SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 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 June 30, 2000
Commission File No. 0-28351
KOLORFUSION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1317836
(State or other jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
14510 East Fremont Avenue
Englewood, Colorado 80112
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (303) 690-2910
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Securities registered pursuant to Section 12(g) of the Act:
None
Common Stock, ($.001 par value)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 30, 2000, based on the average bid and asked prices of Common
Stock in the over-the-counter market on that date was $2,703,747.
18,956,561 shares of Registrant's Common Stock, $.001 par value were outstanding
on June 30, 2000, prior to the effectiveness of the latest practicable date.
<PAGE>
CONTENTS
-------- Page
----
PART I
Item 1. BUSINESS 3
Item 2. PROPERTY 6
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 6
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS 6
Item 6. SELECTED FINANCIAL DATA 7
Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 10
Item 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 10
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT 10
Item 11. EXECUTIVE COMPENSATION 11
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 11
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 12
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K 12
<PAGE>
PART I
Item 1. - 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(TM)) with special inks
that may be any color 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(TM)) 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
3
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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 shared revenue
agreement, 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. Additional related patents have been developed by the
Company. The Company maintains a 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 13,000 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.
4
<PAGE>
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.
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.
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 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 $20,000 per year. 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
5
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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 employees in addition to the officers.
Item 2. - PROPERTY
The Company leases office, warehouse and production space in suburban
Denver for a monthly rental of $12,000.
Item 3. - LEGAL PROCEEDINGS
The Company is the plaintiff in a lawsuit pending in Araphoe County
District Court against its former Vice President Mark Poole and Lazart, Inc. The
Company seeks yet to be determined damages related to misappropriation of
Company information, trade secrets and breach of fiduciary duties. The Company
feels that the case will be tried or resolved in 2001.
The Company's primary patent has been placed for re-examination by the
U.S. Patent Trademark Office at the request of Valmont, Inc. The Company
believes that its patents will be continued as valid, and will contest any
present or future claims as they may arise against the Company's intellectual
property currently owned or later developed.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
-------
HOLDERS
None.
PART II
Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock has been traded since August, 1998 on the
OTC Bulletin Board, with the symbol KOLR, before that time there was no
activity. As of June 30, 2000 the following brokerage firms were making a market
in the Company's common stock: Wien Securities, Mayer & Schwitzer, Herzog Heine
6
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Geduld, Inc, Hill Thompson Magid & Co., Sharpe Capital, Inc., Protective Group
Securities, Knight Securities, Inc. and USCC Trading/a division of Fleet
Securities.
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 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)
Third Quarter (July 1, 1999 $ 1.03125 $ 0.28125
through September 30, 1999)
Fourth Quarter (October 1, 1999
through December 31, 1999) $ .44 $ .20
Fiscal year 2000
First Quarter (January 1, 2000
through March 31, 2000) $ 2.00 $ .27
Second Quarter (April 1, 2000
through June 30, 2000) $ 1.60 $ .50
There are 76 holders of record of the common stock of the Company.
There have never been any dividends, cash or otherwise, paid on the common
shares of the Company.
7
<PAGE>
Item 6. - SELECTED FINANCIAL DATA
Fiscal Years Ended June 30,
-------------------------------
2000 1999
----------- -----------
Income Statement Data
Net Sales $ 225,804 $ 361,044
Net Income (loss) $(1,793,512) $(1,395,528)
Per Share Data
Net Income (loss) $ (.09) $ (.08)
As of June 30,
-------------------------------
2000 1999
----------- -----------
Balance Sheet Data
Total Assets $ 2,287,506 $ 3,291,030
Total Liabilities $ 3,222,797 $ 2,456,809
Stockholders' Equity (Deficit) $ (935,291) $ 834,221
Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management of the Company seeks to have the Company attain a positive
cash flow 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.
8
<PAGE>
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.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 2000.
Revenues decreased in 2000 to $225,804 from $361,044 in 1999. There
were decreased sales in 2000 to account for the difference.
Costs of sales increased in 2000 to $387,453 from $314,879 in 1999.
Selling, general and administrative expenses decreased in 2000, to
$978,751 from $1,355,363 in 1999.
The result was that there was a net loss of $1,793,512 in 2000,
compared to a net loss of $1,395,528 in 1999. The net loss per share in 2000 was
$.09 compared to a net loss per share of $.08 in 1999. This includes an
impairment loss of the patent of $564,210 for the year ended June 30, 2000.
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, 2000 was $8,628,348. 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. 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
9
<PAGE>
Company had a gain in foreign currency transactions in 2000 of $132,890, as
compared to a gain in foreign currency transactions of $250,123 in 1999. 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.
Item 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are attached following Item 14.
Item 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company, with a brief
description, are as follows:
Name Age Position
---- --- --------
Thomas Gerschman 43 Chairman
Stephen Nagel 50 President, Director
Kenneth Bradley 52 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.
10
<PAGE>
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.
The directors of the Company are elected annually by the shareholders
for a term of one year or until their successors are elected and qualified. The
officers serve at the pleasure of the Board of Directors.
Item 11. - 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 1999 and
$79,000 in 2000 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. The Company also paid fees
to Mount Keen, an entity owned by Thomas Gershman, $30,000 in 1999 and $60,000
in 2000.
Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
There are presently 18,956,561 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 June 30, 2000, 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%
Stephen Nagel 6,388,000 34%
Philippe Nordman 8,916,690 47%
Directors and Officers 6,434,875 34%
as a group
11
<PAGE>
Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
PART IV
Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
(a) Attached are the Financial Statements and Independent Auditor's
Report on Examination of Financial Statements for the years ended June
30, 2000, and June 30, 1999.
(b) Attached are the following Financial Statement Schedules and
Auditors Report on Schedules,
None
All schedules are omitted because they are not required or not
applicable or the information is shown in the financial statements or
notes thereto.
(c) No report was filed on Form 8-K.
(d) There are no exhibits.
12
<PAGE>
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.
Dated September 27, 2000
KOLORFUSION INTERNATIONAL, INC.
by /s/ Stephen Nagel
--------------------------------
13
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
FINANCIAL REPORT
JUNE 30, 2000 AND 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, 2000 and 1999, and the related statements of
income, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended June 30, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 2000, 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 8 to the
financial statements, the Company has suffered recurring losses from operations
and its current liabilities exceeded its current assets as of June 30, 2000.
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/ Virchow, Krause & Company, LLP
Bloomington, Minnesota
August 11, 2000
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
BALANCE SHEETS
June 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,785 $ 118,867
Trade accounts receivable, no allowance for
doubtful accounts considered necessary 22,956 56,978
Inventories 102,750 74,067
----------- -----------
Total current assets 136,491 249,912
OTHER ASSETS:
Patents, less accumulated amortization
2000 $1,723,189; 1999 $912,809 1,969,341 2,779,721
Other 1,270 1,270
----------- -----------
1,970,611 2,780,991
LEASEHOLD IMPROVEMENTS AND EQUIPMENT,
less accumulated depreciation and amortization
2000 $240,295; 1999 $153,670 180,404 260,127
----------- -----------
$ 2,287,506 $ 3,291,030
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 181,502 $ 111,327
Current obligation on payable to individual 1,861,008 189,000
Current portion of long-term debt 14,881 11,000
Payable to stockholders 780,000 200,000
Accrued interest payable 385,406 132,905
----------- -----------
Total current liabilities 3,222,797 644,232
PAYABLE TO INDIVIDUAL, less current obligation,
secured by patent -- 1,804,898
LONG-TERM DEBT, less current portion -- 7,679
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none issued or outstanding
Common stock, $.001 par value, 100,000,000 shares authorized
2000 18,956,561; 1999 18,932,561 shares issued and outstanding 18,957 18,933
Additional paid-in capital 7,674,100 7,650,124
Accumulated deficit (8,628,348) (6,834,836)
----------- -----------
(935,291) 834,221
----------- -----------
$ 2,287,506 $ 3,291,030
============ ============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 201,807 $ 358,044 $ 472,394
License and royalty revenue 23,997 3,000 120,000
------------ ------------ ------------
225,804 361,044 592,394
Expenses:
Cost of sales 387,453 314,879 529,661
Selling, general and administrative expenses 978,751 1,355,363 1,179,719
Impairment loss 564,210 -- --
------------ ------------ ------------
Operating loss (1,704,610) (1,309,198) (1,116,986)
Other income (expense):
Gain on foreign currency transactions 132,890 250,123 75,457
Interest and other income (expense) 40,732 (20,720) 9,515
Interest expense (262,524) (315,733) (1,294,729)
------------ ------------ ------------
(88,902) (86,330) (1,209,757)
------------ ------------ ------------
Net loss $ (1,793,512) $ (1,395,528) $ (2,326,743)
============ ============ ============
Loss per share $ (.09) $ (.08) $ (.17)
============ ============ ============
Shares used in computing loss per common equivalent share 18,940,561 16,967,294 13,296,245
============ ============ ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended June 30, 2000, 1999 and 1998
<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 services 24,000 24 23,976 - 24,000
Net loss - - - (1,793,512) (1,793,512)
-------------- -------------- -------------- -------------- --------------
Balance at June 30, 2000 18,956,561 $ 18,957 $ 7,674,100 $ (8,628,348) $ (935,291)
============== ============== ============== ============== ==============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,793,512) $(1,395,528) $(2,326,743)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 332,795 323,740 442,184
Gain on foreign currency transactions (132,890) (250,123) (75,457)
Stock issued for services 24,000 97,375 --
Loss on disposal of fixed assets -- 73,399 --
Amortization of prepaid interest -- -- 83,333
Interest converted to debt 252,501 51,330 21,312
Impairment loss 564,210 -- 75,030
(Increase) decrease in trade accounts receivable 34,022 11,560 (48,955)
(Increase) decrease in inventories (28,683) (37,565) (5,589)
(Increase) decrease in prepaid expenses -- 16,545 113
Increase (decrease) in accounts payable 70,175 16,477 (49,074)
Increase (decrease) in accrued interest -- 53,836 1,018,799
Increase (decrease) in deferred revenue -- (10,000) 10,000
----------- ----------- -----------
Net cash used in operating activities (677,382) (1,048,954) (855,047)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leasehold improvements and equipment (6,902) (79,519) (19,230)
Proceeds from sale of equipment -- -- 8,615
Decrease in intangibles -- -- 12,051
----------- ----------- -----------
Net cash provided by (used in) investing activities (6,902) (79,519) 1,436
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on payable to individual -- -- (132,850)
Proceeds from payable to stockholders 580,000 200,000 --
Proceeds from notes payable 5,447 21,081 246,416
Payments on notes payable (9,245) (2,402) (50,451)
Net proceeds from issuance of common stock -- 971,327 835,349
Repurchase of common stock -- -- (20,000)
----------- ----------- -----------
Net cash provided by financing activities 576,202 1,190,006 878,464
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (108,082) 61,533 24,853
Cash and cash equivalents:
Beginning 118,867 57,334 32,481
----------- ----------- -----------
Ending $ 10,785 $ 118,867 $ 57,334
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 9,813 $ 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 $ --
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Periods Ended June 30, 2000
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. 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.
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 9 years. Patent amortization
expense amounted to $246,170 for each of the years ended June 30,
2000 and 1999. In addition, the Company recorded an impairment
loss of $564,210 for the year ended June 30, 2000, based on the
provisions of SFAS 121 (see below).
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
Depreciation expense for the years ended June 30, 2000 and 1999
was $86,625 and $63,468, respectively.
6
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Periods Ended June 30, 2000
Note 1. Nature of Business and Significant Accounting Policies
(Continued):
LONG-LIVED ASSETS:
In accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" as
circumstances dictate, the Company evaluates whether changes have
occurred that would require revision of the remaining estimated
lives of recorded long-lived assets, or render those assets not
recoverable. If such circumstances arise, recoverability is
determined by comparing the undiscounted net cash flows of
long-lived assets to their respective carrying values. The amount
of impairment, if any, is measured based on the projected
discounted cash flows using an appropriate discount rate.
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.
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.
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.
7
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Periods Ended June 30, 2000
Note 1. Nature of Business and Significant Accounting Policies
(Continued):
FINANCIAL INSTRUMENTS:
The Company has entered into obligations to an individual (see
Note 2) 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. The Company has not
made the required payments on this agreement as of June 30, 2000
and, as a result, the entire amount due has been classified as a
current liability. The amount outstanding at June 30, 2000 and
1999 including interest is $2,246,414 and $2,126,803,
respectively.
Note 3. Notes Payable and Long-Term Debt:
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <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 9,434 13,556
Note payable, bank, payable in monthly installments
of $500, including interest at 11.75%, through
June 2001, collateralized by vehicle 5,447 -
--------- --------
14,881 18,679
Less current maturities 14,881 11,000
--------- --------
$ - $ 7,679
========= ========
</TABLE>
Note 4. Stockholders' Equity:
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, 2000, no shares of
preferred stock are issued and outstanding.
8
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Periods Ended June 30, 2000
Note 4. 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:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ----------------------------
Weighted Weighted
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C>
Under option, beginning of year 3,650,000 $ 1.66 -- $ --
Granted -- -- 3,650,000 1.66
Expired (950,000) 1.00 -- --
---------- ------------- ---------- -------------
Under option, end of year 2,700,000 $ 1.90 3,650,000 $ 1.66
========== ============= ========== =============
Exercisable at end of year 250,000 $ 1.00 150,000 $ 1.20
========== ============= ========== =============
</TABLE>
Note 5. 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 $148,000 and $140,000 for the years ending June
30, 2000 and 1999, respectively.
The Company leases various office equipment under operating
leases. Rental expense on these leases was $23,000 and $9,614 for
the years ending June 30, 2000 and 1999, respectively.
9
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Periods Ended June 30, 2000
Note 5. Commitments and Contingencies (Contingencies):
Minimum lease payments at June 30, 2000 are as follows:
Year Ending June 30: Facility Equipment Total
------------ ------------- ----------
2001 $ 54,600 $ 20,320 $ 74,920
2002 - 2,685 2,685
------------ ------------- ----------
$ 54,600 $ 23,005 $ 77,605
============ ============= ==========
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.
Note 6. Income Taxes:
The Company has available net operating loss carryforwards of
approximately $5,400,000 at June 30, 2000 which will expire in
eleven through twenty years.
The following is a summary of deferred taxes:
June 30
--------------------------
2000 1999
----------- -----------
Deferred tax assets:
Operating loss carryforwards $ 2,200,000 $ 1,710,000
Depreciation and amortization 140,000 -
---------- -----------
2,340,000 1,710,000
Valuation allowance (2,340,000) (1,710,000)
---------- -----------
$ - $ -
========== ===========
A reconciliation of the Company's statutory tax rate to the
effective date is as follows:
2000 1999
-------- --------
Federal statutory rate 35% 35%
State taxes 5% 5%
Valuation allowance (40)% (40)%
-------- --------
0% 0%
======== ========
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.
10
<PAGE>
KOLORFUSION INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Periods Ended June 30, 2000
Note 7. Major Customers:
The Company derived more than 10% of its net sales from the
following unaffiliated customers and had receivable balances from
those customers in the approximately amounts of:
2000
-----------------------------------
Sales Receivables
-------------- --------------
Customer A $ 58,000 $ 1,000
Customer B 40,000 -
Customer C 29,000 -
Customer D 28,000 3,000
Note 8. 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.
