either party upon giving the required notice may
terminate them. 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 that are not completed.
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
15
conclusions, the effectiveness of a system of disclosure and internal controls
and procedures is subject to certain inherent limitations, including cost and
staffing limitations, judgments used in decision making, assumptions regarding
the likelihood of future events, soundness of internal controls and fraud. Due
to such inherent limitations, there can be no assurance that any system of
disclosure or internal controls and procedures will be successful in preventing
all errors or fraud, or in making all material information known in a timely
manner to the appropriate management.
RISKS RELATING TO OUR INDUSTRY:
WE OPERATE IN A COMPETITIVE AND RAPIDLY CHANGING MARKETPLACE.
There is significant competition in the toner and consumable imaging products
industry in which we operate. In addition, the market for digital color printers
and copiers and related consumable products is subject to rapid change and the
OEM technologies are becoming increasingly difficult barriers to market entry.
Many competitors, both OEMs and other after market firms, have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. These competitors
may be able to devote substantially more resources to developing their business
than we can. Our ability to compete depends upon a number of factors, including
the success and timing of product introductions, marketing and distribution
capabilities and the quality of our customer support. Some of these factors are
beyond our control. In addition, competitive pressure to develop new products
and technologies could cause our operating expenses to increase substantially.
THE IMAGING SUPPLIES INDUSTRY IS COMPETITIVE AND WE ARE RELATIVELY SMALL IN SIZE
AND HAVE FEWER RESOURCES IN COMPARISON WITH MANY OF OUR COMPETITORS.
Our industry includes large original equipment manufacturers of printing and
photocopying equipment and the related imaging supplies, as well as other
manufacturers and resellers of aftermarket imaging supplies, with substantial
resources to support customers worldwide. Our future performance depends, in
part, upon our ability to continue to compete successfully worldwide. All of the
original equipment manufacturers and many of our other competitors are
diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products, some of which compete with the
products that we offer. These competitors may bundle their products in a manner
that may discourage customers from purchasing our products. In addition, we face
competition from smaller emerging imaging supply companies whose strategy is to
provide a portion of the products and services that we offer. Loss of
competitive position could impair our prices, customer orders, revenues, gross
margins, and market share, any of which would negatively affect our operating
results and financial condition. Our failure to compete successfully with these
other companies would seriously harm our business. There is risk that larger,
better-financed competitors will develop and market more advanced products than
those that we currently offer or may be able to offer, or that competitors with
greater financial resources may decrease prices thereby putting us under
financial pressure. The occurrence of any of these events could have a negative
impact on our revenues.
OUR PRODUCTS HAVE SHORT LIFE CYCLES AND ARE SUBJECT TO FREQUENT PRICE
REDUCTIONS.
Rapidly evolving and increasingly difficult technologies, frequent new product
introductions and significant price competition characterize the markets in
which we operate. Consequently, our products have short life cycles, and we must
frequently reduce prices in response to product competition. Our financial
condition and results of operations could be adversely affected if we are unable
to manufacture new and competitive products in a timely manner. Our success
depends on our ability to develop and manufacture technologically advanced
products, price them competitively, and achieve cost reductions for existing
products. Technological advances require sustained research and development
efforts, which may be costly and could cause our operating expenses to increase
substantially.
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.
16
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 OPTIONS WILL DILUTE EXISTING STOCKHOLDERS AND COULD DECREASE THE
MARKET PRICE OF OUR COMMON STOCK.
As of February 18, 2005, we had issued and outstanding 12,699,005 shares of
common stock, options and warrants to purchase an additional 1,420,000 and
100,000 shares of common stock, respectively. The existence of the remaining
options and warrants may adversely affect the market price of our common stock
and the terms under which we obtain additional equity capital.
THE COMPANY MAY GO PRIVATE, WHICH MAY RESULT IN STOCKHOLDERS OWNING SHARES IN A
PRIVATE COMPANY WITHOUT THE ABILITY TO SELL THEIR SHARES IN THE PUBLIC MARKET.
Although there are no definite proposals to do so, management and the Board are
analyzing the benefits of a possible "going private" transaction for the
Company, and the Board has formed a special committee to evaluate potential
transactions. One result of such a transaction would be to remove the Company's
stock from trading on the OTC Bulletin Board, and the stock would not be
eligible for trading on any stock exchange. The Company has less than 300
holders of record of its common stock, and is eligible to terminate its SEC
reporting requirements without stockholder approval or additional financing.
Should the Company go private, some stockholders may have shares in the Company
for which there would be no public market and their ability to sell the shares
would be impeded. Furthermore, the Company would not file current, quarterly or
annual reports or be subject to the proxy requirements of the federal securities
laws. Stockholders may therefore find it more difficult to obtain information
about the Company and its financial performance. In addition, should the Company
go private, this may adversely affect the Company's access to capital and its
ability to complete any proposed merger transaction.
WE MAY FACE POTENTIAL REGULATORY ACTION OR LIABILITY IN CONNECTION WITH OUR 2001
PRIVATE PLACEMENT.
Our issuance of common stock and warrants in a private placement which was
completed in 2001 could subject us to potential adverse consequences, including
securities law liability and the voiding of contracts entered into in connection
with the private placement. If our activities or the activities of other parties
in the 2001 private placement are deemed to be inconsistent with securities laws
under Section 29 of the Securities Exchange Act of 1934 or our activities or the
activities or the activities of other parties are deemed to be inconsistent with
the broker dealer registration provisions of Section 15(a) of the Exchange Act:
o we may be able to void our obligation to pay transaction-related fees in
connection with the private placement and we may receive reimbursement for
fees already paid;
o persons with whom we have entered into securities transactions that are
subject to these transaction-related fees may have the right to void these
transactions; and
o we may be subject to regulatory action.
Due to the inherent uncertainties involved with the interpretation of securities
laws, we are unable to predict the following: the validity of any potential
liability in connection with our private placement, the outcome of any
regulatory action or potential liability or the outcome of voiding transactions
in connection with the private placement. The defense of any regulatory action
or litigation and any adverse outcome could be costly and could have a material
adverse effect on our financial position and results of operations and could
divert management attention.
OUR COMMON STOCK IS LISTED ON THE OVER-THE-COUNTER (OTC) BULLETIN BOARD, WHICH
MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECREASE.
Because our common stock is listed on the OTC Bulletin Board, the liquidity of
our common stock is impaired, not only in the number of shares that are bought
and sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media, if any, of us. As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
17
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, whether or not we will remain
public or go private, 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 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.
18
ITEM 2. PROPERTIES
We currently lease a facility of approximately 180,000 square feet in Norcross,
Georgia from an affiliated party. This facility serves as our executive
headquarters and houses our toner manufacturing facilities, as well as our
research and development and sales and marketing departments. On February 5,
2003, we amended the lease to extend the term from March 31, 2009 to March 31,
2013 for this facility and it includes three options at our election to extend
the term for five years each. The rental payments for 2004, 2003 and 2002 were
$544,728, $531,444 and $518,484, respectively, subject to annual increases of
2.5% until the end of the term. On September 30, 2002, we divested Logical
Imaging Solutions and no longer have the facility in Santa Ana, California.
Management considers its facility to be sufficient for its operations for the
foreseeable future. On August 15, 2003, we entered into a one-year lease for a
2,450 square foot facility in Buena Park, CA to serve as a west coast sales
office and local warehouse, and effective August 31, 2004 this facility is
leased on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
Color Imaging is not a party to nor is any of its property subject to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2004.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is traded on the Over the Counter Bulletin Board (the OTC
Bulletin Board) under the symbol CIMG. Prior to July 7, 2000, our common stock
was traded on the OTC Bulletin Board under the symbol ADTX. The following table
sets forth the high and low prices of our common stock for the quarters
indicated as quoted on the OTC Bulletin Board.
2004 2003
----------------------- ----------------------
HIGH LOW HIGH LOW
---------- ---------- --------- ---------
First Quarter....... $ 0.8000 $ 0.6900 $ 1.5800 $ 0.4500
Second Quarter...... 0.8000 0.4200 0.8200 0.4000
Third Quarter....... 0.5200 0.4100 0.7000 0.5100
Fourth Quarter...... 0.5800 0.4100 0.7800 0.5400
The above quotations represent prices, adjusted for stock splits, between
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
HOLDERS
As of February 9, 2005, there were 252 holders of record of our common stock.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings to finance our
operations and fund the growth of our business. Any payment of future dividends
will be at the discretion of our board of directors and will depend upon, among
other things, our earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of dividends
and other factors that our board of directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
As of the year ended December 31, 2004, the following securities were authorized
for issuance under our equity compensation plans:
- --------------------------------------- ------------------------ ------------------------ ------------------------
Number of securities
remaining available
for future issuance
under equity
Number of securities to Weighted-average compensation plans
be issued upon exercise exercise price of (excluding securities
Plan Category of outstanding options outstanding options reflected in column)
- --------------------------------------- ------------------------ ------------------------ ------------------------
Equity compensation plans approved by 1,420,000 $ 1.58 80,000
security holders
- --------------------------------------- ------------------------ ------------------------ ------------------------
Equity compensation plans not approved None N/A N/A
by security holders
- --------------------------------------- ------------------------ ------------------------ ------------------------
Total 1,420,000 $ 1.58 80,000
- --------------------------------------- ------------------------ ------------------------ ------------------------
20
After the merger, on June 28, 2000, we granted options to acquire 500,000 shares
of our common stock to senior members of our management at an exercise price of
$2.00 per share. The options vest over a two to four year period and expire 5
years from their respective date of vesting.
During the year ended December 31, 2001, the board of directors granted officers
and employees options to acquire 535,000 shares of our common stock and outside
directors options to acquire 175,000 shares of our common stock at an exercise
price of $2.75 per share. Of the 535,000 options granted to officers and
employees, 25% vested immediately and the remainder will vest over 3 years. The
officer and employee options expire 5 years from their respective date of
vesting. Each outside director was granted options to acquire 25,000 shares of
our common stock, for a total of 175,000 options, effective upon his or her
election or appointment to the board of directors. The outside director options
vest over 5 years, beginning with the first anniversary date of his or her
appointment to the board, and expire 3 years from their respective date of
vesting.
The board of directors granted options to acquire 100,000 shares of our common
stock to an officer at an exercise price of $2.00 per share during the year
ended December 31, 2002. 25% vested immediately and the remainder will vest over
3 years. The options expire 5 years from their respective date of vesting.
The board of directors granted options to acquire 100,000 shares of our common
stock to an officer at an exercise price of $0.77 per share during the year
ended December 31, 2003. 25% vested immediately and the remainder will vest over
3 years. The options expire 5 years from their respective date of vesting. The
board of directors also granted to two new directors during the year ended
December 31, 2003, options to purchase 25,000 shares each at an exercise price
of $0.45 for a total of 50,000 options, effective upon his or her election or
appointment to the board of directors. The director options vest over 5 years,
beginning with the first anniversary date of his or her appointment to the
board, and expire 3 years from their respective date of vesting.
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.
As a result of employment terminations, resignations or retirements, as of
December 31, 2004, options to purchase 405,000 shares of common stock by
management or our employees have lapsed, and options to purchase 100,000 shares
of our common stock granted to directors have lapsed.
CHANGES IN SECURITIES
On January 23, 2003, the Company's registration statement on Form SB-2,
registering up to 7 million shares of the Company's common stock, was declared
effective (Registration Statement No. 333-76090), and the Company's officers and
directors commenced the offering. 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.
21
Our intended uses, as reallocated, of the $6,075,000 of proceeds received from
the public sale of our common stock, and our uses through December 31, 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 $ (56,133) $ 500,000 $ 443,867
For other general corporate purposes
including working capital . . . . . . . . $ 2,175,000 $( 536,072) $ (577,490) $ 1,061,438
----------- ------------ -----------
Total: $ 6,075,000 $(3,091,133) $ 2,983,867
Pending application:
-------------------
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,483,867
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 December 31,
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 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 December 31, 2004, under the repurchase program the
Company has repurchased 84,700 shares of our common stock on the open
market for $56,133, or at an average price of $0.66. All of the shares
repurchased under the program have been cancelled and retired as of
December 31, 2004. There remains $943,867 available for future common stock
repurchases under the authorization of the board of directors and $443,867
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 December 31, 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
22
ISSUER PRIVATE PURCHASES OF EQUITY SECURITIES
With the approval of the board of directors of the Company, on March 4, 2003,
the Company completed the repurchase from a stockholder of 12,939 shares of the
Company's common stock together with warrants to purchase 25,878 shares of the
Company's common stock at an exercise price of $2.00 per share for $25,878. The
shares and warrants were originally sold in the Company's private placement that
was completed in December 2001. The shares and warrants repurchased by the
Company were retired and cancelled as of December 31, 2003.
With the approval of the board of directors of the Company, on February 27,
2003, the Company entered into an agreement with a stockholder to repurchase
150,000 shares of common stock and warrants to purchase 300,000 shares of the
Company's common stock at an exercise price of $2.00 per share. Under the
agreement, the stockholder has a one-time right to cancel the sale of the common
stock and warrants not yet paid for by the Company upon written notice to the
Company. Upon receipt of such notice, the Company is not obligated to purchase
the remaining common stock and warrants. The agreement provides that the Company
is to pay $2.00 for each common share and warrant to purchase two common shares
of the Company's common stock. The shares and warrants are to be repurchased in
approximately equal installments over nine months, beginning in March and ending
in November 2003. From March 24, 2003 through December 31, 2003, the Company
repurchased 150,000 of the Company's common shares and warrants to purchased
300,000 common shares, paying $300,000. The shares and warrants repurchased by
the Company were cancelled and retired as of December 31, 2003.
ISSUER MARKET PURCHASES OF EQUITY SECURITIES
On April 18, 2003, the Company established a stock repurchase program under
which the Company may purchase on the open market the lesser of the aggregate
value of $1,000,000 or 1,000,000 shares in compliance with Rule 10b-18 until
September 30, 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 $0.65. From January 1 through December 31, 2004, under the
repurchase program the Company has repurchased 40,200 shares of our common stock
on the open market at an average price of $0.68. Since the inception of the
repurchase program the Company has repurchased 84,700 shares of our common stock
for $56,133 and at an average price of $0.66. There remains $943,867 available
for future common stock repurchases, as authorized by the board of directors.
- --------------------------------------------------------------------------------------------------
ISSUER (MARKET) PURCHASE OF EQUITY SECURITIES
- --------------------------------------------------------------------------------------------------
Maximum Number
Total Number of (or Approximate
Shares Purchased Dollar Value) of
Total Number Average Price as Part of Publicly Shares that May Be
of Shares Paid per Publicly Announced Purchased Under the
Period Purchased Share ($) Plans or Programs Plans or Programs
- -------------------- ---------------- --------------- -------------------- -----------------------
During 2003 (1) 59,500 0.69 59,500
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
October 0 -- 0
November 2,900 0.43 2,900
December 0 -- 0
---------------- --------------- -------------------- -----------------------
Total 2004 40,200 0.68 40,200 1,000,000
---------------- --------------- -------------------- -----------------------
Total 99,700 0.66 99,700 1,000,000
(1) Includes 15,000 shares purchased by Jui-Chi Wang, who may be deemed to be an
affiliated purchaser under Rule 10b-18. These shares are not included in the
Company's stock repurchase program.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 7 and other financial information included elsewhere in this
Report or incorporated herein by reference. The selected data presented below
are derived from the Color Imaging's Consolidated Financial Statements. Prior to
the merger on June 28, 2000, Color Imaging was a non-operating public shell. On
September 30, 2002, Color Imaging divested itself of Logical Imaging Solutions,
Inc. in a share exchange agreement with Digital Color Print, Inc. The historical
results are not necessarily indicative of future results of operations.
Fiscal Year
(Dollars in thousands, except per share data) 2004 2003 2002 2001 2000
--------- ---------- ---------- ---------- ----------
Income Statement Data:
Total revenue $ 21,835 $ 21,058 $ 28,000 $ 29,970 $ 11,385
Operating income (loss) 636 667 988 732 (292)
Net income (loss) from continuing operations 464 433 430 254 (386)
Net loss from discontinued operations -- -- (261) (204) (272)
Net income (loss) 464 433 169 50 (658)
Diluted net income (loss) per share from
continuing operations .04 .04 .04 .03 (.05)
Balance Sheet Data:
Cash and short-term investments $ 2,045 $ 2,214 $ 129 $ 394 $ 338
Net assets of discontinued operations 0 0 0 2,264 1,547
Total assets 16,696 17,895 16,114 19,817 19,295
Working capital 7,415 6,456 1,797 4,352 1,891
Long-term obligations 2,943 3,149 4,683 4,798 5,446
Retained earnings (accumulated deficit) (1,152) (1,616) (2,049) (2,218) (2,268)
Total stockholders' equity 11,656 11,220 5,241 7,608 5,036
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
On June 28, 2000, Color Imaging, formerly known as Advatex Associates, Inc.
merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and Logical
Imaging Solutions and Color Image became wholly-owned subsidiaries of Advatex.
The financial information contained in this report is in conformity with the
purchase method of accounting. The assets, liabilities and operating results of
Color Image are only included in the consolidated financial statements of Color
Imaging from the date of acquisition, June 28, 2000, or for only the last six
months of the year ended December 31, 2000 and for the full years ended December
31 thereafter, and discontinued operations are those of Logical Imaging
Solutions for all periods. On December 31, 2000, Color Image was merged with and
into Color Imaging. On September 30, 2002, we divested Logical Imaging Solutions
in exchange for 1.7 million shares of our common stock and warrants to purchase
up to 15% of the common stock of Digital Color Print or Logical Imaging
Solutions. As the result of our disposing of Logical Imaging Solutions, Inc. we
no longer offer printing systems to commercial printers nor the support services
and consumables related thereto. As a further result of Color Imaging's
divestiture of Logical Imaging Solutions, our investments in the furthering of
Logical Imaging Solutions' technologies and carrying its operations have ceased.
Significantly, since the merger on June 28, 2000, Color Imaging invested
approximately $2.35 million in the operations of Logical Imaging Solutions and
the development of its technologies with $675,000 of that amount having been
invested during the nine-month period ended September 30, 2002.
The following discussion and analysis should be read in conjunction with our
financial data and our Financial Statements and notes appearing elsewhere in
this report.
Net sales for the year ended December 31, 2004 was approximately $22 million
compared to $21 million in 2003. The increase in our copier product sales during
2004 offset the decreases from our two largest customers and the decreases
experienced in laser and MICR sales. Net sales for the year ended December 31,
2003 and 2002 were approximately $21 million and $28 million, respectively. Net
sales in 2003, as well as 2002, decreased primarily due to substantially reduced
sales to our largest customers. In the twelve months ended December 31, 2004,
2003 and 2002, our net sales were primarily generated from the sale of finished
consumable products for electronic printers and photocopying machines, which
comprised approximately 80%, 72% and 77% of net sales, respectively. Only one
customer accounted for more than 10% of our net sales during the year-end
December 31, 2004. Net sales from this customer for the year ended December 31,
2004 were 24% of our net sales, while net sales from this same customer for the
years ended December 31, 2003 and 2002 were approximately 29% and 44% of our net
sales, respectively. Sales to this customer consist primarily of analog copier
products, and as a result are expected to decline over time. Notwithstanding the
foregoing, our largest customer is testing our Ricoh AP3800 digital color copier
product. Net sales to our largest customer were approximately $5.2 million, or
24%, $6.1 million, or 29% and $13.2 million, or 47%, in 2004, 2003 and 2002,
respectively. We do not
24
have a written or oral contract with our largest customer, and all sales are
made through purchase orders. Though our sales are on purchase orders, the
customer typically issues purchase orders three months in advance of the product
delivery date and provides us with an additional two-month rolling forecast.
Based on this and other information, we anticipate significant additional
decreases in sales to our largest customer in 2005. Consistent with the purchase
orders and forecasts provided to us by our largest customer, we provide our
major suppliers with purchase orders three months in advance and an additional
rolling forecast for two months. In April 2001, we changed our purchasing
arrangement with our largest supplier to FOB origination from FOB destination,
and we adjusted our pricing to reflect the change to costs.
Net sales made outside of the United States increased by approximately 15% to
$9.9 million for the twelve months ended December 31, 2004. This increase in net
sales made outside of the United States was derived from customers other than
our largest customer. Net sales made outside of the United States decreased 17%
to approximately $8.6 million, or 41% of total sales for the twelve months ended
December 31, 2003, compared to $10.3 million, or 37% for the twelve months ended
December 31, 2002. This 17% decrease in international sales resulted primarily
from the decrease in sales to our two largest customers.
The following table reflects the consolidated new orders, net of cancellations,
revenues and backlog as of the beginning and end of the three years ended
December 31, 2004, as well as for Color Imaging's two general product lines.
Backlog Backlog
at start at end
of New Net of
Year Orders Revenue Year
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
2004:
Copier Products $ 1,896 $ 15,976 $ 16,469 $ 1,403
Printer Products 575 5,339 5,366 548
-------- -------- -------- --------
Total $ 2,471 $ 21,315 $ 21,835 $ 1,951
======== ======== ======== ========
2003:
Copier Products $ 2,718 $ 13,338 $ 14,160 $ 1,896
Printer Products 473 6,999 6,897 575
-------- -------- -------- --------
Total $ 3,191 $ 20,337 $ 21,057 $ 2,471
======== ======== ======== ========
2002:
Copier Products $ 1,921 $ 20,518 $ 19,721 $ 2,718
Printer Products 483 8,269 8,279 473
-------- -------- -------- --------
Total $ 2,404 $ 28,787 $ 28,000 $ 3,191
======== ======== ======== ========
CRITICAL ACCOUNTING ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that we
believe to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
A critical accounting policy is one that is both important to the portrayal of
Color Imaging's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.
25
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. For
the years ended December 31, 2004, 2003 and 2002 our write-offs were
approximately $19,638, $41,339 and $8,733, or averaged less than $20,000 per
year. As of December 31, 2004, we had $2,506,000 of accounts receivable net of a
$93,200 valuation allowance.
INVENTORY VALUATION. Our inventories are recorded at the lower of standard cost
or the current estimated market value. As with any manufacturer or wholesaler,
economic conditions, cyclical customer demand, product introductions or pricing
changes of our competitors and changes in purchasing or distribution can affect
the carrying value of inventory. Demand for our products has fluctuated
significantly and may do so in the future, which could result in an increase in
the cost of inventory or an increase in excess inventory quantities on hand. As
circumstances warrant, we record lower of cost or market inventory adjustments.
In some instances these adjustments can have a material effect on the financial
results of an annual or interim period. In order to determine such adjustments,
we evaluate the age, inventory turns, estimated fair value and, in the case of
toner products, whether or not they can be reformulated and manufactured into
other products, and record any adjustment if estimated fair value is below cost.
Through periodic review of each of our inventory categories and by offering
markdown or closeout pricing, we regularly take steps to sell off slower moving
inventory to eliminate or lessen the effect of any lower of cost or market
adjustment. If assumptions about future demand or actual market conditions are
less favorable than those projected by management, write-downs of inventory
could be required, and there can be no assurance that future developments will
not necessitate further write-downs. For the years ended December 31, 2004, 2003
and 2002 we made inventory obsolescence reserves of $280,000, $275,000 and
$240,000, totaling $795,000, or an average of $265,000 per year, and we have
written-down or disposed of approximately $296,000, $212,000 and $279,000 for
the same period for a total of $787,000 of inventory, or an average of $262,000
per year. Our experience over the last few years has indicated an obsolescence
rate of approximately $20,000 per month. As of December 31, 2004, we had
approximately $4,855,000 of inventory net of an $82,000 valuation provision.
VALUATION OF LONG-LIVED ASSETS. We periodically evaluate whether events and
circumstances have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of our long-lived assets, such as our
investment in our toner manufacturing equipment. Our manufacturing equipment is
suitable for, and is used to make, a large number of products, and as such we
have not experienced any impairment due to the discontinuation of any
product(s). During the years 2000 through 2002 we moved and expanded our
manufacturing facilities, upgrading the technologies we employ, and during 2003
we continued to upgrade and take out of service equipment that has reached its
useful life or was no longer competitive, much of all of which was fully
depreciated. We have approximately $8.1 million invested in such equipment and
plant improvements, with a carrying value of $6.1 million, that have estimated
lives of up to twenty years. Should competing technologies or offshore
competitors cause our manufacturing technology to be non-competitive, or should
other events or circumstances indicate that the carrying amount of these assets
would not be recoverable, the estimated life of these assets may need to be
shortened and their carrying value could be materially affected. If the sum of
the undiscounted expected cash flows from an asset to be held and used in
operations is less than the carrying value of the asset, an impairment loss is
recognized.
WARRANTY. We provide a limited warranty, generally ninety (90) days, to all
purchasers of our products. Accordingly, we do not make a provision for the
estimated cost of providing warranty coverage, and instead we expense these
costs as they are incurred. On occasion, we have been required and may be
required in the future to provide additional warranty coverage to ensure that
our products are ultimately accepted or to maintain customer goodwill. We
incurred no material warranty expenses for 2004, 2003 and 2002. While our
warranty costs have historically not been significant we cannot guarantee that
we will continue to experience a similar level of predictability with regard to
warranty costs as we have in the past. In addition, the introduction of more
expensive finished products, manufactured by us and by others and distributed by
us through more sales channels, technological changes or previously unknown
defects in raw materials or components may result in more extensive and frequent
warranty claims than anticipated, which could have a material adverse impact on
our operating results for the periods in which such additional costs
materialize.
26
RESULTS OF CONTINUING OPERATIONS
Color Imaging's net sales increased approximately 4% to $22 million for the year
ended December 31, 2004, compared to approximately $21 million for the year
ended December 31, 2003. Net sales by product category were:
% Increase % Increase
(Dollars in thousands) 2004 (Decrease) 2003 (Decrease) 2002
----------- ----------- ----------- ----------- -----------
Product Category:
Cartridges and bottles
Copier finished products $15,437 29% $11,925 (28%) $16,581
Printer finished products 1,925 (42%) 3,309 ( 6%) 3,533
----------- ----------- ----------- ----------- -----------
17,362 14% 15,234 (24%) 20,114
Bulk toner and parts 4,473 (23%) 5,823 (26%) 7,886
----------- ----------- ----------- ----------- -----------
Total net revenue $21,835 4% $21,057 (25%) $28,000
=========== =========== =========== =========== ===========
The following table sets forth, for the periods indicated, selected information
derived from Color Imaging's consolidated statements of operations and expressed
as a percentage of net sales.
Twelve Months Ended December 31,
---------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net Sales 100 100 100
Costs of goods sold 75 75 84
Gross profit 25 25 16
Administrative expense 6 8 5
Research and development 5 6 3
Sales and marketing 11 8 5
Operating Income 3 3 3
Interest and financing costs 1 1 1
Depreciation and amortization 5 7 2
Income before taxes 4 3 2
Provision for taxes (credit) 2 1 1
Net income (loss) from continuing operations 2 2 1
27
YEARS ENDED DECEMBER 31, 2004 AND 2003
Net Sales. Our net sales increased to $21.8 million, or 4%, for the twelve
months ended December 31, 2004, from $21.1 million for the twelve months ended
December 31, 2003. Net sales made in the United States were $11.9 million, a
decrease of $0.6 million, or 5%, from $12.5 million made in the comparable
period in 2003. The decrease in net sales made in the United States resulted
primarily from reduced sales to our largest customer and lower demand for bulk
laser toners. While sales to our largest customer decreased by 11% from $6.1
million to $5.4 million for the twelve months ended December 31, 2004 compared
to 2003, and are expected to continue to decline in 2005, sales to other than
our largest customer increased from $1.4 million to $16.4 million, or by 9%. Of
the $21.8 million in net sales, $17.4 million, or 80%, were attributable to
finished products, compared to $15.2 million or 72% for the comparable period in
2003. The increase in finished product sales of $1.4 million or 9% was the
result of increased sales of all-in-one and copier product to customers other
than our largest customer. The revenue decrease from bulk toner and parts was
$1.3 million or 22% compared to 2003, largely as a result of our discontinuing a
number of products and increased competition for certain low margin laser
toners. In the twelve months ended December 31, 2004 and 2003 our largest
customer, a distributor, accounted for approximately 25% and 29%, respectively,
of net sales. During 2005, unless our largest customer approves and purchases
substantial quantities of our digital color copier products, we expect that
sales to our largest customer will continue to decline but will be offset by the
increases in sales to other customers.
Cost of Goods Sold. Cost of goods sold increased by $0.5 million, or 3%, to
$16.3 million from $15.8 million for the twelve months ended December 31, 2004
from the comparable period in 2003, primarily as the result of the increase in
net sales. Cost of goods sold as a percentage of net sales was 75% for the
twelve months ended December 31, 2004 and 2003. The increase in costs of goods
sold in connection with the sale of some $2.5 million of low margin all-in-one
products was offset by the decrease in the cost of goods sold attributable to
the sale of digital color copier products. New digital color products being
introduced and sold during the first quarter 2005 are expected to result in our
further reducing our cost of sales during 2005.
Gross Profit. As a result of the above factors, gross profit increased to $5.6
million, or 25% of net sales, in the twelve months ended December 31, 2004 from
$5.3 million, or 25% of net sales, in the twelve months ended December 31, 2003.
Operating Expenses. Operating expenses increased $0.3 million, or 7%, to $4.9
million in the twelve months ended December 31, 2003 from $4.6 million in the
twelve months ended December 31, 2003. General and administrative, selling and
R&D expenses increased, as a percentage of net sales, to 23% in the twelve
months ended December 31, 2004 from 22% in the twelve months ended December 31,
2003 as the result of the increased marketing and sales expenses. General and
administrative expenses decreased approximately 18%, or $0.3 million to $1.4
million for the twelve months ended December 31, 2004 from the comparable period
in 2003, largely resulting from a lower bonus amount paid in 2004 compared to
2003, and reductions in legal and professional fees and payroll related
expenses. Selling expenses increased by $0.6 million, or 36%, in the twelve
months ended December 31, 2004 compared to the twelve months ended December 31,
2003. Selling expenses increased primarily as a result of $0.5 million of
increased in payroll related expenses from the opening of the California sales
office in late 2003 and the hiring of the senior vice president of marketing and
sales effective April 1, 2004. With our net sales being derived increasingly
from the sales of our direct sales staff and through our manufacturer's
representatives, and with increased sales planned for 2005 together with the
hiring of additional sales personnel during the year, we expect our selling
expenses to further increase in 2005. Research and development expenses remained
approximately the same, some $1.2 million, in the twelve months ended December
31, 2004 and 2003. We expect to increase research and development expenditures
modestly in 2005 in an effort to develop and bring to market more new products
before our competition, while also reformulating certain product formulas to
manufacture a greater percentage of our products on our more efficient
production equipment.
Operating Income. As a result of the above factors, operating income decreased
by $31,000, or 5%, to $636,000 in the twelve months ended December 31, 2004 from
$667,000 in the twelve months ended December 31, 2003.
Interest and Finance Expense. Interest expense decreased by $74,000, or 44%, in
the twelve months ended December 31, 2004 from the twelve months ended December
31, 2003. The decrease was primarily the result of reduced interest bearing debt
levels. We reduced significantly our debt outstanding with proceeds from our
public offering of common stock in 2003.
Other Income. Other income increased by $11,000, from income of $219,000 to
income of $230,000 in the twelve months ended December 31, 2004 from the twelve
months ended December 31, 2003, primarily as the result of $155,000 of Euro
currency gains.
Income Taxes. As the result of our profit from continuing operations in the
twelve months ended December 31, 2004, we recorded an income tax provision of
$311,000 for the period, while the income tax provision was $288,700 for the
twelve months ended December 31, 2003.
28
YEARS ENDED DECEMBER 31, 2003 AND 2002
Net Sales. Our net sales decreased by $6.9 million, or 25%, to $21.1 million for
the twelve months ended December 31, 2003, from $28 million for the twelve
months ended December 31, 2002. Net sales made in the United States were $12.5
million, a decrease of $5.2 million, or 29%, from $17.7 million made in the
comparable period in 2002. The decrease in net sales made in the United States
resulted primarily from reduced sales to our two largest customers and lower
demand for our bulk toners. While sales to our two largest customers decreased
by 51% from $18.8 million to $9.1 million for the twelve months ended December
31, 2003 compared to 2002, and are expected to continue to decline in 2004,
sales to other than our two largest customers increased from $9.2 million to
$11.9 million, or by 29%. Of the $21 million in net sales, $15.2 million, or
72%, were attributable to cartridges and bottled toner products, compared to
$20.1 million or 77% for the comparable period in 2002. The decrease in
cartridge and bottled toner sales of $4.9 million or 24% was primarily the
result of decreased sales to our two largest customers. The revenue decrease
from bulk toner and parts was $2 million or 28% compared to 2002, largely as a
result of our discontinuing a number of products and increased competition for
certain low margin laser toners. In the twelve months ended December 31, 2003,
our two largest customers, a distributor and an OEM, accounted for approximately
29% and 14%, respectively, of net sales. In the twelve months ended December 31,
2002, these two customers accounted for approximately 47% and 20%, respectively,
of net sales. During 2004 we expect that sales to our other customers will more
than offset the further declines in sales to these two customers.
Cost of Goods Sold. Cost of goods sold decreased by $7.6 million, or 33%, to
$15.8 million from $23.4 million for the twelve months ended December 31, 2003
from the comparable period in 2002, primarily as the result of the decrease in
net sales but also as a result of lower manufacturing costs. Cost of goods sold
as a percentage of net sales decreased by 9 percentage points from 84% for the
twelve months ended December 31, 2002 to 75% for the twelve months ended
December 31, 2003. The decrease in the cost of goods sold as a percentage of net
sales was primarily the result of reduced sales derived from certain very low
margin products previously sold to our largest customer that have been
discontinued, the effects of previous price increases on a few analog copier
products and higher levels of sales derived from higher margin color copier
products. Having recently placed more efficient manufacturing equipment in
service, we expect our cost of goods sold on products we manufacture to further
decrease as a percentage of net sales, but there can be no assurance in this
regard. Further, higher cost of goods sold on products purchased for resale
could offset the percentage decrease expected from more efficient manufacturing
operations.
Gross Profit. As a result of the above factors, gross profit increased to $5.3
million, or 25% of net sales, in the twelve months ended December 31, 2003 from
$4.6 million, or 16% of net sales, in the twelve months ended December 31, 2002,
or $0.7 million, while net sales for the same period decreased by approximately
$6.9 million, or 25%.
Operating Expenses. Operating expenses increased $1 million, or 28%, to $4.6
million in the twelve months ended December 31, 2003 from $3.6 million in the
twelve months ended December 31, 2002. General and administrative, selling and
R&D expenses increased, as a percentage of net sales, to 22% in the twelve
months ended December 31, 2003 from 13% in the twelve months ended December 31,
2002 as the result of the decrease in net sales for the year and the increases
in general and administrative, research and development and sales and marketing
expenses. General and administrative expenses increased approximately 28%, or
$367,000 to $1,680,000 for the twelve months ended December 31, 2003 from the
comparable period in 2002, largely resulting from a $140,000 bonus granted the
President by the board, $83,000 for increased payroll, including information
technology payrolls, $37,000 in connection with our recently opened West Coast
office, and professional fees in connection with the repurchase of our
securities from two investors in our 2001 private placement. Selling expenses
increased by $414,000, or 30%, in the twelve months ended December 31, 2003
compared to the twelve months ended December 31, 2002. Selling expenses
increased primarily as a result of $251,000 of increased commissions and
expenses of manufacturer's representatives, $117,000 of expenses in connection
with our West Coast office, $75,000 of advertising and sample expenses, a
$40,000 provision for bad debts and $13,000 for foreign credit insurance.
Research and development expenses increased by $229,000, or 24%, to $1,176,000
in the twelve months ended December 31, 2003, primarily as the result of $97,000
of increased testing expenses in connection with new products under development,
$74,000 of increased payroll and consulting expenses and $22,000 of recruiting
expenses.
Operating Income. As a result of the above factors, operating income decreased
by $321,000, or 33%, to $667,000 in the twelve months ended December 31, 2003
from $988,000 in the twelve months ended December 31, 2002.
Interest and Finance Expense. Interest expense decreased by $166,000, or 50%, in
the twelve months ended December 31, 2003 from the twelve months ended December
31, 2002. The decrease was primarily the result of reduced interest bearing debt
levels.
Other Income. Other income increased by $172,000, from income of $47,000 to
income of $219,000 in the twelve months ended December 31, 2003 from the twelve
months ended December 31, 2002, primarily as the result of $149,000 of Euro
currency gains.
Income Taxes. As the result of our profit from continuing operations in the
twelve months ended December 31, 2003, we recorded an income tax provision of
$288,700 for the period, while the income tax provision was $274,000 for the
twelve months ended December 31, 2002.
29
RESULTS OF DISCONTINUED OPERATIONS
On September 30, 2002, we completed a share exchange agreement with Digital
Color Print, Inc., whereby we received 1.7 million shares of our common stock in
exchange for all of the shares of the common stock of our subsidiary, Logical
Imaging Solutions, Inc. The financial statements included herein, reflect the
divestiture of Logical Imaging Solutions, Inc. as discontinued operations.
The following table sets forth, for the periods indicated, selected information
relating to the discontinued operations of Logical Imaging Solutions that has
been derived from our consolidated statements of operations.
Twelve Months Nine Months Twelve Months
Ended Ended Ended
December 31, September 30, December 31,
---------------- ----------------- -----------------
2004 2003 2002
---------------- ----------------- -----------------
Net revenue $ -- $ -- $ 464,628
Operating (loss) -- -- (406,570)
Net (loss) $ -- -- $ (261,326)
================ ================= =================
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of December 31, 2004, Color Imaging had cash on hand of $2,045,000 and
$1,500,000 of availability under our revolving credit line with our bank. Our
working capital and current ratio was approximately $7.4 million and $6.5
million and 4.54 to 1 and 2.83 to 1, respectively, at December 31, 2004 and
2003.
Color Imaging generated $852,000 of cash flows from operating activities in the
twelve months ended December 31, 2004, compared to $258,000 of cash flows from
operating activities in the twelve months ended December 31, 2003. The increase
in operating cash flows from continuing operations in the twelve months ended
December 31, 2004 was primarily due to a $770,000 decrease in inventories
resulting from our inventory improvement project launched during 2004. The
increase in cash flows from continuing operations in the twelve months ended
December 31, 2003 was also due to the reduction in accounts receivable, prepaid
expenses and other assets. There was no operating cash flows used by
discontinued operations were for the years ended December 31, 2004 and 2003.
Cash flows used in investing activities were $222,000 in the twelve months ended
December 31, 2004, compared to $473,000 in the twelve months ended December 31,
2003. The decrease in cash used in investing activities in the twelve months
ended December 31, 2003, was entirely attributable to decreased capital
expenditures in our factory. During 2005 we plan as much as $1 million of
additional capital expenditures, and we expect to fund these expenditures from
our cash on hand or cash flow from operations.
Cash flows used in financing activities, primarily to repay bond and related
party debt, for the twelve months ended December 31, 2004 was $799,000 compared
to $2,300,000 of cash flows provided by financing activities for the twelve
months ended December 31, 2003. The cash flow used in financing activities in
2004 consisted primarily of debt repayments. The $2,300,000, derived primarily
from $5,900,000 of net proceeds from the sale of our common stock, was partially
offset by debt repayments of $3,225,000.
We have a $1.5 million revolving line of credit with our bank, with a $500,000
sub-limit for letters of credit that had an outstanding balance as of December
31, 2004 of $0, and we had $1.5 million in borrowing availability. The interest
rate is the one-month Libor interest rate in effect two business days before the
first day of the month plus 2.50%. As of December 31, 2004, the interest rate
was the one-month Libor rate of 2.28% plus 2.50% (4.78%). This revolving line of
credit has a June 30, 2005 expiration date. Under the line of credit, we are
permitted to borrow up to 75% of eligible accounts receivable and 50 percent of
eligible inventories (up to a maximum of $750,000 of such inventories and not to
exceed 50 percent of the total outstanding). Based on the foregoing formula, we
had $1,500,000 of the additional monies available to us to borrow from the bank
as of December 31, 2004. 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. On January 5, 2005, the irrevocable standby
letter of credit was amended and reduced by $500,000 to $1 million. The letter
of credit has an expiration date of June 30, 2005. We have granted our bank a
security interest in all of our assets as security for the repayment of the line
of credit and our obligations under the letter of credit. The bank agreement
contains various covenants that Color Imaging is required to maintain, and
throughout 2004 and as of December 31, 2004, we were in compliance with these
covenants. Further, we expect to remain in compliance with the bank's covenant
requirements throughout 2005.
Our liquidity is affected by many factors, some based on the normal operations
of our business and others related to the uncertainties of the industry and
global economies. Although our cash requirements will fluctuate based on the
timing of these factors, we believe that current cash and cash equivalents, cash
flows from operations and amounts available under our credit agreement are
sufficient to fund our planned capital expenditures of approximately $1 million,
working capital, financing needs and other operating cash requirements
throughout 2005.
30
COMMITMENTS
Our minimum payment obligations relating to long-term debt and other contractual
obligations are as follows:
CONTRACTUAL OBLIGATIONS LESS THAN 1 AFTER
(IN THOUSANDS) YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS TOTAL
------------ ------------ ------------ ------------ ------------
IDR bonds $390 $1,080 $175 $1,080 $2,725
Long-term debt 6 5 11
Related party debt 68 68
Operating leases, automobiles 29 16 45
Unconditional purchase obligations(1) 2,404 2,404
Facility lease, related party 558 1,760 1,248 1,481 5,047
Facility lease, other 2 2
Severance obligations under
Employment agreements (2) 341 45 386
------------ ------------ ------------ ------------ ------------
Total $3,798 $2,906 $1,423 $2,561 $10,688
============ ============ ============ ============ ============
(1) Unconditional commitments, open purchase orders, to purchase raw materials,
plastic cartridges and bottles, parts and other products for use in
manufacturing and finished products for resale in the ordinary course of
business with future delivery dates. Due to minimum order quantities and long
lead times for many of these products, we have made purchase commitments that
may be in excess of future production requirements, and it could take several
months to use all of these product commitments in the manufacture of our
products. These purchase commitments are not expected to result in any
significant losses, though those in connection with older analog copier products
have a higher risk of obsolescence than those used in the manufacture of our
other products.
(2) Employment agreements between Color Imaging and three
executive officers that provide for severance payments of the lesser of three
(3) to twelve (12) months of salary and benefits or the remainder of the term of
the agreement, expiring from June 30, 2005 to March 31, 2006.
OTHER COMMERCIAL COMMITMENTS LESS THAN AFTER
(IN THOUSANDS) 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS TOTAL
----------- ----------- ----------- ----------- -----------
Lines of credit (1) $ 0 $ 0 $ 0 $ 0 $ 0
Standby letters of credit (2) 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total $ 0 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
(1) Color Imaging has a $1.5 million revolving line of credit with its bank that
expires June 30, 2005. As of December 31, 2004, there was no outstanding
principal balance. A renewal of the line of credit to June 30, 2006, has been
requested.
(2) On January 28, 2004, Color Imaging applied for a $1.5 million irrevocable
standby letter of credit with an expiration date of June 30, 2005, to secure its
payments to a vendor for the importation of toner related products. On January
5, 2005, the letter of credit was amended and reduced by $500,000 to $1 million.
OFF BALANCE SHEET ARRANGEMENTS
As a condition of the Share Exchange Agreement, as amended, of September 2002,
between Logical Imaging Solutions, Inc., Digital Color Print, Inc. and Color
Imaging, Logical Imaging Solutions and Digital Color Print assumed the
responsibility for an operating lease for equipment used by Logical Imaging
Solutions upon which Color Imaging is a co-obligor. The aggregate payment
obligations remaining as of September 2002 were less than $50,000, and as a
condition of the Share Exchange Agreement Logical Imaging Solutions and Digital
Color Print pledged 50,000 shares of the common stock of Color Imaging to secure
their performance of all of the terms and conditions of the lease.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q for the quarter ended September 30,
2003), as amended and restated on November 15, 2004, effective as of April 1,
2004, with its affiliate General Plastic Industrial Co Ltd. Per the Marketing
and Licensing Agreement General Plastic Industrial Co Ltd agrees to indemnify
and hold harmless Color Imaging for any costs and expense arising from any
defective licensed product, and/or any recalled licensed product including
litigation arising therefrom. Further General Plastic Industrial Co Ltd agrees
to credit Color Imaging for product cost, shipping and related expenses arising
from any defective licensed product, and/or any recalled licensed product.
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. On January 5, 2005, the irrevocable standby letter of credit
was amended and reduced by $500,000 to $1 million. 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 net 30
to net 120. At December 31, 2004, the Company's accounts payable to this
supplier was $94,625, while our open purchase order commitments were $756,468.
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.
31
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (i.e., third quarter 2005 for the
Company). All public companies must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is encouraged. The Company has not yet evaluated the impact of
adoption of this pronouncement that must be adopted in the third quarter of
fiscal year 2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," ("SFAS 151") which clarifies the types of costs that
should be expensed rather than capitalized as inventory. This statement also
clarifies the circumstances under which fixed overhead costs associated with
operating facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the Company will adopt this standard in its fourth quarter of
fiscal 2005. The Company has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any investments or assets outside of the United States. However,
we are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates.
We estimate that about 80% of our transactions are denominated in U.S. dollars,
excepting those sales in Euros to two of our customers in Europe. Accordingly,
beginning in 2001, we became subject to foreign currency risk with respect to
future costs or cash flows from our sales in Euros. We have adjusted our prices
with our customers to reflect the change in the exchange rate and do not expect
to be subject to material foreign currency risk, accordingly, with respect to
those sales. As a result, to date, we have not entered into any foreign currency
forward exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange. We incurred a
net foreign currency transaction gain of $154,583, $149,110 and $2,858 in 2004,
2003 and 2002, respectively. Our pricing for our products sold in Euros is
currently at the rate of 1.25 to 1.00 Euros relative to the U.S. dollar, and at
December 31, 2004, according to information available from the Pacific Exchange
Rate Service, the exchange rate for the Euro relative to the U.S. dollar was
1.3536. A 10% change in the value of the Euro from 1.25 Euros relative to the
United States dollar would cause approximately an $8,000 foreign currency
translation adjustment in an average month, a type of other comprehensive income
(loss), which would be a direct adjustment to stockholders' equity.
Our revolving line of credit bears interest based on interest rates tied to the
LIBOR rate, which may fluctuate over time based on economic conditions. As a
result, we are subject to market risk for changes in interest rates and could be
subjected to increased or decreased interest payments if market rates fluctuate
and we are in a borrowing mode.
Color Imaging's investment policy requires investments with high credit quality
issuers and limits the amount of credit exposure to any one issuer. Investments
made by Color Imaging will principally consist of U.S. government and government
agency obligations and investment-grade, interest-bearing corporate debt
securities with varying maturity dates of five years or less. Because of the
credit criteria of the Color Imaging's investment policies, the primary market
risk associated with these investments is interest rate risk. Color Imaging does
not use derivative financial instruments to manage interest rate risk or to
speculate on future changes in interest rates. During 2004 Color Imaging made
investments from $0.4 million to $1.7 million that resulted in interest income
of $17,502 with some $1,048,087, all of which were available-for-sale securities
invested as of December 31, 2004. During 2003 Color Imaging made investments
that resulted in interest income of $5,586 with some $1,421,000 in
available-for-sale securities as of December 31, 2003. Color Imaging did not
have any monies invested in securities at December 31, 2002.
Management believes that a reasonable change in raw material prices could have a
material impact on future earnings or cash flows, because we generally are not
able to offset increases to our costs with higher prices for our products.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Annual Report on Form 10-K:
Page
Financial Statements:
Independent Auditors' Report..................................................F1
Consolidated Balance Sheets December 31, 2004 and 2003 ......................F2
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 .............................................F3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2004, 2003, and 2002.................................F4
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002.............................................F5
Notes to Consolidated Financial Statements December 31, 2004,
2003 and 2002.................................................................F6
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COLOR IMAGING, INC.
NORCROSS, GEORGIA
We have audited the accompanying consolidated balance sheets of Color Imaging,
Inc. (a Delaware corporation) and subsidiary as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule listed on the Index of
Item 15(a). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Color Imaging, Inc.
and subsidiary as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the
Unites States of America.
LAZAR LEVINE & FELIX LLP
New York, New York
February 11, 2005
F1
34
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
--------------- ---------------
- ASSETS -
CURRENT ASSETS:
Cash $ 2,044,989 $ 2,213,830
Accounts receivable - net of allowance for doubtful accounts
of $93,201 and $67,839 for 2004 and 2003, respectively 2,412,354 1,941,404
Inventories 4,854,939 5,624,328
Related party portion of IDR bond - current 92,664 87,912
Other current assets 106,618 114,721
--------------- ---------------
TOTAL CURRENT ASSETS 9,511,564 9,982,195
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,601,832 6,973,834
--------------- ---------------
OTHER ASSETS:
Related party portion of IDR bond 554,764 647,428
Other assets 27,864 291,978
--------------- ---------------
582,628 939,406
--------------- ---------------
$ 16,696,024 $ 17,895,435
=============== ===============
- LIABILITIES & STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Revolving credit lines $ -- $ --
Accounts payable 1,625,282 2,413,695
Current portion of notes payable 6,071 5,612
Current portion of notes payable - related parties 67,816 343,736
Current portion of bonds payable 390,000 370,000
Other current liabilities 7,500 393,579
--------------- ---------------
TOTAL CURRENT LIABILITIES 2,096,669 3,526,622
--------------- ---------------
LONG TERM LIABILITIES:
Notes payable 5,438 11,509
Notes payable - related parties -- 120,102
Bonds payable 2,335,000 2,725,000
Deferred tax liability 602,450 292,700
--------------- ---------------
TOTAL LONG TERM LIABILITIES 2,942,888 3,149,311
--------------- ---------------
TOTAL LIABILITIES 5,039,557 6,675,933
--------------- ---------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000,000 shares;
12,690,305 and 12,730,505 shares issued and outstanding on 126,903 127,305
December 31, 2004 and 2003, respectively
Additional paid-in capital 12,681,472 12,708,368
Accumulated deficit (1,151,908) (1,616,171)
--------------- ---------------
11,656,467 11,219,502
--------------- ---------------
$ 16,696,024 $ 17,895,435
=============== ===============
See notes to consolidated financial statements.
F2
35
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Year Ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
SALES $ 21,834,829 $ 21,057,601 $ 28,000,309
COST OF SALES 16,283,031 15,789,078 23,421,429
------------ ------------ ------------
GROSS PROFIT 5,551,798 5,268,523 4,578,880
------------ ------------ ------------
OPERATING EXPENSES:
Administrative 1,373,694 1,679,576 1,312,317
Research and development 1,171,502 1,176,085 946,848
Sales and marketing 2,370,767 1,745,812 1,331,454
------------ ------------ ------------
4,915,963 4,601,473 3,590,619
------------ ------------ ------------
INCOME FROM OPERATIONS 635,835 667,050 988,261
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 229,588 219,059 47,201
Interest and financing costs (90,160) (164,438) (330,606)
------------ ------------ ------------
139,428 54,621 (283,405)
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 775,263 721,671 704,856
PROVISION FOR INCOME TAXES 311,000 288,700 274,246
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 464,263 432,971 430,610
(LOSS) FROM OPERATIONS OF SUBSIDIARY
DISPOSED OF - NET OF INCOME TAX -- -- (261,326)
------------ ------------ ------------
NET INCOME $ 464,263 $ 432,971 $ 169,284
============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic:
Continuing operations $ .04 $ .04 $ .04
Discontinued operations -- -- (.02)
------------ ------------ ------------
Basic earnings per share $ .04 $ .04 $ .02
============ ============ ============
Diluted:
Continuing operations $ .04 $ .04 $ .04
Discontinued operations -- -- (.02)
------------ ------------ ------------
Diluted earnings per share $ .04 $ .04 $ .02
============ ============ ============
Weighted average shares outstanding:
Basic 12,703,575 11,966,981 9,686,429
Diluted 12,710,306 11,979,554 9,686,429
See notes to consolidated financial statements.
F3
36
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ADDITIONAL STOCK TOTAL
COMMON PAID-IN SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL RECEIVABLE DEFICIT EQUITY
------------- ------------- ------------ ------------ ------------- -------------
Balance at December 31, 2001 10,099,175 $ 100,992 $ 9,873,939 $ (149,000) $(2,218,426) $ 7,607,505
Stock subscription received -- -- (5,649) 149,000 -- 143,351
Exercise of stock warrants -
cashless 38,790 388 (388) -- -- --
Common stock, exchanged for
subsidiary disposed of (1,700,000) (17,000) (2,661,993) -- -- (2,678,993)
Net income for the year -- -- -- -- 169,284 169,284
------------- ------------- ------------ ------------ ------------- -------------
Balance at December 31, 2002 8,437,965 84,380 7,205,909 -- (2,049,142) 5,241,147
Stock subscription received 4,500,000 45,000 5,855,584 -- -- 5,900,584
Common stock, repurchased
and retired (207,460) (2,075) (353,125) -- -- (355,200)
Net income for the year -- -- -- -- 432,971 432,971
------------- ------------- ------------ ------------ ------------- -------------
Balance at December 31, 2003 12,730,505 127,305 12,708,368 -- (1,616,171) 11,219,502
Common stock, repurchased
and retired (40,200) (402) (26,896) -- -- (27,298)
Net income for the year -- -- -- -- 464,263 464,263
------------- ------------- ------------ ------------ ------------- -------------
Balance at December 31, 2004 12,690,305 $ 126,903 $12,681,472 $ -- $(1,151,908) $11,656,467
============= ============= ============ ============ ============= =============
See notes to consolidated financial statements.
F4
37
COLOR IMAGING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
YEAR ENDED DECEMBER 31,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 464,263 $ 432,971 $ 430,610
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 593,801 537,369 542,661
Deferred income taxes 309,750 292,700 190,509
Allowance for doubtful accounts 45,000 3,661 (8,733)
(Increase) decrease in:
Accounts receivable (515,950) 444,955 512,717
Inventory 769,389 (544,091) 524,738
Prepaid expenses and other assets 272,217 251,468 (100,415)
Due from related party - IDR bond 87,912 83,160 79,596
Increase (decrease) in:
Accounts payable and accrued liabilities (1,174,492) (1,244,188) (1,221,997)
------------ ------------- -------------
Net cash provided by continuing operations 851,890 258,005 949,686
Net cash (used) by discontinued operations -- -- (676,202)
------------ ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 851,890 258,005 273,484
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (221,799) (473,093) (567,702)
------------ ------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES: (221,799) (473,093) (567,702)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit -- (1,022,470) (439,946)
Principal payments of long-term debt (5,612) (1,336,335) (339,667)
Principal payments of IDR bond (370,000) (350,000) (335,000)
Proceeds from related party borrowing -- -- 1,100,000
Principal repayments to related party (396,022) (536,162) (100,000)
Proceeds from sale of stock -- 5,900,584 143,351
Payments for the repurchase of common stock and warrants ( 27,298) (355,200) --
------------ ------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (798,932) 2,300,417 28,738
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH (168,841) 2,085,329 (265,480)
Cash at beginning of year 2,213,830 128,501 393,981
------------ -------------- -------------
CASH AT END OF YEAR $ 2,044,989 $ 2,213,830 $ 128,501
============ ============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 78,547 $ 147,694 $ 299,226
Income taxes -- -- --
NONCASH ITEMS:
Common stock issued $ -- $ -- $ 388
See notes to consolidated financial statements.
F5
38
COLOR IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
NOTE 1. DESCRIPTION OF COMPANY:
Color Imaging, Inc., (Color) develops, manufactures and markets products used in
electronic photocopying and printing. Color designs, manufactures and delivers
black text toners, specialty toners, including color and MICR (magnetic
characters used on checks and other financial documents). Color also supplies
other consumable products used in electronic printing and photocopying,
including toner cartridges, cartridge components, photoreceptors, imaging drums
and parts.
See Note 3 regarding Discontinued Operations - Disposal of Logical Imaging
Solutions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its now discontinued subsidiary. All significant inter-company balances and
transactions have been eliminated in consolidation.
(B) ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in Color's financial
statements and accompanying notes. Management bases its estimates on certain
assumptions, which they believe are reasonable in the circumstances, and does
not believe that any change in those assumptions would have a significant effect
on the financial position or results of operations. Actual results could differ
from those estimates.
(C) FAIR VALUE FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents, trade receivables and payables
approximates fair value because of the short maturity of those instruments. The
carrying value of the Company's debt is considered to approximate the fair value
of these instruments based on the borrowing rates currently available to the
Company for loans with similar terms and maturities.
(D) CONCENTRATION OF CREDIT RISK:
Financial instruments, which potentially subject the Company to concentrations
of credit risk, are cash equivalents, marketable securities and accounts
receivable. The Company attempts to limit its credit risk associated with cash
equivalents and marketable securities and at December 31, 2004 its investments
were in cash held in highly rated financial institutions. With respect to
accounts receivable, the Company limits its credit risk by performing ongoing
credit evaluations and, when deemed necessary, requiring cash in advance,
payment by credit card, letters of credit or guarantees. The Company's customer
base is comprised principally of domestic distributors and dealers of copier
supplies and re-manufacturers of laser printing consumable products. The
Company's international customers are comprised principally of an OEM and a
large international distributor. Management does not believe significant risk
exists in connection with the Company's concentrations of credit at December 31,
2004.
(E) CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with maturity of three
months or less when purchased to be cash equivalents.
(F) ACCOUNTS RECEIVABLE:
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $93,201 and $67,839 at December 31, 2004 and 2003,
respectively.
F6
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(G) INVENTORIES:
Inventories are stated at the lower of cost or market with cost determined by
the first-in, first-out (FIFO) method for raw materials, work-in-process and
finished goods. Consideration is given to deterioration, obsolescence and other
factors in evaluating the estimated market value of inventory based upon
management's judgment and available information. Costs in inventory include
materials, direct labor, and applied manufacturing overhead.
(H) PROPERTY, PLANT AND EQUIPMENT:
Property, plant, and equipment are recorded at cost. Replacements and major
improvements are capitalized; maintenance and repairs are expensed as incurred.
Gains or losses on asset dispositions are included in the determination of net
income.
Depreciation of the Company's property, plant, and equipment is computed using
the straight-line method. The average estimated useful lives are as follows:
Years
----------
Leasehold improvements 10
Machinery and equipment 5 - 20
Furniture and fixtures 7 - 10
Test and computer equipment 5 - 10
(I) INTANGIBLE ASSETS:
Intangible assets are comprised of patents and intellectual property. All
intangible property is amortized by the straight-line method, over their
respective useful lives, commencing upon completion of commercialization.
Intangibles are periodically reviewed to assess recoverability from future
operations using undiscounted cash flows in accordance with SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". To the extent
carrying values exceed fair values, an impairment loss is recognized in
operating results.
(J) STOCK-BASED COMPENSATION:
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its stock-based
compensation plans and accordingly, no compensation cost has been recognized for
its stock options in the financial statements. The Company has elected not to
implement the fair value based accounting method for employee stock options
under SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected
to disclose the pro forma net income (loss) per share for employee stock option
grants made beginning in fiscal 1997 as if such method had been used to account
for stock-based compensation costs described in SFAS No. 148 "Accounting for
Stock Based Compensation-Transition and Disclosure", an amendment of SFAS No.
123. (SFAS No. 123 was further amended - see Note (R) below - Recent Accounting
Pronouncements.)
The Company has determined pro forma net earnings and net earnings per share
information as if the fair value method described in SFAS No. 123, "Accounting
for Stock-Based Compensation," had been applied to its employee stock-based
compensation. The fair value of stock options was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------ ------ ------
Risk-free interest rate 3.00% 2.68% 2.35%
Dividend yield 0.00% 0.00% 0.00%
Expected market price volatility factor 2.26 2.42 0.88
Weighted-average expected life of option 3 years 3 years 3 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F7
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(J) STOCK-BASED COMPENSATION (CONTINUED):
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:
2004 2003 2002
------------ ------------ ------------
Net income, as reported $ 464,263 $ 432,971 $ 169,284
Less: Pro forma stock based
compensation expense - net of tax 94,756 80,908 65,457
------------ ------------ ------------
Pro forma net income $ 369,507 $ 352,063 $ 103,827
============ ============ ============
Basic Earnings per share:
As reported $ .04 $ .04 $ .02
Pro forma .03 .03 .01
Diluted Earnings per share:
As reported $ .04 $ .04 $ .02
Pro forma .03 .03 .01
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the average vesting period of the options.
(K) INCOME TAXES:
The asset and liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for operating
loss and tax credit carry forwards and for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless it is more likely than not
that such asset will be realized.
(L) REVENUE RECOGNITION:
The Company recognizes revenues in accordance with Staff Accounting Bulletin
104, Revenue Recognition in Financial Statements (SAB104).
The Company designs, manufactures and acquires from third parties and sells
toner and parts used in electronic printing and photocopying. Revenue from such
product sales is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. At this time the earnings process is complete and the risks and
rewards of ownership have transferred to the customer, which is generally when
the goods are shipped and all significant obligations of the Company have been
satisfied.
(M) ADVERTISING COSTS:
In accordance with SOP No. 93-7, Reporting on Advertising Costs, the Company
expenses all advertising expenditures as incurred. The Company incurred
$158,253, $146,255 and $106,077 in advertising costs during 2004, 2003 and 2002,
respectively.
(N) RESEARCH AND DEVELOPMENT EXPENSES:
Research and development costs are charged to expense when incurred and
aggregated $1,171,502, $1,176,085 and $946,848 for 2004, 2003 and 2002,
respectively, from continuing operations.
(O) SHIPPING AND HANDLING COSTS:
Shipping and handling costs of $122,566, $107,423 and $83,879 in 2004, 2003 and
2002, respectively, are included in sales and marketing expense.
F8
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(P) EARNINGS (LOSS) PER COMMON SHARE:
Earnings per common share are calculated under the provisions of SFAS No. 128,
"Earnings per Share". SFAS No. 128 requires the Company to report both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding plus all potential dilutive
common shares outstanding.
(Q) FOREIGN CURRENCY TRANSACTIONS:
During 2001, the Company began selling its products in certain overseas markets
where the prices were denominated in Euros. All balance sheet accounts resulting
from foreign transactions are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet date and statements of operations items
are translated at the weighted average exchange rates for the year. The
resulting translation adjustments are made directly to a separate component of
stockholders' equity. Gains and losses from foreign currency transactions, such
as those resulting from the settlement of foreign receivables (or payables) are
included in the consolidated statements of operations. As of December 31, 2004,
there were no material balance sheet items resulting from foreign currency
transactions. Aggregated gains of $154,583, $149,110 and $2,858 from the
settlement of foreign receivables were recognized for the 2004, 2003 and 2002
years, respectively, and are included in other expense on the statements of
operations.
(R) DEFERRED CHARGES:
The Company, in connection with an offering of its securities, incurs certain
costs that are deferred and then charged against the proceeds of the offering or
charged to expense in the event the offering is not completed.
The Company also defers certain expenditures related to the activities
associated with the acquisition of business assets, which the Company has
determined have a future economic benefit. These expenditures are then
capitalized into the cost of the assets upon acquisition. Management reviews
these assets whenever the circumstances and situations change such that there is
an indication that the carrying amount is not recoverable. When management's
best estimate of the future economic benefit of these assets is less than the
carrying amount, the carrying amount is reduced to the fair value and a
write-off is recognized. Deferred charges written off are not restored.
(R) RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective for public companies that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005 (i.e., third quarter 2005 for the
Company). All public companies must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is encouraged. The Company has not yet evaluated the impact of
adoption of this pronouncement, which must be adopted in the third quarter of
fiscal year 2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," ("SFAS 151") which clarifies the types of costs that
should be expensed rather than capitalized as inventory. This statement also
clarifies the circumstances under which fixed overhead costs associated with
operating facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the Company will adopt this standard in its fourth quarter of
fiscal 2005. The Company has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
F9
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NOTE 3. DISCONTINUED OPERATIONS:
On September 30, 2002, the Company completed a share exchange agreement with
Digital Color Print, Inc. and four of its former directors, whereby the Company
received 1.7 million shares of its common stock in exchange for all of the
shares of the common stock of its subsidiary, Logical Imaging Solutions, Inc.,
("Logical"). Based upon guidance provided by APB 29 in connection with
accounting for non-monetary transactions, the fair value of the 1.7 million
shares of common stock received was $2,678,993; the fair value (approximating
the net book value) of Logical plus the transaction costs incurred.
Logical designed, manufactured and delivered complete printing systems,
including software, control units and print engines to its customers. Logical's
development efforts focused on creating a digital variable printing process that
provides high-speed, color printing systems for commercial applications.
Following is summary financial information for Logical:
Nine Months Ended
September 30, 2002
------------------
Net sales $ 464,628
------------------
Loss before taxes (406,570)
Income tax benefit (145,244)
------------------
Net loss from discontinued
operations $ (261,326)
==================
Pursuant to the share exchange agreement, the Company also received a warrant to
purchase approximately 15% of the then outstanding common stock of Digital Color
Print, Inc. or Logical Imaging Solutions, Inc. The warrant was not assigned any
value, since it is not cashless, increases from $1.50 to $2.25 and then to $3.25
per share each year over three years, expires after three years, is not
registered for resale and has no current market.
In addition, the share exchange agreement, as amended, also provided that Mr.
Brennan's (the Company's former chief executive officer) employment agreement
would be immediately terminated upon the transaction's closing and severance of
$6,058 per two-week period, plus reimbursement of health and life insurance
premium costs formerly payable through June 10, 2003 will terminate as of March
10, 2003.
The financial statements and related notes presented herein have been restated
to reflect discontinued operations accounting as a result of this transaction.
NOTE 4. INVENTORIES:
Inventories for continuing operations consisted of the following components as
of December 31, 2004 and 2003:
2003 2003
------------- -------------
Raw materials $ 945,311 $ 631,960
Work-in-process 1,464,875 1,715,684
Finished goods 2,526,370 3,374,773
Obsolescence allowance (81,617) ( 98,089)
------------- -------------
Total $ 4,854,939 $ 5,624,328
============= =============
F10
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NOTE 5. PROPERTY AND EQUIPMENT:
Property and equipment of continuing operations consisted of the following as of
December 31, 2004 and 2003:
2004 2003
------------ ------------
Furniture and fixtures $ 120,080 $ 112,159
Test and computer equipment 1,003,925 712,176
Manufacturing machinery and equipment 6,727,889 6,805,761
Leasehold improvements 1,364,608 1,364,608
------------ ------------
9,216,502 8,994,704
Less: accumulated depreciation
and amortization (2,614,670) (2,020,870)
------------ ------------
$ 6,601,832 $ 6,973,834
============ ============
Depreciation and amortization expense amounted to $593,801, $537,369 and
$542,661 in 2004, 2003 and 2002, respectively.
NOTE 6. RELATED-PARTY TRANSACTIONS:
(A) LEASE:
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from whom the Company leases its Norcross,
Georgia, plant. The real property lease agreement between the Company and Kings
Brothers, LLC, was entered into on April 1, 1999, and was amended on February 5,
2003, extending the expiration date from March 31, 2009 to March 31, 2013 (the
Related Party - see Note 8). The rental payments for 2004, 2003 and 2002 were
$544,728, $531,444 and $518,484, respectively.
Minimum annual lease commitments are as follows:
2005 $ 558,346
2006 572,305
2007 586,612
2008 601,278
2009 616,310
2010 631,717
Thereafter 1,481,282
------------
Total minimum lease payments $ 5,047,850
============
(B) PURCHASES:
The Company purchases copier and laser printer products from an entity in which
three directors have a beneficial ownership interest. Purchases for the 2004,
2003 and 2002 years aggregated $4,028,303, $2,091,785 and $2,148,279,
respectively. See also Note 14.
F11
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NOTE 6. RELATED-PARTY TRANSACTIONS (CONTINUED):
(C) NOTES PAYABLE:
On March 14, 2002, the Company borrowed $500,000 from director, Sueling Wang, on
an unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and is evidenced in writing. On September 2, 2002, the note was
modified to extend the term to March 1, 2005, provide for a $100,000 principal
payment, decreased the interest rate to 6% per annum, provided for interest only
payments through February 28, 2003, and 24 monthly payments of principal and
interest beginning on April 1, 2003, in the amount of $17,735.67. The Company
borrowed the $500,000 to meet a supplier commitment for product. Interest paid
Sueling Wang on the note for the years ended December 31, 2004, 2003 and 2002
was $3,607, $14,641 and $36,296, respectively. As of December 31, 2004 and 2003,
the principal outstanding was $15,000 and $105,000, respectively.
On August 21, 2002, the Company borrowed $100,000 from director, Jui-Chi Wang,
on an unsecured basis. The loan bears interest at the rate of 6% per annum,
mature on March 1, 2005 and is evidenced in writing. The Company borrowed this
amount in order to repay $100,000 borrowed from director Sueling Wang on March
14, 2002. The note is interest only through February 28, 2003, and then is fully
amortizing over 24 months with principal and interest payments payable monthly
beginning April 1, 2003 in the amount of $4,434. As of December 31, 2004, 2003
and 2002, the interest accrued and paid on the note was $2,203, $ 5,115 and
$2,170, respectively. As of December 31, 2004 and 2003, the outstanding
principal balance on the note was $8,803 and $59,806, respectively.
On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, mature 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 $22,169.60. As of December 31, 2004, 2003 and 2002, interest accrued
and paid on the note was $11,017, $ 25,577 and $10,259, respectively. As of
December 31, 2004 and 2003, the principal outstanding was $44,013 and $299,032,
respectively.
(D) COMMON STOCK
On March 6, 2003, the Company received from Chi Fu Investment Co Ltd $6,075,000
of gross subscription proceeds for the public sale of 4,500,000 of its common
shares at a price of $1.35 per share in its offering on Form SB-2 filed with the
Securities and Exchange Commission. Chi Fu Investment Co Ltd is a wholly owned
subsidiary of the Company's affiliate, General Plastic Industrial Co., Ltd, and
as of December 31, 2004, Company directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each owned 8.0%, 8.4% and 1.8%, respectively, of General Plastic
Industrial Co., Ltd. ("GPI").
(E) MARKETING AND LICENSE AGREEMENT
On June 1, 2003, the Company entered into a Marketing and Licensing Agreement
with a foreign affiliate, GPI. 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. Royalty payments for this nine month period in 2004 aggregated
$86,073.
F12
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NOTE 7. BORROWING ARRANGEMENTS:
The Company has a $1.5 million revolving line of credit, as amended, with a
sub-limit for letters of credit of $500,000 and an outstanding balance of $0 as
of December 31, 2004, bearing interest at the one-month Libor interest rate in
effect two business days before the first day of the month plus 2.50%. As of
December 31, 2004, the interest rate was the one-month Libor rate of 2.28% plus
2.50% (4.78%). 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. On January 5,
2005, the irrevocable standby letter of credit was amended and reduced by
$500,000 to $1 million. 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. The Bank
agreement also contains various covenants that the Company is required to
maintain, and as of December 31, 2004, the Company was in compliance with these
covenants.
Long-term debt was comprised of the following as of December 31,
2004 2003
------------ ------------
Note maturing in 2005 $ 11,509 $ 17,121
------------ ------------
11,509 17,121
Less current maturities 6,071 5,612
------------ ------------
$ 5,438 $ 11,509
============ ============
The aggregate scheduled maturities of long-term debt for each of the next two
years are as follows:
2005 $ 6,071
2006 5,438
-----------
Total $ 11,509
===========
NOTE 8. INDUSTRIAL DEVELOPMENT REVENUE BOND:
On June 1, 1999, the Development Authority of Gwinnett County (the Authority)
issued $4,100,000 of industrial development revenue bonds on behalf of the
Company and a Related Party. The 3.07%, inclusive of the 1% letter of credit fee
annually, revenue bonds as of December 31, 2004, are payable in varying annual
principal and monthly interest payments through July 2019. The bond is secured
by all the assets of the Company and by real property owned by the Related
Party. The bonds along with the line of credit and term loan (see Note 6) are
held by two related financial institutions.
A loan agreement between the Authority and the Company and a Related Party
allows funds to effectively pass through the Authority to the Company. The
majority of the proceeds, $3,125,872, were used by the Company to purchase and
install certain manufacturing equipment, while $974,128 was used by the Related
Party to pay down the mortgage on the real property leased to the Company (see
Note 6). The Company and the Related Party are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and the Related Party, each has agreed to be responsible to the other
for their share of the bond obligations and that any party causing an act of
default shall be responsible for 100% of the bond obligations. The amount for
which the Related Party is responsible to the Company is reflected in current
and other assets of the Company. The Related Party amounts owed to the Authority
are secured by a lien on the real property leased by the Company and by personal
guarantees executed by members of the Related Party. At this time, the Company
believes that the Related Party portion of the bond is fully collectible. As of
December 31, 2004, the bond principal outstanding was $2,725,000 and the portion
due from the Related Party was $647,428.
F13
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NOTE 8. INDUSTRIAL DEVELOPMENT REVENUE BOND (CONTINUED):
The aggregate maturities of bonds payable for each of the next five years and
thereafter are as follows:
Company Related Party Total
------------- ------------- -------------
2005 $ 297,336 $ 92,664 $ 390,000
2006 308,772 96,228 405,000
2007 453,628 141,372 595,000
2008 60,992 19,008 80,000
2009 64,804 20,196 85,000
Thereafter 892,040 277,960 1,170,000
------------- ------------- -------------
Total $2,077,572 $ 647,428 $ 2,725,000
============= ============= =============
NOTE 9. STOCKHOLDERS EQUITY:
(A) COMMON STOCK AND STOCK WARRANTS:
The Company issued an aggregate of 6,000,000 shares of its common stock to the
stockholders of Logical and Image in exchange for their shares in Logical and
Image in a merger transaction consummated in 2000. Simultaneously, in 2000, the
Company affected a reverse stock split of one for 6.0779 shares of common stock.
As part of the merger, the Company granted warrants (the New Warrant) to
purchase up to 100,000 shares of the common stock of the Company to professional
advisors to the merger. The New Warrant entitles the warrant holder to purchase,
at any time and for a five-year period, a share of common stock of the Company
for $2.00 per share. In addition, original stockholders of Logical at December
31, 2001, own 225,507 similar warrants (the Old Warrant).
The Old Warrant entitled the warrant holder to purchase, at any time until
September 15, 2002, a share of common stock of the Company for $2.70 per share.
As of December 31, 2002 and 2001, the Company had received $0 and $110,904,
respectively, in proceeds from the exercise of Old Warrants. During August 2002
seven holders of Old Warrants were issued 38,085 shares of the Company's common
stock for having exercised Old Warrants to purchase 157,116 shares of the
Company's common stock, on a cashless basis, and on September 15, 2002, Old
Warrants to purchase 12,939 shares of the Company's common stock expired.
The Company issued Units consisting of common stock and common stock underlying
warrants to investors in a private placement approved by the Board of Directors
on August 29, 2000. Each Unit in the private placement was priced at $2.00 and
consisted of one common share of the Company's common stock and one warrant to
purchase one share of common stock at an exercise price of $2.00. An additional
warrant to purchase common stock of the Company, for each Unit purchased in the
private placement, was issued to subscribers, at no additional cost, whose
investment(s) aggregated at least $300,000. The warrants expired November 30,
2003. During 2001, the Company issued and sold 1,437,960 Units for a total of
$2,925,920 in cash and notes receivable. The Company also issued, at no
additional cost, 1,312,960 additional warrants during this same period. In March
2002, subsequent to the balance sheet date of December 31, 2001, the Company
rescinded one transaction entered into during 2001 for the sale of 25,000 shares
of common stock and warrants to purchase 25,000 shares of the common stock of
the Company. This transaction was retroactively reflected in the financial
statements as of December 31, 2001. The Company paid fees of $59,520 in
connection with the private placement. Additionally, the Company issued 129,837
warrants to finders to purchase the Company's common stock at an exercise price
of $2.00. During 2001, holders of the Company's warrant exercised 2,462,500
warrants on a cashless basis and received 1,104,815 shares of the Company's
common stock. During 2002, holders of the Company's warrant exercised 1,750
warrants on a cashless basis and received 705 shares of the Company's common
stock. No underwriting discounts or commissions were paid to any person. As of
March 12, 2002, all notes receivable have been fully paid by the investors.
On October 30, 2001, the Company issued and sold 1,000,000 shares of its common
stock to one accredited investor in exchange for $2 million. The purchase price
was $2.00 per share, of which $10,000 was payable in cash and $1,990,000 was
payable in the form of a recourse promissory note, payable at the earlier of (i)
six months after the registration statement covering the shares is declared
effective or (ii) twelve months from the date of the purchase agreement. The
Company also agreed to issue up to 500,000 warrants to purchase its common stock
to the investor in the event it resells the shares at a purchase price of at
least $2.00 per share. These warrants are exercisable for one year at an
exercise price of $2 per share. In March 2002, when the shares could not be
registered with the Securities and Exchange Commission while the promissory note
was unpaid, the Company and the investor mutually rescinded this transaction and
the Company retroactively reflected this rescission as of December 31, 2001.
F14
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NOTE 9. STOCKHOLDERS EQUITY (CONTINUED):
(A) COMMON STOCK AND STOCK WARRANTS (CONTINUED):
On February 27, 2003, the Company entered into an agreement with a stockholder
to repurchase 150,000 shares of common stock and warrants to purchase 300,000
shares of the Company's common stock for an aggregate cost of $300,000. The
shares and warrants were to be repurchased in approximately equal installments
over nine months, beginning in March and ending in November 2003. From March 24,
2003 through November 30, 2003, the Company repurchased 150,000 of the Company's
common shares and warrants to purchase 300,000 common shares, paying $300,000.
As of December 31, 2003, all shares and warrants repurchased under this
agreement have been cancelled.
On March 4, 2003, the Company completed the repurchase from a stockholder of
12,939 shares of the Company's common stock together with warrants to purchase
25,878 shares of the Company's common stock at an aggregate cost of $25,878. As
of December 31, 2003, all shares and warrants repurchased under this agreement
have been cancelled.
On March 13, 2003, the Company completed the public sale of 4,500,000 shares of
the Company's common stock at a price of $1.35 per share (see Note 6), whereby
the Company received $5,900,584 in net proceeds.
On April 18, 2003, the Company established a stock repurchase program under
which the Company's common stock, with an aggregate market value up to the
lesser of $1 million or 1 million shares, may be acquired in the open market or
through private or other transactions through September 30, 2005. As of December
31, 2004 and 2003, the Company has repurchased, cancelled and retired 40,200 and
44,500 shares of its common stock at a cost of $27,298 and $28,835 and at an
average price of $0.65 and $0.68 per share, respectively.
(B) STOCK OPTIONS:
After the merger transaction, on June 28, 2000, the Company granted options to
acquire 500,000 shares of the common stock of the Company to senior members of
the Company's management at an exercise price of $2.00 per share. The options
vest over a two to four year period and expire 5 years from their respective
date of vesting.
The Company granted options to acquire 710,000 shares of the common stock of the
Company to employees, officers and directors at an exercise price of $2.75 per
share during the year ended December 31, 2001; 535,000 options were granted to
officers and employees of which 25% vested immediately and the remainder vest
over 3 years. The officer and employee options expire 5 years from their
respective date of vesting. Each outside director of the Company was granted
options to acquire 25,000 shares of the common stock of the Company, for a total
of 175,000 options, effective upon his or her election or appointment to the
board of directors. The outside director options vest over 5 years, beginning
with the first anniversary date of his or her appointment to the board, and
expire 3 years from their respective date of vesting.
On July 8, 2002, the Company granted options to acquire 100,000 shares of the
common stock of the Company to an officer at an exercise price of $2.00 per
share of which 25% vested immediately and the remainder vest over 3 years. The
options expire 5 years from their respective date of vesting.
On April 18, 2003, the Company granted options to two directors to purchase
25,000 shares of the Company's common stock at an exercise price of $.45 per
share. The options vest at the rate of 5,000 per year beginning on the first
anniversary date of the grant and continuing annually thereafter and expire
three years from their respective date of vesting. On June 2, 2003, the Company
granted options to an officer to purchase 100,000 shares of the Company's common
stock at an exercise price of $.77 per share. The options vest at the rate of
25,000 per year beginning on the date of the grant and continuing annually
thereafter and expire five years from their respective date of vesting.
On June 2, 2003, the Company granted options to an officer to purchase 100,000
shares of the Company's common stock at an exercise price of $.77 per share of
which 25% vested immediately and the remainder vest over 3 years. The options
expire 5 years from their respective date of vesting.
As a result of employment terminations, resignations or retirements, as of
December 31, 2003, options to purchase 405,000 shares of common stock by
management or our employees have lapsed, and options to purchase 100,000 shares
of our common stock granted to directors have lapsed.
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. All stock options were granted at an
exercise price equal to the market value of the Company's stock as of the date
of grant.
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NOTE 9. COMMON STOCK AND EQUIVALENTS (CONTINUED)
(B) OPTIONS (CONTINUED):
A summary of the Company's stock option activity, and related information,
follows:
2004 2003 2002
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- --------- ---------- --------- ---------- ----------
Outstanding at beginning
of year 970,000 $2.33 945,000 $2.33 1,210,000 $2.44
Granted 465,000 .58 150,000 .66 100,000 2.75
Exercised - - -
Terminated ( 15,000) 2.75 (125,000) 2.30 (365,000) 2.75
---------- ---------- ----------
Outstanding at end of year 1,420,000 1.58 970,000 2.08 945,000 2.33
========== ========== ==========
Exercisable at end of year 1,037,500 $1.88 706,260 $2.33 667,500 $2.22
Weighted average fair value
of options granted during
the year $0.58 $0.53 $0.98
The weighted-average remaining contractual life of these options is 5 years.
No compensation expense has been recognized, as all options have been granted
with an exercise price equal to the fair value of the common stock upon date of
grant. No adjustment has been made for the non-transferability of the options or
for the risk of forfeiture at the time of issuance. Forfeitures are instead
recorded as incurred.
The following is a summary of total outstanding options and stock warrants at
December 31, 2004:
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted-Average
Range of Exercise Weighted-Average Remaining Weighted-Average
Prices Number Exercise Price Contractual Life Number Exercise Price
- ----------------- --------- ---------------- ----------------- --------- --------------
Options:
$0.45-$0.77 150,000 $0.66 6.06 years 60,000 $0.72
$0.54-$0.73 465,000 $0.58 5.37 years 202,500 $0.56
$2.00 450,000 $2.00 1.46 years 450,000 $2.00
$2.75 355,000 $2.75 2.74 years 330,000 $2.75
Warrants:
$2.00 100,000 $2.00 .52 years 100,000 $2.00
--------- ----------
Options and
warrants 1,520,000 $1.61 3.35 years 1,142,500 $1.89
========= ==========
(C) RETAINED EARNINGS:
The Company is limited in its ability to declare and pay dividends by the terms
of certain debt agreements.
F16
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NOTE 10. PENSION PLANS AND POSTRETIREMENT BENEFITS:
The Company has adopted the Color Image, Inc. Profit Sharing Retirement Plan.
Under this defined contribution plan, employees with one year or more of service
who have worked at least 1,000 hours and have reached age 21 are eligible for
participation. Participants may contribute between 1% and 15% of their
compensation as basic contributions. The Company will match 50% of the first 3%
deferred by any participant. Company contributions vest from 20% in the second
year of service to 100% in the sixth year. For the years ended December 31,
2004, 2003 and 2002, the Company incurred expenses of $18,437, $23,532 and
$20,783, respectively.
NOTE 11. INCOME TAXES:
The provision for income taxes is composed of the following:
2004 2003 2002
----------- ----------- -----------
Current:
Federal $ -- $ -- $ 70,538
State -- -- 13,199
Deferred:
Federal 262,000 243,100 160,482
State 49,000 45,600 30,027
----------- ----------- -----------
$ 311,000 $ 288,700 $ 274,246
=========== =========== ===========
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to income tax expense attributable to income from continuing operations is:
2004 2003 2002
--------- --------- --------
Tax at U.S. statutory rates 34.00% 34.00% 34.00%
State income taxes net of
Federal tax benefit 5.11 4.02 6.38
Other-net 1.00 1.98 (1.48)
-------- -------- --------
40.11% 40.00% 38.90%
======== ======== ========
The components of the net deferred income tax asset as of December 31, 2004 and
2003 are as follows:
2004 2003
------------ ------------
Deferred tax assets:
Inventory $ 35,000 $ 40,000
Accounts receivable 40,000 27,000
Accrued expenses -- 4,800
Federal tax credits --
Net operating loss carry-forward 450,000 683,000
------------ ------------
525,000 754,800
Valuation allowance for deferred tax assets (112,500) (334,800)
------------ ------------
412,500 420,000
Deferred tax liabilities:
Fixed assets (1,014,950) (712,700)
------------ ------------
Net deferred tax asset (liability) $( 602,450) $ (292,700)
============ ============
At December 31, 2004, the Company had net operating loss carry forwards (NOLs)
of approximately $1,000,000 for income tax purposes that expire in years
beginning 2020. The Company has provided for a 25% valuation allowance against
the deferred tax asset generated by its NOL's, since management believes that it
is more likely than not that this asset will be realized in the near future.
F17
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NOTE 12. EMPLOYMENT AGREEMENTS:
On June 28 and August 1, 2000, Color Imaging entered into employment agreements
with its President and Executive Vice President. Each of the employment
agreements has a 5-year term. Color Imaging is obligated to pay the President an
annual salary of $150,000 with a guaranteed increase of 5% per annum over the
term of the agreement. Color Imaging is obligated to pay the Executive Vice
President an annual salary of $144,000 with a guaranteed increase of 5% over the
term of his agreement. Each employee may terminate the agreement upon 6 months
notice to Color Imaging. Color Imaging may terminate each employee upon 6 months
notice by Color Imaging; provided, however, that Color Imaging is obligated to
pay to the employee his annual base salary, commissions or bonuses earned, and
benefits for a period of 12 months after the date of such notice.
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Executive Vice President voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. On July 14, 2003, the Executive
Vice President's employment agreement was modified, giving him the additional
duties of marketing and sales, provide for commissions, a reduced base salary of
$78,000 per annum and deleting the provision providing for a minimum 5% annual
salary increase. On October 1, 2003, the Executive Vice President's employment
agreement was again amended to return his base salary to its former level of
$151,200 and his commission program on certain sales of Color Imaging was
modified. On April 19, 2004, the Executive Vice President's employment agreement
was again amended, reducing his base salary to $120,000 and providing for a
commission on certain sales of Color Imaging.
The employment agreements with the above named officers also commits Color
Imaging to purchasing, for their benefit, certain life insurance plans. Color
Imaging pays the premiums and is the collateral assignee of four split dollar
life insurance policies owned by the President. Pursuant to the policies, Color
Imaging will, upon his death or earlier liquidation of each such policy, be
entitled to the refund of all premium payments made by Color Imaging on the
policies, and the balance of the proceeds will be paid to the President's
designated beneficiaries. During 2003 the President repaid the loan due Color
Imaging in connection with the split dollar life insurance policies, Color
Imaging then released its collateral assignment of the policies and is no longer
required to pay any premiums in connection with the four policies. The split
dollar life insurance premiums paid by Color Imaging during 2003 and 2002 were
$660 and $22,773, respectively. The amount due from its President in connection
with these life insurance policies at the years ended December 31, 2003 and 2002
was $0 and $134,877, respectively. For the periods during which such plans were
in place for the Executive Vice President for the years ended December 31, 2003
and 2002 Color Imaging paid or reimbursed the Executive Vice President $5,525
and $6,446, respectively, for such supplemental life insurance plans. On July
14, 2003, the Executive Vice President's employment agreement was amended to
delete the provision requiring Color Imaging to pay or reimburse premiums in
connection with his supplemental life insurance policy.
On April 1, 2004, the Company hired and entered into a two year employment
agreement with the Senior Vice President of Marketing and Sales, providing the
employee with an annual salary of $150,000, the lesser of three months severance
or the remainder of the term of the agreement if terminated by the Company
without cause and granting the employee options to purchase 100,000 shares of
the Company's common stock.
NOTE 13. SIGNIFICANT CUSTOMERS:
For the 2004 year, one unrelated distributor of imaging supplies accounted for
24% of net sales from continuing operations. For the 2003 year two unrelated
distributors/customers of imaging supplies accounted for 29% and 14% of net
sales from continuing operations. For the 2002 year two unrelated
distributors/customers of imaging supplies accounted for 47% and 20% of net
sales from continuing operations. The Company does not have a written or oral
contract with any of these customers. All sales are made through purchase
orders.
NOTE 14. SIGNIFICANT SUPPLIERS:
For the years ended December 31, 2004, 2003 and 2002, the Company purchased 34%,
43% and 44%, respectively, of its raw materials and supplies from one unrelated
foreign supplier in connection with the sale of copier products. For the years
ended December 31, 2004, 2003 and 2002, the Company purchased 30%, 16% and 10%,
respectively, of its all-in-one cartridges, components and parts from a related
supplier in connection with the sale of both copier and printer products. See
also Note 6(b).
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NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2004 and 2003 (in thousands, except per share
data).
Quarter
--------------------------------------------------
2004 First Second Third Fourth
- ---- --------- --------- --------- ---------
Sales, net $ 5,601 $ 5,669 $ 5,679 $ 4,886
Income from operations 101 287 151 97
Net income 103 198 107 56
Net income per share:
Basic .01 .02 .01 .00
Diluted .01 .02 .01 .00
========= ========= ========= =========
Quarter
----------------------------------------------------
2003 First Second Third Fourth
- ---- --------- --------- --------- ---------
Sales, net $ 5,629 $ 5,058 $ 5,361 $ 5,010
Income (loss) from operations 213 400 223 (169)
Net income (loss) 112 254 152 (85)
Net income per share:
Basic .01 .02 .01 .00
Diluted .01 .02 .01 .00
========= ========= ========= =========
NOTE 16. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving the development and manufacture of products used in electronic
printing. All of the Company's assets are domestic. The sales to unaffiliated
customers by geographic region are as follows:
2004 2003 2002
---------------------- ---------------------- ---------------------
United States $ 11,922,183 55% $ 12,507,490 59% $ 17,728,982 63%
Europe/Eastern Europe 5,539,810 25% 4,416,152 21% 5,638,161 20%
Mexico 2,488,963 11% 2,502,831 12% 2,477,862 9%
Asia/Southeast Asia 1,026,517 5% 814,387 4% 1,253,862 5%
Other 857,356 4% 816,741 4% 901,442 3%
------------ ------- ------------- ------ ------------ -------
Total $ 21,834,829 100% 21,057,601 100% $ 28,000,309 100%
============ ======= ============= ====== ============ =======
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed on our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
The Company's management does not expect that its disclosure controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control system, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdown can occur because of simple error or mistake. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
As of the end of the period covered by this report, December 31, 2004, (the
"Evaluation Date"), we carried out an evaluation, under the supervision and with
the participation of Color Imaging's management, including our Chief Executive
Officer, President and Chief Financial Officer, of the effectiveness of the
design and operation of Color Imaging's disclosure controls and procedures.
Based upon this evaluation, the Chief Executive Officer, President and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective in timely alerting them to material information relating to Color
Imaging required to be included in our periodic SEC filings.
CHANGES IN DISCLOSURE CONTROLS AND PROCEDURES
Although we concluded that our disclosures controls and procedures were
effective at the end of fiscal 2004 and in each interim period of fiscal 2004,
we recognized that further improvements could be made with regard to purchasing
and receiving. During 2004 the improvements made to our internal controls
included: the updating of our policies for disclosure controls and financial
reporting and the commencement of the updating of the procedures and tests to be
implemented during 2005 in compliance with SOX 404.
ITEM 9B. OTHER INFORMATION
NONE.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Each of the individuals listed in the table below is currently a director and or
executive officer of Color Imaging. The name and ages of each director and
executive officer, his principal occupation, and the period during which he has
served as a director is set forth in the table. Each of the executive officers
of Color Imaging was elected by the Board of Directors to serve until the Board
of Directors' meeting immediately following the next annual meeting of
shareholders or until his earlier resignation or removal by the Board of
Directors:
NAME AGE SERVICE AS A DIRECTOR POSITION
- --------------------------- ------- ----------------------------- -------------------------------------------
Jui-Kung Wang 61 Since September 2001 Chief Executive Officer, Director
and Chairman of the Board
Sueling Wang, PhD 51 Since June 2000 President, Vice Chairman and Director
Morris E. Van Asperen 61 Since June 2000 Executive Vice President, Chief Financial
Officer, Secretary and Director
Patrick J. Wilson 62 Since April 2004 Senior Vice President, Marketing and Sales
Yi-Jen Wang 28 Since April 2003 Assistant Vice President and Director
Jui-Hung Wang 58 Since June 2001 Director
Jui-Chi Jerry Wang 48 Since June 2000 Director
Richard S. Eiswirth 35 Since April 2003 Director
Color Imaging's board of directors retains the responsibilities of the
Compensation Committee, and upon the divestiture of Logical Imaging Solutions on
September 30, 2002, and resultant resignation of the directors affiliated
therewith, the responsibilities of the Audit Committee were performed by the
entire board until the appointment of another independent director and audit
committee member in April 2003.
The employment histories of Color Imaging's directors and executive officers is
set forth below:
Jui-Kung (Elmer) Wang, Chief Executive Officer and Chairman of the Board since
August 2003, has served as a director of Color Imaging since September 2001. He
was a founder of Color Image, Inc. in 1989 and its Chairman until its merger
with Color Imaging. He is a co-founder and has served as a director of General
Plastic Industrial Co., Ltd, a leading Taiwan based manufacturer of after market
injection molded cartridges and accessories for copiers and laser printers since
1978. In 1998 Mr. Wang was a founding member of Kings Brothers LLC, which leases
space to Color Imaging we use for our headquarters and manufacturing facilities
in Norcross, Georgia. Mr. Wang has been a professor of management with Tung-Hai
University, Taiwan for over 20 years. He has received a bachelor's degree in
economics, and MBA and PhD degrees in management.
Sueling Wang, PhD., became President and Vice-Chairman of Color Imaging in June
2000. From 1989 to 2000, he served as President and director of Color Image,
Inc., which was merged with Color Imaging. Dr. Wang was also a founder of Color
Image Inc. In 1998, Dr. Wang was a founding member of Kings Brothers LLC, which
leases space to Color Imaging used for our headquarters and manufacturing
facilities in Norcross, Georgia. Dr. Wang received a M.S. degree from the
University of Windsor, in Ontario, Canada and a PhD degree from the University
of Detroit. Dr. Wang's expertise in resin synthesis brought him into the toner
industry and led to the formation of Color Image, Inc. in 1989.
Morris E. Van Asperen has served as Executive Vice President, Chief Financial
Officer and director of Color Imaging since June 2000. In June 2001 he was made
Secretary and on July 14, 2003, he was given the additional responsibilities of
Marketing and Sales, which he held until April 1, 2004. From 1998 he served as
director of Logical Imaging Solutions and was from August 2000 its Executive
Vice President, Chief Financial Officer and Secretary until it was disposed of
by Color Imaging in September 2002. In 1986 he was employed by the National Bank
of California as Senior Vice President, Corporate Banking, and when he left the
bank in July 2000 he was its Executive Vice President and Credit Administrator.
Mr. Van Asperen also has extensive experience as a financial and management
consultant to businesses of up to $50 million in revenues and 1,000 employees in
construction, household goods, industrial glass, electronics manufacturing and
software development. From 1977 to 1984, he served as Vice President & Chief
Financial Officer of ATE Associates, Inc., a supplier of test fixtures and
software for numerous military aircraft programs. Mr. Van Asperen received a
B.S. degree in Mathematics from the University of Oklahoma and an M.B.A. degree
from Pepperdine University.
Patrick J. Wilson has served as Senior Vice President of Marketing and Sales
since April 2004. Prior to joining Color Imaging in April 2004 he consulted to
the Company for the previous three years and assisted the Company in increasing
copier product sales, identifying new copier products to be developed and
recruiting manufacturer's representatives to sell the Company's products
directly to dealers and distributors. Prior to this from 1990 to 1998 Mr. Wilson
held executive positions with Lanier Worldwide, leaving as worldwide sourcing
director. From 1986 until 1990 Mr. Wilson was with the Harris/3M joint venture
company, leaving as vice president/general manager of the facsimile division.
From 1968 until 1986 he held positions with 3M, and was their engineering
manager prior to becoming vice president of research and development for the
Harris/3M joint venture. Mr. Wilson has a BS degree in chemical engineering from
Michigan Tech and an MBA from Xavier University.
54
Yi-Jen Wang has served as a director of Color Imaging since April 2003. Until
her resignation on January 28, 2005, to relocate outside of the country, she was
an Assistant Vice President and Human Resources Manager, having first been
employed by Color Imaging in February 2003. Prior to that she is attend the
University of San Francisco, pursuing an MBA degree. From October 2000 to June
2001 Ms. Wang served as a property manager for Kings Brothers LLC. From June
1998 to August 2000 Ms. Wang served as controller for GPI-USA, Inc. until it
discontinued its warehouse and marketing activities in the United States. From
January 1997 to May 1998 Ms. Wang was a sales representative assistant for our
affiliate General Plastic Industrial Co Ltd, Taiwan, R.O.C. Ms. Wang received a
Bachelor of Arts degree in June 1998 from Providence University, Taiwan, R.O.C.
Jui-Hung (Jack) Wang has served as a director of Color Imaging since June 2001
and was Chairman from June 2002 through August 2003. He was a founder and
director of Color Image, Inc. until its merger with Color Imaging. He is a
founder and serves as Chairman of General Plastic Industrial Co., Ltd, a leading
Taiwan based manufacturer of after market injection molded cartridges and
accessories for copiers and laser printers. Since January 2001, Mr. Wang has
served as a director of Taiwan Yu-Tzu Company, a food company. In 1998, Mr. Wang
was a founding member of Kings Brothers LLC, which leases space to Color Imaging
used for our headquarters and manufacturing facilities in Norcross, Georgia.
From 1986 to 1994, Mr. Wang was mayor of Wu-Chi Town, Taiwan.
Richard S. Eiswirth has been a Director of the Company since April 2003 and is
Chairman of the Audit Committee. Since April 2002 he has been involved in
capital raising efforts for several start-ups. From August 1999 to April 2002,
he was Senior Executive Vice President and Chief Financial Officer of Netzee,
Inc., a publicly owned affiliate of The Intercept Group. Mr. Eiswirth was
responsible for the initial public offering and the identification, evaluation
and negotiation of ten acquisitions that fortified Netzee's product offerings.
Additionally, he facilitated the disposition of three operating units during the
company's restructuring. He has extensive experience in managing investment
bankers, brokers, attorneys, and accountants. For nine years prior to joining
Netzee, Mr. Eiswirth worked for Arthur Andersen LLP, where he was a senior
manager. In this capacity he provided audit, accounting, due diligence, merger
and acquisition, and consulting services to a variety of industries including
real estate, technology, banking, insurance and financial services. A certified
public accountant (CPA), Eiswirth graduated cum laude from Wake Forest
University in 1991 with a Bachelor of Arts degree in accounting.
Jui-Chi (Jerry) Wang has served as a director of Color Imaging since June 2000.
From 1994 until 2000, he served as a director of Color Image, Inc., which was
merged with Color Imaging. Since 1984, Mr. Wang has served as President of
General Plastic Industrial Co. Ltd (GPI), a Taiwan-based plastics manufacturer
specializing in injection moldings and more particularly toner cartridges and
accessories for copiers and laser printers. In 1998, Mr. Wang was a founding
member of Kings Brothers LLC, which leases space to Color Imaging used for our
headquarters and manufacturing facilities in Norcross, Georgia. Mr. Wang
received a Master's Degree in Computer Engineering from the University of
Southern California.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The members of the board of directors, certain executive officers of Color
Imaging and persons who hold more than 10% of Color Imaging's outstanding common
stock are subject to the reporting requirements of Section 16(a) of the Exchange
Act, which require them to file reports with respect to their ownership of
common stock and their transactions in common, stock. Based upon the copies of
Section 16(a) reports that the Color Imaging received from such persons for
their 2004 fiscal year transactions in the common stock and their common stock
holdings, Color Imaging believes that all reporting requirements under Section
16(a) for such fiscal year were met in a timely manner by its executive
officers, board members and greater than ten-percent stockholders, excepting the
late filing of (a) one Form 4 filed on August 23, 2004, by Patrick J. Wilson
disclosing the purchase of 6,000 shares of our common stock, (b) the late filing
of a Form 3 and Form 4 for Patrick J. Wilson in connection with his appointment
as an officer and initial exempt option grant, and (c) the late filing of one
Form 4 each by directors Jui-Kung Wang, Sueling Wang, Jui-Chi Wang, Jui-Hung
Wang and Morris E. Van Asperen reflecting one exempt option grant.
AUDIT COMMITTEE COMPOSITION
The Company has a separately designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Richard S. Eiswirth, CPA, is the chairman and only
member of the audit committee. The Company's Board of Directors has determined
that all members of the Company's Audit Committee are "independent" as defined
in Rules 1400(a)(14) of the NASDAQ listing standards.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors has determined that in its judgment, Mr.
Eiswirth qualifies as an "audit committee financial expert" in accordance with
the applicable rules and regulations of the Securities and Exchange Commission
("SEC"). An audit committee financial expert is a person who has (1) an
understanding of generally accepted accounting principles and financial
statements; (2) the ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and reserves; (3)
experience preparing, auditing, analyzing or evaluating financial statements
that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the registrant's financial statements, or experience
actively supervising one or more persons engaged in such activities; (4) an
understanding of internal controls and procedures for financial reporting; and
(5) an understanding of audit committee functions
55
CODE OF ETHICS
On December 29, 2003, the Company adopted a Code of Ethics (as defined in Item
406 of Regulation S-K) that applies to our Chief Executive Officer, Chief
Financial Officer and Controller. The Code of Ethics was filed as an Exhibit to
the Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned by
our chief executive officer and the three other most highly compensated
executive officers who were serving as such as of December 31, 2004, 2003 and
2002 (collectively, the Named Executive Officers), whose aggregate compensation
for fiscal years 2004, 2003 and 2002 exceeded $100,000 for services rendered in
all capacities to Color Imaging and its subsidiaries for that fiscal year.
Annual Compensation Long Term Compensation
---------------------------------------------- ----------------------------------------
Other Annual Restricted Securities LTIP
Compensation Stock Underlying Payments All Other
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) Awards ($) Options/SARS(#) ($) Compensation
- --------------------------- -------- ----------- ----------- -------------- ------------ ---------------- ---------- --------------
Jui-Kung Wang (2) 2004 97,808 4,200 18,354 -- 25,000 -- --
Chief Executive Officer 2003 29,908 -- 6,501 -- -- -- --
2002 N/A -- 1,000 -- -- -- --
Dr. Sueling Wang (3) 2004 115,500 4,000 12,841 100,000 -- --
President 2003 136,826 140,000 4,203 -- -- -- --
2002 158,439 -- 38,736 -- -- -- --
Morris E. Van Asperen (4) 2004 152,589 3,500 7,082 -- 100,000 -- --
Executive Vice President, 2003 162,001 -- 9,204 -- -- -- --
Chief Financial Officer & 2002 151,200 -- 14,353 -- -- -- --
Secretary
Patrick J. Wilson (5)
Senior Vice President 2004 110,769 3,000 69,426 -- 100,000 -- --
2003 -- -- -- --
2002 -- -- -- --
(1) For named executive officers the amount reported represents the cost of
group insurance benefits, Color Imaging's matching contribution to the
401(k) plan for the officer, other life insurance policies maintained for
him, and other compensation as further described in the notes for each
officer, respectively.
(2) Mr. Wang was employed by Color Imaging on August 15, 2003, and other annual
compensation included the personal benefit of his use of a company
automobile of $10,273 and $4,442 during 2004 and 2003, respectively, and
$5,342 for the personal use of a corporate apartment. Also included in
other annual compensation are the fees paid to the named executive officer
while he was an outside director which were $0, $ 2,000 and $1,000 during
2004, 2003 and 2002, respectively. The options were granted by action of
the board on May 18, 2004, with 50% vesting immediately and the remainder
vesting equally upon the next two anniversary dates of the grant, expiring
5 years from their respective date of vesting. As of December 31, 2004, Mr.
Wang had 50,000 options, 22,500 of which were vested, to purchase Color
Imaging's common stock at an exercise prices ranging from $0.54 to $2.75.
(3) Other annual compensation includes the personalbenefit of his use of a
company automobile of $5,000 and $1,358 during 2004 and 2003, respectively
and split dollar life insurance premiums of $0, $660 and $16,773 during
2004, 2003 and 2002, respectively. During 2003 the officer repaid the loan
due to the Color Imaging in connection with the split dollar life insurance
policy and the collateral assignment of the policy was released by Color
Imaging and the plan between Color Imaging and the officer was terminated.
Options granted by action of the board on May 18, 2004. 50% vested
immediately and the balance vest equally upon each of the next two
anniversary dates of the grant. The options expire five years after their
respective vesting date(s). As of December 31, 2004, Dr. Wang had 400,000
options, 350,000 of which were vested, to purchase Color Imaging's common
stock at exercise prices ranging from $0.54 to $2.75.
(4) Other annual compensation includes, by agreement, the reimbursement for a
supplemental life insurance policy for the benefit of the officer. The life
insurance premiums reimbursed or paid by Color Imaging in 2004, 2003 and
2002 were $0, $5,525, and $6,446, respectively. In 2003 the officer
voluntarily terminated the life insurance reimbursement program previously
funded by Color Imaging; and, subsequently, the officer's employment
agreement was modified to delete the provision of the additional life
insurance benefit. Options granted by action of the board on May 18, 2004.
50% vested immediately and the balance vest equally the next two
anniversary dates of the grant. The options expire five years after their
respective vesting date(s). As of December 31, 2004, Mr. Van Asperen had
400,000 options, 350,000 of which were vested, to purchase Color Imaging's
common stock at exercise prices ranging from $0.54 to $2.75.
(5) Other annual compensation includes payments made to the officer prior to
his employment by Color Imaging under the consulting agreement between the
officer and the Color Imaging. Options granted by action of the board upon
the employment of the officer on April 1, 2004. 20% vested immediately and
the balance vest equally upon each of the next four anniversary dates of
the grant. The options expire five years after their respective vesting
date(s). As of December 31, 2004, Mr. Wilson had 100,000 options, 25,000 of
which were vested, to purchase Color Imaging's common stock at an exercise
price of $0.73.
56
OPTION GRANTS TABLE
Options granted the Named Executive Officers during the year ended December 31,
2004 were:
Potential realizable
value at assume
annual rates of stock Alternative to
price appreciation (f) and g):
Individual Grants for the option term grant date value
- -------------------------------------------------------------------------------------- ----------------------- ------------------
Percent of
Number of total
securities options/SARS
underlying granted Exercise or
Options/SARS employees in base price Expiration Grant date
Name (#) fiscal year (%) ($/Share) date 5% ($) (f) 10% ($) (g) present value $
- ------------------------ -------------- ----------------- --------------- ------------ ----------- ----------- ------------------
Jui-Kung Wang (2) 25,000 5.4% $.54 05/18/11 8,490 21,516 ___
Chief Executive Officer
Dr. Sueling Wang (3) 100,000 21.5% $.54 05/18/11 33,960 86,062 ___
President
Morris E. Van Asperen
Executive Vice
President, Chief
Financial Officer 100,000 21.5% $.54 05/18/11 33,960 86,062 ___
& Secretary
Patrick J. Wilson 100,000 21.5% $.77 04/01/13 48,425 122,718 ___
Senior Vice President
OPTION EXERCISES AND YEAR-END VALUE TABLE
None of the Named Executive Officers exercised stock options during 2004. The
following table sets forth certain information regarding unexercised options
held at year-end by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 2004 AND OPTION VALUES AT DECEMBER 31, 2004
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
SHARES OPTIONS
ACQUIRED VALUE ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
- ------------------------- ------------- ------------- ------------- -------------
Jui-Kung Wang 0 0 22,500 27,500
Sueling Wang 0 0 350,000 50,000
Morris E. Van Asperen 0 0 350,000 50,000
Patrick J. Wilson 0 0 25,000 75,000
Based on the closing price of our common stock of $0.52 on December 31, 2004, no
unexercised options were in the money for the Named Executive Officers.
EMPLOYMENT AGREEMENTS
On June 28 and August 1, 2000, Color Imaging entered into employment agreements
with its President and Executive Vice President. Each of the employment
agreements has a 5-year term. Color Imaging is obligated to pay the President an
annual salary of $150,000 with a guaranteed increase of 5% per annum over the
term of the agreement. Color Imaging is obligated to pay the Executive Vice
President an annual salary of $144,000 with a guaranteed increase of 5% over the
term of his agreement. Each employee may terminate the agreement upon 6 months
notice to Color Imaging. Color Imaging may terminate each employee upon 6 months
notice by Color Imaging; provided, however, that Color Imaging is obligated to
pay to the employee his annual base salary, commissions or bonuses earned, and
benefits for a period of 12 months after the date of such notice.
57
Each of the officers voluntarily waived the annual increases to their salaries
that would have otherwise been payable upon the second anniversary of their
respective contracts. The President and Executive Vice President voluntarily
agreed to accept reduced annual increases upon the third anniversary of their
respective agreements in the amount of 2.5%. On July 14, 2003, the Executive
Vice President's employment agreement was modified, giving him the additional
duties of marketing and sales, provide for commissions, a reduced base salary of
$78,000 per annum and deleting the provision providing for a minimum 5% annual
salary increase. On October 1, 2003, the Executive Vice President's employment
agreement was again amended to return his base salary to its former level of
$151,200 and his commission program on certain sales of Color Imaging was
modified. On April 19, 2004, the Executive Vice President's employment agreement
was again amended, reducing his base salary to $120,000 and providing for a
commission or certain sales of Color Imaging.
The employment agreements with the above named officers also commits Color
Imaging to purchasing, for their benefit, certain life insurance plans. Color
Imaging pays the premiums and is the collateral assignee of four split dollar
life insurance policies owned by the President. Pursuant to the policies, Color
Imaging will, upon his death or earlier liquidation of each such policy, be
entitled to the refund of all premium payments made by Color Imaging on the
policies, and the balance of the proceeds will be paid to the President's
designated beneficiaries. During 2003 the President repaid the loan due Color
Imaging in connection with the split dollar life insurance policies, Color
Imaging then released its collateral assignment of the policies and is no longer
required to pay any premiums in connection with the four policies. The split
dollar life insurance premiums paid by Color Imaging during 2004, 2003 and 2002
were $0, $660, $15,773, respectively. The amount due from its President in
connection with these life insurance policies at the years ended December 31,
2004, 2003 and 2002 was $0, $0 and $134,877, respectively. Color Imaging paid or
reimbursed the Executive Vice President for such supplemental life insurance
plans $0, $5,525 and $6,446 during 2004, 2003 and 2002, respectively. On July
14, 2003, the Executive Vice President's employment agreement was amended to
delete the provision requiring Color Imaging to pay or reimburse premiums in
connection with his supplemental life insurance policy.
On April 1, 2004, the Company hired and entered into a two year employment
agreement with the Senior Vice President of Marketing and Sales, providing the
employee with an annual salary of $150,000, the lesser of three months severance
or the remainder of the term of the agreement if terminated by the Company
without cause and granting the employee options to purchase 100,000 shares of
the Company's common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire board of directors of the Company serves as the Compensation
Committee of the Company. Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang,
are owners in and Chairman, Auditor and President, respectively, of General
Plastic Industrial Co., LTD (GPI), a Taiwanese manufacturer of all in one and
injection molded cartridges and accessories for copiers and laser printers. For
the twelve months ended December 31, 2004, 2003 and 2002 we purchased
$4,028,303, $2,091,785 and $2,148,279, respectively, of all in one and injected
molded products from GPI.
On March 6, 2003, Color Imaging received from Chi Fu Investment Co Ltd
$6,075,000 of subscription proceeds for the public sale of 4,500,000 of our
common shares at a price of $1.35 per share in our offering on Form SB-2 filed
with the Securities and Exchange Commission. Chi Fu Investment Co Ltd is a
wholly owned subsidiary of our affiliate General Plastic Industrial Co., Ltd,
and as of December 31, 2004 our directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each own 8.03%, 8.39% and 1.84%, respectively, of General Plastic
Industrial Co., Ltd.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q on October 28, 2003) with its
affiliate General Plastic Industrial Co Ltd. Per the Marketing and Licensing
Agreement General Plastic Industrial Co Ltd agrees to indemnify and hold
harmless Color Imaging for any costs and expense arising from any defective
licensed product, and/or any recalled licensed product including litigation
arising therefrom. In addition, General Plastic Industrial Co Ltd agrees to
credit Color Imaging for product cost, shipping and related expenses arising
from any defective licensed product, and/or any recalled licensed product. On
November 15, 2004 the Marketing and License Agreement was amended and replaced
in its entirety effective April 1, 2004. The amended agreement is filed herewith
as Exhibit 10.12. For the periods ended December 31, 2004, 2003 and 2002, the
Company paid its affiliate royalties under the Marketing and Licensing Agreement
of $86,073, $0 and $0, respectively.
COMPENSATION OF DIRECTORS
Directors who are employees of Color Imaging receive no separate compensation
for their service as directors. Our non-employee directors are each granted by
the board of directors nonqualified options to acquire 25,000 shares of our
common stock at the then market price per common share, effective upon his or
her election or appointment to the board of directors. The non-employee director
options vest over 5 years, beginning with the first anniversary date of his or
her appointment to the board, and expire 3 years from their respective date of
vesting. Also, non-employee directors receive $1,000 for each meeting of the
board of directors physically attended and $500 for meetings conducted by
teleconference or unanimous written consent. Directors who are members of the
Audit Committee receive $500 for each meeting of the Audit Committee and
beginning in 2005 will be paid $1,000 for each meeting of the Audit Committee.
Non-employee directors are also reimbursed for travel expenses for attending
Board and committee meetings. Color Imaging has no consulting contracts or other
arrangements between it and non-employee directors in return for their services
on the board.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to Color Imaging with respect
to the beneficial ownership of Color Imaging's common stock as of February 18,
2005 by:
o each stockholder known by Color Imaging to own beneficially more than 5% of
Color Imaging's common stock;
o each Named Executive Officer;
o each of Color Imaging's directors; and
o all directors and executive officers as a group.
Except as otherwise indicated in the footnotes, Color Imaging believes that the
beneficial owners of the common stock listed below, have sole voting power and
investment power with respect to such shares of common stock indicated. In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of the date of this report are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percent ownership of
any other person.
PERCENTAGE OF
NAME OF BENEFICIAL OWNER NO. OF SHARES OWNERSHIP(1)
- ---------------------------------- ------------------- ------------------
Sueling Wang (2) 2,056,551 15.8%
Morris E. Van Asperen (3) 480,906 3.7%
Jui-Chi Wang (4)(5) 5,226,950 40.2%
Jui-Hung Wang (5)(6) 5,226,678 40.2%
Jui-Kung Wang (5)(7) 4,838,709 37.2%
Patrick J. Wilson (8) 32,000 *%
Yi-Jen Wang 35,000 *%
Richard S. Eiswirth (9) 5,000 *%
Chi Fu Investment Co Ltd (5) 4,500,000 35.3%
General Plastic Industrial Co., Ltd (5) 4,500,000 35.3%
Executive officers and directors
as a group (8 persons) (10) 8,829,794 65.5%
- ----------------
* Less than 1%
(1) Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). The table above includes the number of shares underlying
options and warrants which are exercisable within 60 days after the date of
this report.
(2) Includes: (a) 600,000 shares owned by Sueling Wang's four children, (b)
141,204 shares owned by Yik-Li Sih, Sueling Wang's wife, in which Dr. Wang
may be deemed to have pecuniary interest. Dr. Wang disclaims beneficial
ownership of such 741,204 shares. Also includes 350,000 shares subject to
options that are currently exercisable.
(3) Includes 350,000 shares subject to options that are currently exercisable.
(4) Includes 32,500 shares subject to options that are currently exercisable.
(5) Includes 4,500,000 shares held by Chi Fu Investment Co Ltd ("CFI"). CFI is
a wholly owned subsidiary of General Plastic Industrial Co., Ltd ("GPI").
Jui-Hung Wang, Jui-Chi Wang and Jui-Kung Wang, owns 8.03%, 8.39% and 1.84%,
respectively, of the outstanding common stock of GPI as of December 31,
2004. Each of Messrs. Wang disclaims beneficial ownership of the shares
held by CFI except to the extent of his pecuniary interest.
(6) Includes 27,500 shares subject to options that are currently exercisable.
(7) Includes 22,500 shares subject to options that are currently exercisable.
(8) Includes 20,000 shares subject to options that are currently exercisable.
(9) Includes 5,000 shares subject to options that are currently exercisable.
(10) Includes 782,500 shares subject to options that are exercisable within 60
days after the date of this prospectus.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, Jui-Hung Wang, Jui-Kung Wang, Sueling Wang and Jui-Chi Wang, own
Kings Brothers, LLC, the landlord from whom the Company leases its Norcross,
Georgia, plant. The real property lease agreement between the Company and Kings
Brothers, LLC, was entered into on April 1, 1999, and was amended on February 5,
2003, extending the expiration date from March 31, 2009 to March 31, 2013 (the
Related Party - see Note 8). The rental payments for 2004, 2003 and 2002 were
$544,728, $531,444 and $518,484, respectively.
On November 19, 2001, we borrowed $200,000 on an unsecured basis from Kings
Brothers LLC. The revolving loan bears interest at the rate of 9% per annum,
matured on November 18, 2002 and is evidenced in writing. We paid the principal
and interest outstanding on December 10, 2001, paying $790.38 in total interest
to Kings Brothers. We borrowed this amount for general corporate purposes,
including working capital. On March 20, 2002 the revolving loan arrangement was
cancelled.
59
On June 1, 1999, the Development Authority of Gwinnett County (the Authority),
issued $4,100,000 of industrial development revenue bonds on behalf of the
Company and Kings Brothers LLC. The 3.07%, inclusive of the 1% letter of credit
fee annually, revenue bonds as of December 31, 2004, are payable in varying
annual principal and monthly interest payments through July 2019. The bond is
secured by all the assets of the Company and by real property owned by Kings
Brothers LLC. 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 purchase and
install certain manufacturing equipment, while $974,128 was used by Kings
Brothers LLC to pay down the mortgage on the real property leased to the
Company. The Company and Kings Brothers LLC are jointly obligated to repay any
outstanding debt. Under the Joint Debtor Agreement of June 28, 2000, between the
Company and Kings Brothers LLC, each has agreed to be responsible to the other
for their share of the bond obligations and that any party causing an act of
default shall be responsible for 100% of the bond obligations. The amount for
which Kings Brothers LLC is responsible to the Company is reflected in current
and other assets of the Company. Kings Brothers LLC amounts owed to the
Authority are secured by a lien on the real property leased by the Company and
by personal guarantee of the managing member of Kings Brothers LLC. At this
time, the Company believes that the Kings Brothers LLC portion of the bond is
fully collectible. As of December 31, 2004, the bond principal outstanding was
$2,725,000 and the portion due from Kings Brothers LLC was $647,428.
Directors Jui-Hung Wang, Jui-Kung Wang, Jui-Chi Wang, are owners in and
Chairman, Auditor and President, respectively, of General Plastic Industrial
Co., LTD (GPI), a Taiwanese manufacturer of injection molded cartridges and
accessories for copiers and laser printers. For the twelve months ended December
31, 2004, 2003 and 2002 we purchased $4,028,303, $2,091,785 and $2,148,279,
respectively, of injected molded products from GPI.
On March 14, 2002, the Company borrowed $500,000 from director, Sueling Wang, on
an unsecured basis. The interest rate on the loan was 12% per annum, matured on
March 14, 2003 and is evidenced in writing. On September 2, 2002, the note was
modified to extend the term to March 1, 2005, provide for a $100,000 principal
payment, decreased the interest rate to 6% per annum, provided for interest only
payments through February 28, 2003, and 24 monthly payments of principal and
interest beginning on April 1, 2003, in the amount of $17,735.67. The Company
borrowed the $500,000 to meet a supplier commitment for product. Interest paid
Sueling Wang on the note for the years ended December 31, 2004, 2003 and 2002
was $3,607, $14,641 and $36,296, respectively. As of December 31, 2004, 2003 and
2002, the principal outstanding was $15,000, $105,000 and $400,000,
respectively.
On August 21, 2002, the Company borrowed $100,000 from director, Jui-Chi Wang,
on an unsecured basis. The loan bears interest at the rate of 6% per annum,
matures on March 1, 2005 and is evidenced in writing. The Company borrowed this
amount in order to repay $100,000 borrowed from director Sueling Wang on March
14, 2002. The note is interest only through February 28, 2003, and then is fully
amortizing over 24 months with principal and interest payments payable monthly
beginning April 1, 2003 in the amount of $4,434. As of December 31, 2004, 2003
and 2002, the interest accrued and paid on the note was $2,203, $ 5,115 and
$2,170, respectively. As of December 31, 2004, 2003 and 2002 the outstanding
principal balance on the note was $8,803, $59,806 and $100,000, respectively.
On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000,
respectively, from director, Jui-Hung Wang, on an unsecured basis. The loan
bears interest at the rate of 6% per annum, matures on March 1, 2005 and is
evidenced in writing. The Company borrowed this amount in order to make a
principal payment due on its industrial development bond in the approximate
amount of $255,000, for the acquisition of capital equipment in the approximate
of $125,000 and for general corporate purposes. The note is interest only
through February 28, 2003, and then is fully amortizing over 24 months with
principal and interest payments payable monthly beginning April 1, 2003 in the
amount of $22,169.60. As of December 31, 2004, 2003 and 2002, interest accrued
and paid on the note was $11,017, $ 25,577 and $10,259, respectively. As of
December 31, 2004, 2003 and 2002, the principal outstanding was $44,013,
$299,032 and $500,000, respectively.
Directors Jui-Chi Wang and Jui-Hung Wang purchased 350,000 and 50,000 Units
(each Unit consisted of one share of common stock and a warrant to purchase one
share of common stock at an exercise price of $2.00 per share) for $700,000 and
$100,000, including promissory notes, respectively. Jui-Chi Wang's $700,000
recourse promissory note without interest was made on December 1, 2001, due
December 31, 2001 and paid in full on December 18, 2001. Jui-Hung Wang's $99,500
recourse promissory note without interest was made on December 24, 2001, due
April 1, 2002 and paid in full on January 30, 2002. The terms of the notes were
consistent with the terms of notes of third parties who purchased Units in the
private placement from Color Imaging.
We believe that the terms of the loans and borrowings from affiliates were on
terms more favorable than were otherwise available from third parties.
On September 11, 2002, we entered into a share exchange agreement with four of
our directors, Messrs. Brennan, St. Amour, Langsam and Hollander, whereby a new
company, Digital Color Print, Inc., owned by them, acquired the capital stock of
our wholly owned subsidiary, Logical Imaging Solutions, in exchange for
approximately 1.6 million shares of the our common stock. On September 20, 2002,
we entered into an amendment to the share exchange agreement pursuant to which
the number of shares of the our common stock to be exchanged for the capital
stock of Logical Imaging Solutions was increased from 1.6 million to 1.7 million
and a requirement was added that Logical Imaging Solutions have at least
$100,000 on hand at closing. On September 30, 2002, the share exchange
transaction was closed, and the 1.7 million shares of our stock were received
and retired by our stock transfer agent (see Financial Statements "Note 3 -
Discontinued Operations").
60
On March 6, 2003, the Company received from Chi Fu Investment Co Ltd $6,075,000
of subscription proceeds for the public sale of 4,500,000 of its common shares
at a price of $1.35 per share in its offering on Form SB-2 filed with the
Securities and Exchange Commission. Chi Fu Investment Co Ltd is a wholly owned
subsidiary of the Company's affiliate, General Plastic Industrial Co., Ltd, and
as of December 31, 2004, Company directors Jui-Hung Wang, Jui-Chi Wang and
Jui-Kung Wang each owned 8.03%, 8.39% and 1.84%, respectively, of General
Plastic Industrial Co., Ltd.
On June 1, 2003, Color Imaging entered into a Marketing and Licensing Agreement
(refer to Exhibit 10.14 filed with Form 10-Q on October 28, 2003) with its
affiliate General Plastic Industrial Co Ltd, which was amended and restated on
November 15, 2004, effective April 1, 2004 and is filed herewith. Per the
Marketing and Licensing Agreement General Plastic Industrial Co Ltd agrees to
indemnify and hold harmless Color Imaging for any costs and expense arising from
any defective licensed product, and/or any recalled licensed product including
litigation arising therefrom. Further General Plastic Industrial Co Ltd agrees
to credit Color Imaging for product cost, shipping and related expenses arising
from any defective licensed product, and/or any recalled licensed product. For
the periods ended December 31, 2004, 2003 and 2002, the Company paid its
affiliate royalties under the Marketing and Licensing Agreement of $86,073, $0
and $0, respectively.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS IN FISCAL 2004 AND 2003
During fiscal 2004 and 2003 the Company incurred the following fees for services
performed by Lazar Levine & Felix LLP:
Fiscal 2004 Fiscal 2003
----------------- -----------------
Audit Fees $ 83,339 $ 78,671
Audit Related Fees 0 0
Tax Fees(1) 14,775 15,000
All Other Fees(2) 500 4,895
(1) The aggregate fees for all professional services related to tax compliance
and the preparation and filing of Federal and state income tax returns.
(2) Other services included in fees in connection with the review of Color
Imaging's Registration Statement filings on Form S-8 and Form SB-2 and the
consent to the inclusion of Color Imaging's financial statements contained
therein.
The Company's audit committee approved all of the services described above. The
audit committee has determined that the payments made to its independent
accountants for these services are compatible with maintaining such auditors'
independence.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
The Committee has the sole authority to appoint or replace, compensate, and
oversee the work of any independent auditor, who must be, when required, a
registered firm as defined by law, whose purpose is the preparation or issuance
of an audit report or related work. The independent auditor's reports and other
communications are to be delivered directly to the Committee, and the Committee
is responsible for the resolution of disagreements between management and the
independent auditor regarding financial reporting.
The Committee pre-approves all audit and non-audit services and all engagement
fees and terms in connection therewith, except as otherwise permitted by
regulation or the exchange.
The fees for professional services other than Audit Fees, in aggregate, for 2004
and 2003, approved by the Committee, were approximately $15,275 and $19,895,
respectively. All of the hours expended on the principal accountant's engagement
to audit the financial statements of Color Imaging for the year 2004 and 2003
were attributable to work performed by full-time, permanent employees of the
principal accountant.
61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The consolidated financial statements required by this item are set
forth on the pages indicated at Item 8.
(2) Financial Statement Schedule for the years ended December 31, 2004, 2003 and
2002:
Schedule II - Valuation and Qualifying Accounts is set forth below.
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
- -----------------------------------------------------------------------------------------------------------
For the Year Balance at Charged
Ended Beginning (credited) Balance at
December 31, of Year to Expense Write-offs End of Year
------------- ------------- ------------- ------------- -------------
1. ALLOWANCE FOR
DOUBTFUL ACCOUNTS
2004 $ 67,839 $ 35,000 $ 9,638 $ 93,201
2003 64,178 45,000 41,339 67,839
2002 72,911 -- 8,733 64,178
2. RESERVE FOR
OBSOLETE INVENTORY
2004 $ 98,089 $ 280,000 $ 296,472 $ 81,617
2003 34,964 275,000 211,875 98,089
2002 73,830 240,000 278,866 34,964
3. DEFERRED TAX
VALUATION ALLOWANCE
2004 $ 334,800 $ 309,750 $ -- $ 602,450
2003 -- 334,800 -- 334,800
2002 53,760 (53,760) -- --
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
(3) Exhibits:
Incorporated by reference herein to Item 15(c) below.
(c) Exhibits:
The following exhibits are filed herewith or incorporated herein by reference:
(a) EXHIBITS
Exhibit
No. Description
- -------- -----------
2.1 Merger Agreement and Plan of Reorganization dated May 16, 2000,
by and between Advatex Associates, Inc., Logical Imaging
Solutions Acquisition Corp., Color Imaging Acquisition Corp.,
Logical Imaging Solutions, Inc., and Color Image, Inc.,
incorporated by reference to the Registrant's Form 8-K filed on
July 17, 2000.
2.2 Amendment No. 1 to the Merger Agreement and Plan of
Reorganization dated June 15, 2000, incorporated by reference to
the Registrant's Form 8-K filed on July 17, 2000.
2.3 Amendment No. 2 to the Merger Agreement and Plan of
Reorganization dated June 26, 2000, incorporated by reference to
the Registrant's Form 8-K filed on July 17, 2000.
2.4(1) Share Exchange Agreement dated as of September 11, 2002 between
Color Imaging, Inc., Logical Imaging Solutions, Inc., Digital
Color Print, Inc., and the shareholders of Digital Color Print,
Inc., incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K filed September 26, 2002.
62
Exhibit
No. Description
- ---------- --------------
2.5 Amendment No. 1 to Share Exchange Agreement dated as of September
20, 2002 between Color Imaging, Inc., Logical Imaging Solutions,
Inc., Digital Color Print, Inc., and the shareholders of Digital
Color Print, Inc., incorporated by reference to Exhibit 2.2 to
the Registrant's Form 8-K filed September 26, 2002.
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 to the Registration statement on Form SB-2 filed July
15, 2002.
3.2 Bylaws, incorporated by reference to the Registrant's Form 10-QSB
for the quarter ended March 31, 2002.
4.1 Stock Purchase Agreement between the Company and Wall Street
Consulting Corp. dated October 30, 2001, incorporated by
reference to Exhibit 4.1 to the Registration statement on Form
SB-2 filed May 31, 2002.
4.2 Promissory Note of Wall Street Consulting Corp. dated October 30,
2001, incorporated by reference to Exhibit 4.2 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.3 Form of Warrant issued to Selling Stockholders, incorporated by
reference to Exhibit 4.3 to the Registration statement on Form
SB-2 filed November 28, 2001.
4.4 Development Authority of Gwinnett County, Georgia Industrial
Development Trust Indenture dated June 1, 1999, incorporated by
reference to Exhibit 4.27 to the Registration statement on Form
SB-2 filed May 31, 2002.
4.5 Loan Agreement between the Company, Kings Brothers LLC and the
Development Authority of Gwinnett County, Georgia dated June 1,
1999, incorporated by reference to Exhibit 4.28 to the
Registration statement on Form SB-2 filed May 31, 2002.
4.6 Joint Debtor Agreement dated June 28, 2000 by and among Color
Image, Inc., Kings Brothers, LLC, Dr. Sueling Wang, Jui-Chi Wang,
Jui-Kung Wang, and Jui-Hung Wang, incorporated by reference to
Exhibit 4.28 to the Registration statement on Form SB-2 filed
February 11, 2002.
4.7 First Amendment to Joint Debtor Agreement dated January 1, 2001
by and among Color Imaging, Kings Brothers, LLC, Dr. Sueling
Wang, Jui-Chi Wang, Jui-Kung Wang, and Jui-Hung Wang,
incorporated by reference to Exhibit 4.29 to the Registration
statement on Form SB-2 filed February 11, 2002.
4.8 $500,000 Promissory Note between Color Imaging and Sueling Wang
dated March 14, 2002, incorporated by reference to Exhibit 4.34
to the Registration statement on Form SB-2 filed April 11, 2002.
4.9 $500,000 Promissory Note between Color Imaging and Jui Hung Wang
dated August 21, 2002, incorporated by reference to Exhibit 4.50
to the Registration statement on Form SB-2 filed October 2, 2002.
4.10 $100,000 Promissory Note between Color Imaging and Jui Chi Wang
dated August 21, 2002, incorporated by reference to Exhibit 4.51
to the Registration statement on Form SB-2 filed October 2, 2002.
4.11 First Note Modification Agreement between Sueling Wang and Color
Imaging dated August 27, 2002, incorporated by reference to
Exhibit 4.52 to the Registration statement on Form SB-2 filed
October 2, 2002.
4.12 Amended and restated $1,500,000 revolving note between Color
Imaging and SouthTrust Bank dated June 16, 2003, incorporated by
reference to Exhibit 4.12 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
4.13 Amended and restated loan and security agreement between Color
Imaging and SouthTrust Bank dated June 16, 2003, incorporated by
reference to Exhibit 4.13 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
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.
10.1* Employment Agreement between Color Imaging and Dr. Sueling Wang
dated June 28, 2000, incorporated by reference to Exhibit 10.2 to
the Registration statement on Form SB-2 filed November 28, 2001.
10.2* Employment Agreement between the Company and Morris E. Van
Asperen dated June 28, 2000, incorporated by reference to Exhibit
10.3 to the Registration statement on Form SB-2 filed November
28, 2001.
10.3* Employment Agreement amendment between the Company and Morris E.
Van Asperen dated July 14, 2003, incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-Q for the quarter ended
June 30, 2003.
10.4* Employment Agreement amendment between the Company and Morris E.
Van Asperen dated April 23, 2004, incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended
March 31, 2004.
10.5* Second Amendment to the Employment Agreement between the Company
and Morris E. Van Asperen dated October 31, 2003 incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-Q for the
quarter ended June 30, 2004.
10.6 Lease Agreement between Color Imaging and Kings Brothers LLC
dated April 1, 1999, incorporated by reference to Exhibit 10.5 to
the Registration statement on Form SB-2 filed November 28, 2001.
10.7 Amendment No. 1 to Lease Agreement between the Company and Kings
Brothers LLC dated April 1, 1999, incorporated by reference to
Exhibit10.6 to the Registration statement on Form SB-2 filed
November 28, 2001. 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.
10.8 Commercial Lease Agreement Amendment between Kings Brothers LLC
and Color Imaging, Inc. dated February 5, 2003, incorporated by
reference to Exhibit 10.13 to the Registrant's Form 10-K for the
year ended December 31, 2002.
10.9 Purchase and Sale and Release Agreement between Michael Edson and
Color Imaging, Inc. dated February 27, 2003, incorporated by
reference to Exhibit 10.14 to the Registrant's Form 10-K for the
year ended December 31, 2002.
10.10 Purchase and Sale and Release Agreement between Stephen Chromik
and Color Imaging, Inc. dated February 27, 2003, incorporated by
reference to Exhibit 10.15 to the Registrant's Form 10-K for the
year ended December 31, 2002.
10.11 Form of Indemnification Agreement, incorporated by reference to
the post effective Amendment No. 1 to Form SB-2 filed April 1,
2003.
63
Exhibit
No. Description
- -------- -----------
10.12* Stock Incentive Plan, incorporated by reference to Annex 1 to the
Registrant's Definitive Proxy Statement on Schedule 14A filed on
May 5, 2003.
10.13+ Marketing and Licensing Agreement between General Plastic
Industrial Co Ltd and Color Imaging, Inc. dated as of June 1,
2003 , and amended and restated on November 15, 2004, effective
as of April 1, 2004.
10.14* Employment Agreement between the Company and Patrick J. Wilson
dated April 1, 2004, incorporated by reference to Exhibit 10.1 to
the Registrant's Form 10-Q for the quarter ended June 30, 2004.
14.1 Code of Ethics for Certain Financial Officers of Color Imaging,
Inc. dated December 29, 2003, incorporated by reference to
Exhibit 14.1 to the Registrant's Form 10-K for the year ended
December 31, 2003.
23.1+ Consent of Lazar Levine & Felix LLP
31.1+ Chief executive officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2+ Chief financial officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1+ Chief executive officer's certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2+ Chief financial officer's certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- -----------------------
+ Filed herewith.
* Management contract or compensatory arrangement or plan.
(1) Pursuant to Rule 601(b)(2), the schedules and exhibits to this Agreement
shall not be filed. A list of the schedules and exhibits is contained on the
last page of the Agreement. The Registrant agrees to furnish supplementally a
copy of any of the omitted schedules and exhibits to the Securities and xchange
Commission upon request.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COLOR IMAGING, INC.
("Registrant")
Dated: February 22, 2004 By: /s/ Jui-Kung Wang
------------------------------------
Jui-Kung Wang
Chief Executive Officer and
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jui-Kung Wang Chief Executive Officer and February 22, 2004
- --------------------------- Chairman (principal executive
Jui-Kung Wang officer)
/s/ Sueling Wang President and Vice Chairman February 22, 2004
- ---------------------------
Sueling Wang
/s/ Morris E. Van Asperen Executive Vice President, Chief February 22, 2004
- --------------------------- Financial Officer and Secretary
Morris E. Van Asperen (principal financial and accounting
Officer)
/s/ Jui-Hung Wang Director February 22, 2004
- ---------------------------
Jui-Hung Wang
/s/ Jui-Chi Wang Director February 22, 2004
- ---------------------------
Jui-Chi Wang
/s/ Yi-Jen Wang Director February 22, 2004
- ---------------------------
Yi-Jen Wang
/s/ Richard S. Eiswirth Director February 22, 2004
- ---------------------------
Richard S. Eiswirth
65