U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment #2
Form 10SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Kolorfusion International, Inc.
(Name of Small Business Issuer in its charter)
Colorado 84-1317836
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14510 East Fremont Avenue
Englewood, Colorado 80112
(Address of principal executive office) (Zip Code)
Issuer's telephone number (303) 690-2910
Securities to be registered under Section 12(g) of the Act:
Common Shares
Charles Clayton
527 Marquette
Minneapolis, Minnesota 55402
(612) 338-3738
(Agent for Service)
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ITEM 1. DESCRIPTION OF BUSINESS
Kolorfusion International, Inc. is a Colorado corporation, formed on
May 17, 1995, to develop and market a system for transferring color patterns to
metal, wood, glass and plastic products. Its principal office is located at
14510 East Fremont Avenue, Englewood, Colorado.
Kolorfusion is a process that allows the transfer of colors and
patterns into coated metal, wood, and glass and directly into a plastic surface
that is not flat; the colors do not peel, and they are resistant to ultra violet
rays.
The coloring and design of the products is designed to enhance
consumer appeal, create demand for mature products, achieve product
differentiation and customization and as a promotional vehicle. The Company
currently has customers using the process for the decoration of aluminum brief
cases, lazer cut metal art, motorcycle fenders and tanks, crowd control
railings, skateboard wheels, drum sticks, wheelchairs, table lamps, pocket
knives and clocks. These applications and more are anticipated as the Company is
currently working with manufacturers of chairs, toy guns, kitchen appliances,
automobile wheels, skis, aluminum tanks, office furniture, plumbing fixtures,
2-way radios and other electronic products.
The process uses a transfer material (Kolortex(a)) with special inks
that may be any color or form that the user desires. The end user may use any
color, or combination of colors, and any design or logo desired that are printed
on the Kolortex. The only limitations are the imagination and desires of the
customer. The Kolortex is placed around the product. The product, wrapped in the
Kolortex, is then placed in a carrier (Kolorclam(a)) that allows for a total
vacuum. The Kolorclam is then placed in a heating chamber which allows the inks
to leave the Kolortex and penetrate into the coated product. Plastic and
aluminum may be treated directly, steel, glass and other surfaces must first be
coated. Temperature heating ranges from 280 to 400 degrees Fahrenheit, and the
time of heating is dependent on the product and its characteristics.
The process patents were granted to a French inventor, Mr. Claveau,
by the United States Patent Office on May 3, 1994, and by the Canadian Patent
Office on March 26, 1996. The exclusive license for the US and Canada was first
assigned to the Company's founders, Steve Nagel and Michael Harrop in May, 1994,
and recorded by the US and Canadian Patent Offices. The exclusive license was
transferred to the Company, and then the Company purchased the patents from the
inventor under a Purchase Agreement on October 17, 1995. The purchase agreement
is for 25,000,000 French Francs, or, at the exchange rate, approximately
$5,000,000 United States dollars. There was a down payment of $500,000 and the
remainder is payable monthly over 9 years with no interest. There are no
royalties. The exclusive license for Brazil was assigned in February, 1997 for a
monthly fee of about $7,000, which may be purchased at a later time. The United
States and Canadian patents expire 20 years from the date of application, which
will be November 16, 2012. The Company maintains a
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relationship with the inventor as new advances are achieved in the ink transfer
process technology.
The Company has registered its tradename and trademark design in the
United States, Canada and Brazil.
The Company has established a processing center at its place of
business in suburban Denver, Colorado, and it is actively using the process to
process products. The Company has dedicated 8,000 square feet of its space to
production, with two Koloclam processing units.
The Company has had no dependence upon a significant customer or
supplier to date.
COMPETITION
There is no direct competition because the Company uses a patented
process that is unique in the market. There are companies that are near direct
competition. The most direct competition is "cubic printing," also known as
hydrographics. This is a technology from Japan that has over 65 licensees in 22
countries. Cubic printing uses a film of patterns and colors floating on a water
bath, so that when a product is dipped through the bath, the film attaches to
the product's surface, which is then over-coated with a spray on coating. This
system is quoted in the market as significantly higher in cost than the
Kolorfusion Process, and is not capable of full three dimension printing. As
with all superficially applied decoration durability and abrasion resistances
are inferior to the Company's process. Typical examples of parts decorated with
the cubic printing method are plastic molded parts in automobiles with a wood
grain finish or camouflage decorated parts of archery. Companies now using cubic
printing in the United States include The Colorworks, Inc., Oakley, Inc.,
Designer Molding, Plastic Dress-up Co., Revolution Technologies, Inc. and
Spectrum Cubic, Inc. Cubic printing is mostly limited to the esthetic segment of
the decoration market because the graphic will severely distort when applied and
alignment of the graphic on the part in a specific position is impossible. Only
when the esthetic design is also functional, such as in camouflage patterns can
cubic printing add a practical value to a product. Other liabilities of the
cubic printing process are that it requires an overcoat, and lead times to
obtain new designs are many months.
In mold decoration covers all decoration technologies that are
applied to injection molded parts as part of the molding process. Included in
this family are multi-shot, multi-color molding which is several different
colored polymers are combined into a single molded part using a complex
injection tool. First a base color polymer is injected creating the body of the
part. In mold decoration does not compete directly with the Company, because it
is limited to plastic parts with high volumes, usually small in size. In essence
it is laminating a decal to a plastic surface, control switches in autos is a
good example.
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Indirect competition can be defined very broadly to include pad
printing, screen printing, hot stamping, specialty paints and coatings. Pad
printing can conform to minor curves and contours, as can screen painting and
hot stamping. All are surface decorations and are therefore prone to scratching.
All serve both esthetic and decorative market segments, except specialty paints
and coatings, which includes textures and suspensions of glitter or metallic
flakes. Other decoration methods such as silk screening or decals have limited
utilization as the cost and/or durability make them non competitive for most
dimensional decoration requirements. Many products are decorated with a
combination of colored coatings with silk screen and decals.
The Company has spent approximately $6,500 in fiscal 1998 and $8,800
in fiscal 1999 on research and development. The research and development is for
applications for specific prospective customers. The Company does not maintain a
specific research and development department.
Management of the Company has had extensive discussions with
customers and prospects, and have found that in some instances the process will
reduce the finishing cost of the product, and in some instances will increase
the cost. Pricing is based on several factors, including volume, type of
product, amount of Kolortex used and handling and processing time. The cost of
typical items are: roller blade wheels at $.30-.50 per wheel, bicycle wheels at
$2.50-4.00 per wheel, bicycle frames at $12.00 -$30.00, baseball bats at
$3.00-4.50, hockey sticks at $3.00-4.00 and gift ware items from $1.00-$1.50.
Transportation of the products to be processed creates an expense
problem for customers, and the Company believes that it will be necessary to
open additional centers in key geographical centers to attract those customers
for which transportation cost is a factor.
LICENSING
The Company is also seeking to make license agreements with
manufacturers for their specific products when the process is to be used on a
large scale. The Company has license agreements with George Industries, Inc. of
Los Angeles for aluminum, Ace Industries, Inc. of Chicago for lighting fixtures,
and Sunrise Medical Corporation for wheelchairs at this time. The plan is to
charge a license fee of $100,000, half being paid on execution of the agreement,
and the other half one year later, for five years. The license would be
renewable for three successive five year periods at $20,000 per year. There will
be minimum monthly payments to be recaptured by deductions against invoices for
Kolortex media purchases or royalty payments. The licensee will need to purchase
equipment that will cost between $50,000 and $400,000 depending on size and
volume of the products to be processed.
The Company rents space in a suburban Denver, Colorado industrial
park. It rents 18,000 square feet of space used for office, processing and
storage. There are 11
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employees in addition to the officers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management of the Company seeks to have the Company attain a
positive cash flow and profitability during fiscal year 2001. The achievement of
this goal will be determined by the rate of acceptance and the implementation of
the technology by its customers and licensees.
Current sales result from initial testing and sampling invoices,
limited production runs and license fees. To date the Company has not entered
into a long term contract for processing to establish a continuing base of sales
upon which to build. Accordingly comparative sales during this stage of the
business will show increases and decreases from quarter to quarter until such
contracts or business relationships are made. The Company plans to enter into
processing contracts and additional licensing agreements to achieve a continuous
growth in sales.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1999.
Revenues decreased in 1999 to $361,044 from $592,394 in 1998. There
were decreased license and royalty fees and lower sales in 1999 to account for
the difference.
Costs of sales decreased in 1999 to $314,879 from $529,661 in 1998
as a result of lower sales in 1999.
Selling, general and administrative expenses increased in 1999, to
$1,355,363 from $1,179,719 in 1998. The selling, general and administrative
expense increased 15%, which is primarily attributable to additional legal fees
and salaries. Interest expense was less in 1999, $315,733, from $1,294,729 in
1998.
The result was that there was a net loss of $1,395,528 in 1999,
compared to a net loss of $2,326,743 in 1998. The net loss per share in 1999 was
$.08 compared to a net loss per share of $.17 in 1998.
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Revenues decreased in the quarter in 1999 to $67,227 from $77,142 in
1998. The decline is due to the lack of long term processing contracts. There
was royalty income in 1999, compared to none in 1998, but the sales were lower.
Cost of sales increased in 1999 to $120,808 from $75,735 in 1998.
The cost of sales increase was due to the allocation of salary overhead and the
expansion of leased facilities and equipment. The Company expects the profit
margin to increase
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as it acquires new customers. Selling, general and administrative expenses also
increased in 1999 to $271,111 from $258,928 in 1998. The interest expense in
1999 was much lower than in 1998, $46,500 compared to $78,000.
The result was a net loss in 1999 of $331,129 compared to a net loss
of $336,831 in the same quarter in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Kolorfusion International, Inc. has historically had more expenses
than income in each year of its operations. The accumulated deficit from
inception to June 30, 1999 was $6,834,836. It has been able to maintain a
positive cash position solely through financing activities. As a result of this,
and the fact that the Company's current liabilities exceed its current assets,
the independent auditor has issued a going concern opinion.
There are no known trends, events or uncertainties that are likely
to have a material impact on the short or long term liquidity, except perhaps
declining sales. The primary source of liquidity in the future will be increased
sales. In the event that sales continue to decline the Company may have to seek
additional funds through equity sales, though it has no present plans to do so.
Additional equity sales could have a dilutive effect. The debt financing, if
any, would most likely be convertible to common stock, which would also have a
dilutive effect. There are no material commitments for capital expenditures.
There are no known trends, events or uncertainties reasonably expected to have a
material impact on the net sales or revenues or income from continuing
operations. There are no significant elements of income or loss that do not
arise from continuing operations. There are no seasonal aspects to the business
of Kolorfusion International, Inc.
The contract with the inventor is payable in French Francs. From the
time of the contract to this time the exchange rate has worked in favor of the
Company. The Company had a gain in foreign currency transactions in 1999 of
$250,123, as compared to a gain in foreign currency transactions of $75,457 in
1998. These gains were the result of devaluation of the French franc compared to
the U.S. dollar. In the event that the exchange rate should reverse the Company
will attempt to hedge its obligation.
YEAR 2000 COMPLIANCE
The computers used by the Company are year 2000 compliant. The
software used by the Company is year 2000 compliant. Both the hardware and
software were compliant when purchased. The computers are only used for
accounting and graphic workstations, neither of which is dependent on timing
circuitry. Based on the assessments to this date management believes that future
costs relating to the
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year 2000 issue will not have a material effect on its financial position,
results of operations or cash flows.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases office, warehouse and production space in
suburban Denver for a monthly rental of $12,000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are presently 19,032,561 shares of the Company's common shares
outstanding. The following table sets forth the information as to the ownership
of each person who, as of November 30, 1999, owns of record, or is known by the
Company to own beneficially, more than five per cent of the Company's common
stock, and the officers and directors of the Company.
Shares of Percent of
Name Common Stock Ownership
- --------------------------------------------------------------------------------
Thomas Gerschman 46,875 1%
371 Mitchells Lane
Bridgehampton, NY
Stephen Nagel 6,388,000 34%
7883 S. Espana Way
Aurora, CO
Philippe Nordman 8,916,690 47%
C/o Maus Freres SA
Rue Cornavin 6
Geneva, Switzerland
Directors and Officers 6,434,875 34%
as a group
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the company, with a brief
description are as follows:
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Name Age Position
- ---- --- --------
Thomas Gerschman 42 Chairman
Stephen Nagel 49 President, Director
Kenneth Bradley 51 Secretary
Thomas Gerschman, Mr. Gerschman is the Chairman, and a Director of
the Company. Mr. Gerschman has been the President of Mount Keene, Inc., a
corporation for investment banking, since 1989 and of Summore Plastics, Inc., a
plastic molding company, since 1990. Neither business interferes with the
Company. He became a director of the Company, and Chairman in 1999.
Stephen Nagel, Mr. Nagel is President and a Director. Mr. Nagel was
the CEO of Rescon Technology, a manufacturer of construction materials from 1976
to 1992, and the founding CEO of Selectronics, a consumer electronics and
software publisher from 1983 to 1991, both public companies. He has an MBA from
Arizona State University and a JD from the University of Wyoming. Mr. Nagel has
been President and a Director since inception of the Company.
Kenneth Bradley, Mr. Bradley is the Secretary. Mr. Bradley has
worked for the accounting firm of McGladrey Pullen since 1976. He is now a
Senior Manager in Casper, Wyoming. Mr. Bradley's duties are minimal, and he
spends very little time on the affairs of the Company.
ITEM 6. EXECUTIVE COMPENSATION
There are no officers or directors that received compensation in
excess of $60,000 or more during the last year. The Company paid $85,000 in 1998
and $85,000 in 1999 to Nagel Enterprises as consulting fees, an entity wholly
owned by Stephen Nagel, in lieu of compensation to Mr. Nagel. There is no
written contract or obligation for the payments to Mr. Nagel.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 8. LEGAL PROCEEDINGS
The Company is the plaintiff in a case filed in November, 1999 in
Arapahoe County Court, Arapahoe County, Colorado against its former officer,
Mark Poole and Lazart Productions, Inc. The case involves breach of contract of
confidential
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information, breach of fiduciary duty and tortious interference with contract.
The Company has alleged that Mr. Poole took a customer of the Company while he
was a Vice President of the Company for his own gain. The Company has asked for
a sum in excess of $50,000.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded since April, 1998 on the
OTC Bulletin Board, with the symbol KOLR, before that time there was no
activity. As of November 30, 1999 the following brokerage firms were making a
market in the Company's common stock: Wien Securities, Mayer & Schwitzer, Herzog
Heine Geduld, Inc, Hill Thompson Magid & Co., Sharpe Capital, Inc., Protective
Group Securities, Knight Securities, Inc. and USCC Trading/a division of Fleet
Securities.
The NASD has delisted the Company from its electronic bulletin board
as of January 19, 2000 for failure to have on file with the Securities and
Exchange Commission an effective registration statement. The Company intends to
apply for relisting on the electronic bulletin board upon the effectiveness of
its registration statement.
The following table sets forth for the periods indicated the range
of high and low closing bid quotations per share as reported by the
over-the-counter market. These quotations represent inter-dealer prices, without
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.
Price per Share
---------------
High Low
---- ---
Fiscal year 1998 $1.25 $1.00
Second Quarter (April 1, 1999
through June 30, 1998)
Third Quarter (July 1, 1998 $1.625 $1.00
through September 30, 1998)
Fourth Quarter (October 1, 1998 $1.8125 $0.75
through December 31, 1998)
Fiscal year 1999
First Quarter (January 1, 1999 $1.75 $0.875
through March 31, 1999)
Second Quarter (April 1, 1999 $1.375 $0.6875
through June 30, 1999)
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Third Quarter (July 1, 1999 $1.03125 $0.28125
through September 30, 1999)
There are 76 holders of the common stock of the Company. There have
never been any dividends, cash or otherwise, paid on the common shares of the
Company.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Name Date Shares Cost
Carl Fischer, Jr. 12/97 5,000 $5,000
Elam Baer 12/97 4,000 $4,000
Timothy Brink 12/97 4,000 $4,000
John Oertel 12/97 4,000 $4.000
Michael S. Fattor 12/97 5,000 $5,000
Ann McCready 12/97 5,000 $5,000
Michael Hubbard 12/97 750 $750
Stacy Swanson 12/97 500 $500
Kenneth Bradley 12/97 5,000 $5,000
Michael Lay 12/97 5,000 $5,000
Paul Coniaris 12/97 4,000 $4,000
Owen Fowler 12/97 12,000 $12,000
Scott Gavin 12/97 5,000 $5,000
Arthur Fowler 12/97 5,000 $5,000
Krishna Williams 12/97 2,500 $2,500
David Coffey 12/97 500 $500
Paul Morgan 12/97 500 $500
Margaret McKain 12/97 5,000 $5,000
Vernon Morris 12/97 5,000 $5,000
Sherman Herschderfer 12/97 4,000 $4,000
Joel Nudelman 12/97 4,000 $4,000
Louise Rosenbaum 12/97 750 $750
Lisa Dempsey 12/97 500 $500
Charles Hubbard 12/97 500 $500
Morris Steller 1/98 5.000 $5,000
Jack Lehtinen 1/98 4,000 $4,000
William Huttner 1/98 2,000 $2,000
Thomas Palashewski 1/98 4,000 $4,000
Art Lucking 1/98 5,000 $5,000
Pat Mooney 1/98 4,000 $4,000
Leonard Anderson 1/98 3,000 $3,000
Virgil Anderson 1/98 1,000 $1,000
Bernard Kegan 1/98 4,000 $4,000
Lindley Branson 1/98 4,000 $4,000
Douglas Pietig 1/98 4,000 $4,000
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Paul Sokol 1/98 10,000 $10,000
Gene Josephs 1/98 5,000 $5,000
John Bogard 1/98 5,000 $5,000
Arlan Akerlind, IRA 2/98 40,000 $40,000
Gene Fujan 2/98 2,000 $2,000
Randy Boyd 2/98 4,000 $4,000
Lyle Rich Johnson 2/98 30,000 $30,000
Edward Alexander 2/98 4,000 $4,000
Val Burdick 2/98 4,000 $4,000
Creative Business Strategies 2/98 4,000 $4,000
Richard Neslund 2/98 20,000 $20,000
Joseph Nielsen 2/98 10,000 $10,000
Michael Reichert 2/98 4,000 $4,000
Wayne Densmore 2/98 3,000 $3,000
Craig Paulsen 2/98 5,000 $5,000
Ginger Paulsen 2/98 5,000 $5,000
Gerald Sadoff 2/98 4,000 $4,000
Robert Knutson 2/98 5,000 $5,000
Gus Boosalis 2/98 4,000 $4,000
Uniplan/Matrix, Inc. 2/98 4,000 $4,000
Howard Luetmers 2/98 8,000 $8,000
Dean Zachman 2/98 5,000 $5,000
Stephen King 2/98 10,000 $10,000
William Butler 2/98 1,000 $1,000
Levitz Family Trust 2/98 7,500 $7,500
Robert Emery 2/98 4,000 $4,000
Michael & Erica Bell 2/98 500 $500
Michael & Linda Gill 2/98 500 $500
John & Nicole Levitz 2/98 500 $500
Pat & Susan Mooney 2/98 500 $500
Robin & Dan Simpson 2/98 500 $500
Donald Blakstad 2/98 10,000 $10,000
Joseph Whitney 3/98 34,900 $34,900
Ron Hendrickson 3/98 18,000 $18,000
Philip Chesson 3/98 7,500 $7,500
Arlan Akerlind 3/98 20,000 $20,000
Robert Knutson 4/98 10,000 $10,000
Nicole Neff 4/98 8,000 $8,000
Stephani Neff 4/98 1,800 $1,800
Faye Neff 4/98 1,200 $1,200
Nathan Neff 4/98 500 $500
Mark Churchman 4/98 5,000 $5,000
Henry Holroyd 4/98 15,000 $15,000
Glenn Bailie 5/98 10,000 $10,000
Phyllis Gorectke 5/98 5,000 $5,000
Dora Hanson 5/98 4,450 $4,450
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Ken Bradley 6/98 6,150 $6,150
Nancy Levitz 6/98 2,500 $2,500
Paul Wasson 6/98 2,500 $2,500
All of these sales were pursuant to a Rule 504 Offering. The
offering was dated December 8, 1997, and was for 500,000 shares at $1.00 per
share. There was a commission of 10% paid on all sales to Protective Group
Securities Corporation. The offering was registered in Colorado.
Didier Maus 221,769
Jean-Bernard Rondeau 65,800
Maryse Nordmann 394,996
Philippe Nordmann 1,546,127
Wallace & Lelia Trust 193,488
Lelia Carroll 86,438
Cimofin, Ltd. 376,689
TDT, Ltd. 31,353
Craig & Ginger Paulsen 23,820
William & Debra Dover 11,733
Stephen Fatter 29,312
Charles Hubbard 11,722
John G. Boylan 11,442
Chappell Family 23,275
Joe Triolo 12,933
TFI, LLC 11,711
O'Conner & Associates 34,758
Joseph Brisson 83,564
Jerry Bayne 4,747
Rosie Langston 2,924
Jerry Engle 2,342
Mike Hubbard 1,171
The above list were issued pursuant to the conversion of convertible
debentures. The debentures were sold and issued in August, 1995. All of them
were converted to common stock in September, 1998.
Philippe Nordmann 2/98 312,500 $250,000
Michel Mulliez 2/98 125,000 $100,000
Dider Maus 2/98 62,500 $50,000
Philippe Nordmann 4/99 565,000 $588,329
Michel Mulliez 4/99 226,000 $235,332
Didier Maus 4/99 113,001 $117,666
Thomas Gerschman 4/99 37,500 $30,000
The above list are all isolated sales. All are residents of Europe
except Mr. Gerschman.
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Charles Clayton 6/99 20,000
John Levitz 6/99 15,000
Kevin Gersghty 6/99 15,000
Owen Fowler 6/99 15,000
Thomas Gerschman 6/99 32,375
The above list represents share issued in exchange for services
rendered to the Company. There was no other consideration for the shares.
The registrant believes that all transactions were transactions not
involving any public offering within the meaning of Section 4(2) of the
Securities Act of 1933, since (a) each of the transactions involved the offering
of such securities to a substantially limited number of persons; (b) each person
took the securities as an investment for his own account and not with a view to
distribution; (c) each person had access to information equivalent to that which
would be included in a registration statement on the applicable form under the
Act; (d) each person had knowledge and experience in business and financial
matters to understand the merits and risk of the investment; therefore no
registration statement need be in effect prior to such issuances.
ITEM 11. DESCRIPTION OF SECURITIES
The Company has authorized 100,000,000 shares of common stock, $.001
par value, and 10,000,000 shares of preferred stock, $.001 par value. Each
holder of common stock has one vote per share on all matters voted upon by the
shareholders. Such voting rights are noncumulative so that shareholders holding
more than 50% of the outstanding shares of common stock are able to elect all
members of the Board of Directors. There are no preemptive rights or other
rights of subscription.
Each share of common stock is entitled to participate equally in
dividends as and when declared by the Board of Directors of the Company out of
funds legally available, and is entitled to participate equally in the
distribution of assets in the event of liquidation. All shares, when issued and
fully paid, are nonassessable and are not subject to redemption or conversion
and have no conversion rights.
The Board of Directors is expressly authorized at any time to
provide for the issuance of shares of preferred stock in one or more series,
with such voting powers, full or limited, or without voting powers and with such
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restriction as shall be stated in the
resolution or resolutions providing for the issue of preferred stock adopted by
the Board of Directors.
Risk Factor - Penny Stock Regulation. Broker-dealer practices in
connection with transactions in "penny stocks" are regulated by certain penny
stock rules
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adopted by the Securities and Exchange Commission. Penny stock generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. This rule currently applies to the securities of the Company.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Colorado Statutes contain an extensive indemnification provision
which requires mandatory indemnification by a corporation of any officer,
director and affiliated person who was or is a party, or who is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a member, director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a member,
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
and against judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted, or failed to act, in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. In some instances a court must approve such
indemnification.
As to indemnification for liabilities arising under the Securities
Act of 1933 for directors, officers or persons controlling the company, the
company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy and unenforceable.
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ITEM 13. FINANCIAL STATEMENTS
Please see the attached Financial Statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Please see the attached Financial Statements
(b) Exhibits:
3. Articles of Incorporation and bylaws
10. Patent assignment agreement
15
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: 2/3/00 Kolorfusion International, Inc.
/s/ STEPHEN NAGEL
-----------------------------------------
Stephen Nagel, President, Director
/s/ THOMAS GERSHMAN
-----------------------------------------
Thomas Gershman, Director
/s/ KENNETH BRADLEY
-----------------------------------------
Kenneth Bradley, Secretary
16
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
FINANCIAL REPORT
JUNE 30, 1999
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Kolorfusion International, Inc.
We have audited the accompanying balance sheets of Kolorfusion
International, Inc., as of June 30, 1999 and 1998, and the related statements of
income, stockholders' equity (deficit) and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all
material respects, the financial position of Kolorfusion International, Inc. as
of June 30, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered recurring losses from operations
and its current liabilities exceeded its current assets as of June 30, 1999.
This raises substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ HOUSE, NEZERKA & FROELICH, P.A.
HOUSE, NEZERKA & FROELICH, P.A.
Bloomington, Minnesota
August 12, 1999
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
September 30, -------------------------------
ASSETS 1999 1999 1998
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,905 $ 118,867 $ 57,334
Trade accounts receivable, no allowance for
doubtful accounts considered necessary 27,962 56,978 68,538
Inventories 75,537 74,067 36,502
Prepaid expenses -- -- 16,545
------------- ------------- -------------
Total current assets 117,404 249,912 178,919
OTHER ASSETS (Notes 2 and 3):
Patents, net 2,717,921 2,779,721 3,025,891
Debenture issuance costs, net -- -- 14,102
Other -- 1,270 1,270
------------- ------------- -------------
2,717,921 2,780,991 3,041,263
LEASEHOLD IMPROVEMENTS AND EQUIPMENT,
NET (Notes 4 and 5) 243,097 260,127 317,475
------------- ------------- -------------
$ 3,078,422 $ 3,291,030 $ 3,537,657
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 104,369 $ 111,327 $ 94,850
Current obligation on payable to individual (Note 2) 189,000 189,000 674,306
Current portion of long-term debt (Note 5) 9,979 11,000 --
Payable to stockholders 200,000 200,000 --
Notes payable (Note 5) -- -- 50,000
Accrued interest payable (Note 2) 179,405 132,905 79,069
Deferred revenue -- -- 10,000
Subordinated convertible debentures (Note 6) -- -- 2,524,500
Accrued interest and premium on convertible debentures (Note 6) -- -- 1,917,388
------------- ------------- -------------
Total current liabilities 682,753 644,232 5,350,113
PAYABLE TO INDIVIDUAL, less current obligation,
secured by patent (Note 2) 1,804,898 1,804,898 1,520,861
LONG-TERM DEBT, less current portion (Note 5) 7,679 7,679 --
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 7):
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none issued or outstanding
Common stock, $.001 par value, 100,000,000 shares authorized 19,033 18,933 14,662
Additional paid-in capital 7,730,024 7,650,124 2,091,329
Accumulated deficit (7,165,965) (6,834,836) (5,439,308)
------------- ------------- -------------
583,092 834,221 (3,333,317)
------------- ------------- -------------
$ 3,078,422 $ 3,291,030 $ 3,537,657
============= ============= =============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30 June 30
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales $ 50,912 $ 77,142 $ 358,044 $ 472,394
License and royalty revenue 16,315 -- 3,000 120,000
------------ ------------ ------------ ------------
67,227 77,142 361,044 592,394
Expenses:
Cost of sales 120,808 75,735 314,879 529,661
Selling, general and administrative expenses 271,111 258,928 1,355,363 1,179,719
------------ ------------ ------------ ------------
Operating loss (324,692) (257,521) (1,309,198) (1,116,986)
Other income (expense):
Gain on foreign currency transactions -- -- 250,123 75,457
Interest and other income (expense) 40,063 (1,310) (20,720) 9,515
Interest expense (46,500) (78,000) (315,733) (1,294,729)
------------ ------------ ------------ ------------
(6,437) (79,310) (86,330) (1,209,757)
------------ ------------ ------------ ------------
Net loss $ (331,129) $ (336,831) $ (1,395,528) $ (2,326,743)
============ ============ ============ ============
Loss per share $ (.02) $ (.02) $ (.08) $ (.17)
============ ============ ============ ============
Shares used in computing loss
per common equivalent share 18,982,561 15,722,276 16,967,294 13,296,245
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 12,330,000 $ 12,330 $ 256,370 $ (3,092,655) $ (2,823,955)
Shares issued for cash 1,000,000 1,000 899,000 -- 900,000
Shares issued for compensation 788,000 788 378,242 -- 379,030
Conversion of debt 633,571 634 622,368 -- 623,002
Shares repurchased (90,000) (90) -- (19,910) (20,000)
Stock issuance costs -- -- (64,651) -- (64,651)
Net loss -- -- -- (2,326,743) (2,326,743)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 14,661,571 14,662 2,091,329 (5,439,308) (3,333,317)
Shares issued for cash 941,501 942 970,385 -- 971,327
Conversion of debentures
and premium 3,182,114 3,182 4,441,182 -- 4,444,364
Shares issued for debt 50,000 50 49,950 -- 50,000
Shares issued for services 97,375 97 97,278 -- 97,375
Net loss -- -- -- (1,395,528) (1,395,528)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 18,932,561 18,933 7,650,124 (6,834,836) 834,221
Shares issued for cash 100,000 100 79,900 -- 80,000
Net loss -- -- -- (331,129) (331,129)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1999
(unaudited) 19,032,561 $ 19,033 $ 7,730,024 $ (7,165,965) $ 583,092
============ ============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30 June 30
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (331,129) $ (336,831) $ (1,395,528) $ (2,326,743)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 81,300 91,574 323,740 442,184
Gain on foreign currency transactions -- -- (250,123) (75,457)
Stock issued for services -- -- 97,375 --
Loss on disposal of fixed assets -- -- 73,399 --
Amortization of prepaid interest -- -- -- 83,333
Interest converted to debt -- -- 51,330 21,312
Stock issued for compensation -- -- -- 75,030
(Increase) decrease in trade accounts receivable 29,016 38,132 11,560 (48,955)
(Increase) decrease in inventories (1,470) (7,780) (37,565) (5,589)
(Increase) decrease in prepaid expenses -- (17,038) 16,545 113
Increase (decrease) in accounts payable (6,958) 25,707 16,477 (49,074)
Increase (decrease) in accrued interest 46,500 77,500 53,836 1,018,799
Increase (decrease) in deferred revenue -- (10,000) (10,000) 10,000
------------ ------------ ------------ ------------
Net cash used in operating activities (182,741) (138,736) (1,048,954) (855,047)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leasehold improvements and equipment (2,470) (13,001) (79,519) (19,230)
Proceeds from sale of equipment -- -- -- 8,615
(Increase) decrease in intangibles 1,270 -- -- 12,051
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (1,200) (13,001) (79,519) 1,436
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on payable to individual -- -- -- (132,850)
Proceeds from payable to stockholders -- -- 200,000 --
Proceeds from notes payable -- -- 21,081 246,416
Payments on notes payable (1,021) (61,636) (2,402) (50,451)
Net proceeds from issuance of common stock 80,000 200,000 971,327 835,349
Repurchase of common stock -- -- -- (20,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities 78,979 138,364 1,190,006 878,464
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (104,962) (13,373) 61,533 24,853
Cash and cash equivalents:
Beginning 118,867 57,334 57,334 32,481
------------ ------------ ------------ ------------
Ending $ 13,905 $ 43,961 $ 118,867 $ 57,334
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30 June 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for interest $ -- $ 500 $ 210,567 $ 171,285
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in exchange for debt $ -- $ -- $ 50,000 $ 623,002
============ ============ ============ ============
Issuance of common stock for accrued payroll $ -- $ -- $ -- $ 304,000
============ ============ ============ ============
Issuance of common stock for subordinated
convertible debentures and related accrued
interest and premium $ -- $ 4,444,364 $ 4,444,364 $ --
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 1. Nature of Business and Summary of Significant Accounting Policies:
NATURE OF BUSINESS:
The Company was incorporated on May 17, 1995 in the state of Colorado.
Since inception, the Company's efforts have been devoted to raising
capital and the purchase and development of a patented system for
transferring color patterns to metal, wood, glass and plastic
products. The Company currently owns the patents rights for this
process for the United States and Canada and has a licensing
arrangement for Brazil (Note 8). The Company licenses the system to
outside parties and maintains its own production capabilities in
targeting its sales efforts currently to the United States and Canada.
UNAUDITED FINANCIAL STATEMENTS:
The balance sheet at September 30, 1999, the statements of income and
cash flows for the three month periods ended September 30, 1999 and
1998 and the statement of changes in stockholders' equity (deficit) at
September 30, 1999 are unaudited but, in the opinion of management of
the Company, include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of financial condition
and results of operations. The results of operations for the three
months ended September 30, 1999 are not necessarily indicative of the
results of operations to be expected for the full year ending June 30,
2000.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
INCOME TAXES:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax basis. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the
date of the enactment.
INVENTORIES:
Inventories consist of raw materials and are valued at the lower of
cost or market (first-in, first-out method).
OTHER ASSETS:
The Company purchased the patent rights for Canada and the United
States on October 17, 1995. The cost of those rights are amortized
using the straight-line method over 15 years.
The Company incurred costs of $180,071 in connection with the offering
of subordinated convertible debentures. These costs are amortized
using the straight-line method through September 30, 1998.
7
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 1. Nature of Business and Significant Accounting Policies (Continued):
In accordance with SFAS 121, long-lived assets are reviewed for
impairment whenever circumstances indicate that the carrying amount
may not be recoverable.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Leasehold improvements and equipment are stated at cost and are being
depreciated and amortized using the straight-line method over the
following useful lives:
Years
-----
Leasehold improvements 3
Production equipment 3-10
Office furniture and equipment 3-10
REVENUE RECOGNITION:
The Company records sales when products are shipped, collectibility is
probable, and the fee is fixed or determinable. License revenue is
recognized over the term of the agreement.
Included with certain license agreements are commitments by the
licensee to make royalty payments or minimum monthly payments that are
offset by purchase of Company product. Such revenue is recognized when
earned and collectibility is probable.
ADVERTISING:
The Company expenses advertising costs as they are incurred.
RESEARCH AND DEVELOPMENT COSTS:
The Company expenses research and development costs as incurred.
CALCULATION OF PER COMMON SHARE EARNINGS (LOSSES):
Loss per share is computed based on the weighted average common shares
outstanding. Potential issues that are anti-dilutive and reduce loss
per share are excluded from the computation.
CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company reviews customers' credit history before extending credit
and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends
and other information.
STOCK-BASED EMPLOYEE COMPENSATION:
The Company accounts for its employee stock option plans under the
intrinsic-value method of APB Opinion No. 25 and, accordingly,
compensation costs are recognized in the financial statements only
when options are granted to employees below the estimated fair market
value of the underlying stock. Pro forma information reflecting
compensation expense if SFAS 123 were in effect is not presented as
the Company estimates no compensation costs would result from
implementation of SFAS 123.
8
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 1. Nature of Business and Significant Accounting Policies (Continued):
ESTIMATES AND ASSUMPTIONS:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during
the reporting period. Significant estimates include the lives of
patent rights and equipment and the valuation of stock issued. Actual
results could differ from these estimates.
FINANCIAL INSTRUMENTS:
The Company has entered into obligations to an individual (see Notes 2
and 7) that are due in French francs while the Company's functional
currency is the U.S. dollar, therefore, the related transactions are
exposed to the effects of foreign exchange rate fluctuations on the
U.S. dollar. The payable to the individual is recorded at the current
foreign exchange rate. All gains and losses from currency transactions
are included in income currently as required by Statement on Financial
Accounting Standards No. 52.
Note 2. Payable to Individual:
The Company, on October 17, 1995, purchased certain U.S. and Canadian
patent rights as part of an assignment agreement granted at a total
price of twenty-five million French francs. The agreement is
collateralized by patent rights. In November 1998, the Company and
former patent owner agreed to a revised proposal extending the payment
terms. This restructuring has been accounted for prospectively
reducing the effective interest rate. No gains or losses are
recognized as a result of the restructuring. The following is a
schedule under the revised proposal, by year, of future payments (in
U.S. dollars using the June 30, 1999 conversion rate of FF6.35 to $1)
together with the present value of the payments:
Year Ending June 30:
2000 $ 189,000
2001 189,000
2002 1,398,100
2003 456,400
2004 287,200
-------------
Total payments at FF6.35 2,519,700
Less: Amount representing interest at 6.62% (392,897)
-------------
$ 2,126,803
=============
Current obligation $ 189,000
Accrued interest payable 132,905
Long-term portion 1,804,898
-------------
$ 2,126,803
=============
9
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 3. Other Assets:
Patents consist of the following:
<TABLE>
<CAPTION>
June 30
September 30, ----------------------------
1999 1999 1998
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Patents, at cost $ 3,692,530 $ 3,692,530 $ 3,692,530
Less accumulated amortization 974,609 912,809 666,639
------------ ------------ ------------
$ 2,717,921 $ 2,779,721 $ 3,025,891
============ ============ ============
Amortization expense $ 61,800 $ 246,170 $ 246,169
============ ============ ============
</TABLE>
Debenture issuance costs consist of the following:
<TABLE>
<S> <C> <C> <C>
Debenture issuance costs $ -- $ 180,071 $ 180,071
Less accumulated amortization -- 180,071 165,969
------------ ------------ ------------
$ -- $ -- $ 14,102
============ ============ ============
Amortization expense $ -- $ 14,102 $ 68,277
============ ============ ============
</TABLE>
Note 4. Leasehold Improvements and Equipment:
Leasehold improvements and equipment consist of the following:
<TABLE>
<CAPTION>
June 30
September 30, ----------------------------
1999 1999 1998
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Leasehold improvements $ -- $ 21,732 $ 21,732
Equipment 315,298 314,028 394,368
Office furniture and equipment 79,237 78,037 74,388
------------ ------------ ------------
394,535 413,797 490,488
Less accumulated depreciation and amortization 151,438 153,670 173,013
------------ ------------ ------------
$ 243,097 $ 260,127 $ 317,475
============ ============ ============
Depreciation and amortization expense $ 19,500 $ 63,468 $ 127,738
============ ============ ============
</TABLE>
Note 5. Notes Payable and Long-Term Debt:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Note payable, bank, payable in monthly installments
of $536, including interest at 9.75%, through
March 2000, collateralized by equipment $ 5,123 $ --
Note payable, bank, payable in monthly installments
of $486, including interest at 10.25%, through
February 2002, collateralized by vehicle 13,556 --
</TABLE>
10
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 5. Notes Payable and Long-Term Debt (Continued):
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Note payable, individual, payable in monthly installments of
$500, including interest at 12%, due on April 25, 1998,
unsecured and guaranteed by a stockholder,
converted to common stock in 1999 -- 50,000
------------ -----------
18,679 50,000
Less current maturities 11,000 50,000
------------ -----------
$ 7,679 $ --
============ ===========
</TABLE>
Note 6. Subordinated Convertible Debentures:
In August 1995, the Company authorized, under a Subscription and
Purchase Agreement, the issuance of $2,500,000 in subordinated
convertible debentures. The debentures were due on September 1, 1998
and accrued interest at 10.5% per annum. Subject to the provisions of
the Purchase Agreement, the debenture holder could convert the
principal and accrued interest into shares of common stock at the date
of a U.S. public offering and at a price as follows: Conversion date
on or before April 1, 1998, 68% of offering price; on or before
September 1, 1998, 60% of offering price. If the Company failed to
complete a public offering on or before September 1, 1998, then the
principal and interest, plus a premium equal to 50% of the principal
would become due and payable, unless agreed otherwise by 66-2/3% of
the debenture holders. Interest expense includes premium costs. The
Company could redeem all outstanding debentures by the payment of all
principal multiplied as follows: redemption on or before April 1,
1998, 1.4 times principal; on or before September 1, 1998, 1.5 times
principal.
In addition, the debentures holders could be granted, upon conversion
of the debenture into common stock, warrants to purchase Company
common stock equal to 10% of the number of shares received upon
conversion of the debenture into common stock. The purchase price for
each share of common stock purchasable by exercise of the warrant was
1.2 times the conversion price. The Company could redeem these
warrants upon payment of $1.05 per warrant provided that the fair
market value of the Company's common stock as defined by the agreement
was at least three times the exercise price of the warrant. The
exercise of the warrants could not occur prior to 180 days after the
effective date of the Company's public offering.
In September, 1998, the debentures and related accrued interest and
premium were converted into common stock and warrants.
Note 7. Stockholders' Equity:
Stock split:
On November 12, 1997, the Board of Directors authorized a
three-for-one stock dividend. Unless otherwise stated, issued and
outstanding common stock has been restated to reflect this stock
split.
Preferred stock:
The voting powers and rights of the preferred stock are subject to
approval and amendment by the Board of Directors and will be described
upon issuance. As of June 30, 1999, no shares of preferred stock are
issued and outstanding.
11
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 7. Stockholders' Equity (Continued):
Warrants:
The Company has issued warrants to purchase 50,000 shares of common
stock at a purchase price of $1.30 per share. The warrants are
exercisable after August 1, 1999 and expire on August 1, 2003.
As part of the conversion of subordinated convertible debentures, the
Company issued 636,915 Class A warrants and 1,592,128 Class B
warrants. These warrants contain various anti-dilution rights which
provide for proportionate adjustment of the warrant purchase price in
the event of : a) Any subdivision or combining of the outstanding
shares of Common Stock, b) Declaration of a dividend payable in Common
stock, or c) Issuance of securities at a price that is less than the
purchase price of the warrant in effect immediately prior to such
issuance.
The Class A warrants allow the holder to purchase unrestricted shares
of Company stock at a purchase price of $1.75 per share, are
exercisable after September 1, 1998 and expire on September 1, 2002.
The Class B warrants allow the holder to purchase unrestricted shares
of Company stock at a purchase price of $2.25 per share, are
exercisable after September 1, 1998 and expire on September 1, 2002.
The Company can call these warrants if the bid price is 60% above the
exercise price for twenty consecutive business days. The holder must
exercise the warrant within 30 days or the Company can repurchase the
warrant at $.05 per warrant.
Stock incentive plan:
The Company adopted a Stock Incentive Plan on April 7, 1997 which
authorizes 1,000,000 shares for issuance of stock options and stock
appreciation rights and expires 10 years from the effective date of
the plan.
Information relating to stock options is as follows:
Weighted
Number Average
of Shares Exercise Price
------------- --------------
Under option, June 30, 1998 -- $ --
Granted 3,650,000 1.66
------------- --------------
Under option, June 30, 1999 3,650,000 $ 1.66
============= ==============
Exercisable at June 30, 1999 150,000 $ 1.20
============= ==============
Note 8. Commitments and Contingencies:
The Company leases office, warehouse and production space under a
lease which calls for approximate monthly payments of $9,100 through
December 31, 2000. Rental expense on this operating lease was
approximately $140,000 and $131,000 for the years ending June 30, 1999
and 1998, respectively.
The Company leases various office equipment under operating leases.
Rental expense on these leases was $9,614 and $3,761 for the years
ending June 30, 1999 and 1998, respectively.
12
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 8. Commitments and Contingencies (Continued):
Minimum lease payments at June 30, 1999 are as follows:
Year Ending June 30: Facility Equipment Total
------------ ------------ ------------
2000 $ 109,200 $ 13,659 $ 122,859
2001 54,600 9,580 64,180
------------ ------------ ------------
$ 163,800 $ 23,239 $ 187,039
============ ============ ============
The Company was obligated under a license agreement of the Brazilian
rights to certain patents to make monthly payments of FF35,000 through
March 1998. In November 1998, the Company entered into an agreement
whereby the Company's license in Brazil will be reinstated against
payment by the Company to the patent holder of 30% of any future
license fees and 10% of any future royalties until such time that the
Company acquires the Brazil patents. Meanwhile, the patent holder
retains the right to sell the Brazil patent to a third party and the
Company has the right for 90 days to match that offer. The amount
expensed under this agreement was $0 and $5,882 for the years ended
June 30, 1999 and 1998, respectively.
Note 9. Income Taxes:
The Company has available net operating loss carryforwards of
approximately $4,300,000 at June 30, 1999 which will expire in twelve
through twenty years.
The following is a summary of deferred taxes:
<TABLE>
<CAPTION>
June 30
September 30, ----------------------------
1999 1999 1998
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 1,850,000 $ 1,710,000 $ 1,160,000
Accrued expenses -- -- 760,000
------------ ------------ ------------
1,850,000 1,710,000 1,920,000
Deferred tax liabilities:
Depreciation and amortization -- -- 40,000
------------ ------------ ------------
1,850,000 1,710,000 1,960,000
Valuation allowance (1,850,000) (1,710,000) (1,960,000)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</TABLE>
A reconciliation of the Company's statutory tax rate to the effective
date is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Federal statutory rate 35% 35%
State taxes 5% 5%
Valuation allowance (40)% (40)%
-------- --------
0% 0%
======== ========
</TABLE>
Federal tax rules impose limitations on the utilization of loss
carryforwards following certain changes in ownership. When such
changes occur, the limitation reduces the amount of benefits that are
available to offset future taxable income each year, starting with the
year of ownership changes.
13
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 1999 and 1998 and
Three Months Ended September 30, 1999 and 1998 (Unaudited)
Note 10. Company's Continued Existence:
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has sustained substantial losses in its initial years. The Company
intends to restructure its debt and to arrange for the sale of
additional shares of stock to obtain additional operating capital
throughout the year.
14
EXHIBIT 10
ASSIGNMENT AGREEMENT
BETWEEN THE UNDERSIGNED:
Mr. Jean-Noel Claveau, domiciled at COISIA FR-39240 ARINTHOD, hereinafter
referred to as the Assignor,
party of the first part;
and
The Kolorfusion International Inc. company, domiciled at 7208 South Tucson Way,
Englewood, Colorado 80112, USA, represented by its President, Mr. Michael J.A.
Harrop, J.A., hereinafter referred to as the Assignee, party of the second part.
WHEREAS:
The Assignor is the holder and sole owner of the following patent rights:
1. Canadian patent application No. 20 39054, entitled "Pressure Membrane", filed
on March 26, 1991 under priority of French patent No. 90 04488. The examiner's
fee for the Canadian application must be paid before 1998.
2. Canadian patent application No. 20 82979 entitled "Transfer Tissue", filed on
November 26, 1992 under priority of French patent No. 91 14875. The issue fee
was paid prior to the prescribed deadline.
3. Canadian patent application No. 21 12858 entitled "Pre-formed membrane,"
filed on January 5, 1994 under priority of French patent No. 93 00316. The
Canadian application is pending.
4. US patent entitled "Transfer Tissue", filed on November 16, 1992 under No. 07
977019 under priority of French application No. 91 14875 of November 16, 1991
and issued May 3, 1994 as No. 5 308426.
These patent rights are hereinafter referred to by the term Patents.
An exclusive licensing agreement was signed between the Assignor and the
Assignee dated August 5, 1994 and duly registered with the US Patent and
Trademark Office on September 8, 1994.
1
<PAGE>
Assignor agrees to sell them to him.
The Assignee has reviewed the contents of the research reports on each patent.
THEREFORE THE PARTIES HEREBY AGREE TO THE FOLLOWING:
Article I. Cancellation of the Exclusive Licensing Agreement
When signed, this Assignment Agreement shall cancel and replace the exclusive
licensing agreement signed by the Assignor and the Assignee and duly registered
on September 8, 1994 as No. 70 95/0247 with the US Patent and Trademark Office.
Article II. Purpose
The Assignor hereby assigns to the Assignee, who hereby accepts, all rights of
possession without exceptions or reservations, owned by him to the patents
described in the preamble. The Assignor hereby agrees to provide all signatures
and to fill out all documentation necessary to conduct the procedures required
by the aforementioned patent offices.
The Assignor hereby states that an exclusive licensing agreement, valid in all
countries, with the Caggiati Company for the decorating of religious and/or
funerary and/or cemetery items [incomplete sentence].
Article III. Consequences of Assignment
As a consequence of said sale, the Assignee shall assume all of the Assignor's
rights to the patents so that starting on the day this agreement is signed, he
shall have full possession of said rights and may dispose of or use them as he
sees fit, may maintain them in force or surrender them.
Starting on the day this agreement is signed, the Assignor shall pay the renewal
fees for said patents for as long as he wishes to maintain them in force.
In the above cases, the Assignee agrees to submit to the Assignor a copy of the
receipts for the Patent fees described in the preamble. The Assignee agrees to
keep the Assignor informed of all steps taken with the patent office to ensure
that the Patents described in the preamble are granted.
This assignment entails the right for the Assignee to take action for any
infringement of patent rights occurring either prior to or subsequent to said
sale.
In the event the Assignee has not paid the fees for granting and maintaining the
Patents in force, the Assignor may pay the unpaid fees due at the patent office
at his own expense.
2
<PAGE>
Article IV. Guarantee
The Assignor hereby states that as of the date this agreement is signed, no
assignment concerning the patents has been approved, and no liens have been
placed upon them nor have they been pledged as collateral; thus the Assignor is
free to use them as he sees fit.
This assignment shall be transacted with no guarantee other than that of the
actual existence of the Patents.
Article V. Price
This assignment is hereby granted at a total price of TWENTY-FIVE MILLION FRENCH
FRANCS (FF 25,000,000), payable in accordance with the following schedule.
When this agreement is signed, the Assignee agrees to pay the Assignor, the sum
of TWO MILLION FIVE HUNDRED THOUSAND FRENCH FRANCS (FF 2,500,000), in addition
to a monthly amount during the first year of the agreement of ONE HUNDRED
THOUSAND FRENCH FRANCS (FF 100,000).
For subsequent years until the ninth year starting on the date this agreement is
signed, the Assignee agrees to pay the Assignor a monthly amount of TWO HUNDRED
FORTY-ONE THOUSAND SIX HUNDRED SIXTY-SIX FRENCH FRANCS (FF 241,666).
Article VI. Use
The Assignee agrees to ensure that the products and devices covered by the
agreement are used. He shall be required to exert all due diligence to find
outlets based on serious market research and a reasonable amount of advertising.
The amounts specified in Article V shall be due even if, for any reason, the
Assignee does not use the inventions covered by the patent rights assigned
herein.
Article VII. Accounting
Any amount not paid by the deadlines agreed upon shall incur penalty interest at
the rate of TWO PERCENT (2%) per calendar month.
All the amounts indicated in Article IV shall be paid by bank check in the name
of the Assignor.
Article VIII. Cancellation of the Assignment
If the Assignor is declared bankrupt or in a state of insolvency as defined by
US law, and if the amounts due the Assignor have not been paid in full, this
assignment may be canceled
3
<PAGE>
unreservedly at the express request of the Assignor.
Furthermore, this assignment may be canceled unreservedly at the express request
of the Assignor, with no formal legal procedure required, ONE (1) month after a
demand for payment sent by the Assignor to the Assignee remains without response
for all or part of the payments described in this agreement.
In the cases cited above, any amounts already paid shall remain the property of
the Assignor, and the Assignee shall not be entitled to request reimbursement.
The Assignor shall recover full and entire possession of said rights free of
charge if the assignment agreement is canceled.
Article IX. Non-competition
For the duration of this agreement, the Assignor agrees not to develop, directly
or indirectly, any products or devices which would compete with the products or
devices covered by the agreement.
Article X. Improvements
The Assignor agrees to provide, free of charge, to the Assignee during the
payment period of this agreement, all improvements made to the Patents listed in
the preamble. The Assignee may use them and file them as patent applications if
possible.
In this agreement, "improvement" refers to any patentable or non-patentable
improvements introduced by either of the parties which are legally dependent,
which means they may not be used without posing a serious infringement problem
with respect to any of the patent claims. Any improvements as described
hereinabove made by either of the parties during the performance of this
agreement shall be filed as one or more patent applications in the name of the
party developing said improvement. Any improvements introduced by the Assignor
shall automatically fall within the scope of this agreement at no additional
cost.
The parties hereby jointly and severally to sign a deed of assignment at no
charge so that the Assignee will have full ownership of the property
[represented by] the improvements.
Article XI. Assignment
The Assignee may not assign, transmit or transfer this agreement without the
written consent of the Assignor.
Article XII. Licensing and Sub-licensing
The Assignee agrees to introduce the following provision when granting licenses
or sub-licenses to third parties:
4
<PAGE>
"If the Kolorfusion company is declared bankrupt or in a state of insolvency as
defined by US law, the Assignee shall be required to reimburse the fees to Mr.
Claveau, domiciled in COISIA FR-39240 ARINTHOD for the duration of the licensing
or sub-licensing agreement."
Article XIII. Disputes
The parties shall strive to reach an amicable agreement concerning any disputes
which may arise in regard to the interpretation and performance of the
provisions of this agreement.
This agreement shall be governed by the laws of France.
Failing an amicable settlement, any disputes arising between the parties
regarding the interpretation and/or performance of this agreement shall be
referred by the most diligent party to the Court of First Instance of Lyons.
Article XIV. Registration
All powers are vested in the bearer of an original copy of this agreement to
fulfill any formal legal requirements, including registration in the national
patent registers and registration with tax authorities.
The costs incurred as a result of these requirements, including any drafting or
consulting fees, shall be borne by the Assignee.
The Assignee hereby agrees to register this contract with the appropriate US and
Canadian offices.
Geneva
October 17, 1995
Made in five copies including one for submission to tax authorities and one for
each of the parties.
Assignor Assignee
[signature] [signature]
Jean Noel Claveau J.A.A. Harrop
5
<PAGE>
Geneva, October 17, 1995
Minutes of Meeting
Present:
Mr. J.A.A. Harrop
Mr. E. Garin, Esq.
Mr. B. Cronin
The parties present on October 17, 1995, discussed the Assignment Agreement
entered into by Mr. J.-N. Claveau and Kolorfusion International. Mr. Cronin,
legal counsel to Kolorfusion, company, reviewed the contract and will submit his
comments for review by Mr. Claveau. If possible, and with Mr. Claveau's
agreement, the comments will be incorporated into the Assignment Agreement so
that the agreement may be translated into American English and to ensure
compatibility with US and Canadian practices.
Pending receipt of the second draft agreement, Mr. Harrop is today signing the
Assignment Agreement proposed by Mr. Claveau and is paying the amount of FF
2,500,000 (two million five hundred thousand French francs) by bank check.
Etienne Garin
[signature]
J.A.A. Harrop
[signature]
B. Cronin
[signature]
6
