U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment #1
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(TM)) 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(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 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.
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
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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 employees in addition to the officers.
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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 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.
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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. 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. 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
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.
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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:
Name Age Position
- ---- --- --------
Thomas Gerschman 42 Chairman
Stephen Nagel 49 President, Director
Kenneth Bradley 51 Secretary
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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 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.
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
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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 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)
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
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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
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
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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
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
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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.
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
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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 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
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secondary market for a stock that becomes subject to the penny stock rules. If
the Company's securities become subject to the penny stock rules, investors in
this offering may find it more difficult to sell their securities. 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.
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:
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3. Articles of Incorporation and bylaws
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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: 1/17/2000 Kolorfusion International, Inc.
/s/ Stephen Nagel
------------------------------------
Stephen Nagel, President, Director
/s/ Thomas Gershman
------------------------------------
Thomas Gershman, Director
/s/ Kenneth Bradley
------------------------------------
Kenneth Bradley, Secretary
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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. In addition, the Company is obligated to register the shares
of common stock issued upon exercise of the warrants.
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.
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