<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
COMMISSION FILE NUMBER 0-14392
COLOROCS INFORMATION TECHNOLOGIES, INC.
---------------------------------------
(Exact name of small business issuer as specified in its charter)
GEORGIA 58-1482573
------- ----------
(State of incorporation) (I.R.S. Employer Identification Number)
5600 OAKBROOK PARKWAY, SUITE 240, NORCROSS, GEORGIA 30093-1843
--------------------------------------------------- ----------
(Address of principal executive offices)
(770) 447-3570
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Check whether the issuer filed all documents and reports required to be filed by
Section 12,13 or 15(d) of the Securities Exchange Act of 1934 after the
distribution of securities under a plan confirmed by a court. Yes X No
--- ---
There were 2,113,902 shares of Common Stock outstanding as of September 30,
1998.
Transitional Small Business Disclosure Format. Yes No X
--- ---
<PAGE> 2
COLOROCS INFORMATION TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------------------
ITEM NUMBER PAGE NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 1998 and
December 31, 1997............................................... 3
Condensed Consolidated Statement of Operations - Three Months
and Nine Months Ended September 30, 1998 and 1997............... 4
Condensed Consolidated Statement of Cash Flows - Three Months
and Nine Months Ended September 30, 1998 and 1997............... 5
Notes to Condensed Consolidated Financial Statements -
September 30, 1998.............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 8
PART II OTHER INFORMATION
Item 5. Other Information.................................................. 10
Item 6. Exhibits and Reports on Form 8-K................................... 10
SIGNATURES......................................................... 10
INDEX OF EXHIBITS.................................................. 11
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 116,236 $ 29,381
Short term investments - 0 - 31,875
Receivables 172,673 829,387
Prepaid expenses 131,510 135,003
----------- -----------
TOTAL CURRENT ASSETS 420,419 1,025,646
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $62,408 and $43,399 at September 30, 1998 and
December 31, 1997, respectively 24,954 32,888
INVESTMENT IN NETCHANNEL, INC - 0 - 180,189
GOODWILL AND INTANGIBLE ASSETS, net 77,360 107,020
DEPOSITS 450 1,950
----------- -----------
TOTAL ASSETS $ 523,183 $ 1,347,693
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 255,717 $ 1,505,717
Note payable to director/shareholder - 0 - 37,500
Notes payable 250,000 1,190,380
Accounts payable and accrued liabilities 931,696 1,256,646
----------- -----------
TOTAL CURRENT LIABILITIES 1,437,413 3,990,243
DEFERRED LICENSING INCOME 875,000 875,000
COMMITMENTS AND CONTINGENCIES - 0 - - 0 -
STOCKHOLDERS' DEFICIT
Common stock; no par value; 10,000,000 shares authorized;
2,113,902 and 2,114,794 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 1,802,738 1,802,738
Warrants 100,000 100,000
Additional paid in capital 1,374,039 1,374,039
Retained deficit (5,066,007) (6,794,327)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (1,789,230) (3,517,550)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 523,183 $ 1,347,693
=========== ===========
</TABLE>
3
<PAGE> 4
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1998 30, 1997 30, 1998 30, 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Software $ 134,510 $ 284,191 $ 524,908 $ 812,917
Copier and consumables -0- -0- -0- 209,506
----------- ----------- ----------- -----------
Total revenue 134,510 284,191 524,908 1,022,423
Operating expenses:
Cost of copier and consumables product -0- 36,978 -0- 756,569
Research and development 37,203 18,976 104,072 1,334,155
Selling, general and administrative 138,232 301,945 616,638 2,128,727
----------- ----------- ----------- -----------
Total operating expenses 175,435 357,899 720,710 4,219,451
Operating (loss) (40,925) (73,708) (195,802) (3,197,028)
Other income (expense) net (6,794) (63,172) 1,924,122 1,384,481
----------- ----------- ----------- -----------
Net income (loss) $ (47,719) $ (136,880) $ 1,728,320 $(1,812,547)
=========== =========== =========== ===========
Net Income (loss) per share
Basic $ (.02) $ (.06) $ .82 $ (.86)
Fully Diluted $ (.02) $ (.06) $ .76 $ (.86)
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 2,113,902 2,114,794 2,113,902 2,114,794
Fully Diluted 2,113,902 2,114,794 2,287,053 2,114,794
=========== =========== =========== ===========
</TABLE>
4
<PAGE> 5
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (Loss) (47,719) (136,880) $ 1,728,320 $(1,812,547)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 25,148 11,821 48,668 106,375
Minority interest -0- -0- -0- -0-
Changes in assets and liabilities:
Receivables, net 790,684 705,358 656,714 (356,227)
Inventories -0- 768 -0- 113,821
Prepaid expenses 1,518 -0- 3,493 48,354
Deposits -0- -0- 1,500 -0-
Accounts payable, accrued expenses, and deferred
income (101,649) (95,642) (324,949) (1,977,012)
--------- --------- ----------- -----------
Cash provided by (used in) operating activities 667,982 485,425 2,113,746 (3,877,236)
INVESTING ACTIVITIES:
Write-off of prepaid license fees -0- -0- -0- -0-
Write-off of intangible assets -0- -0- -0- -0-
Investment in affiliate -0- -0- -0- -0-
Investment in NetChannel -0- -0- 180,189 -0-
Sale (purchase) of marketable securities -0- (50,000) 31,875 14,716
Disposition (Purchase) of equipment, net (5,400) -0- (11,075) -0-
--------- --------- ----------- -----------
Cash provided by (used in) investing activities (5,400) (50,000) 200,989 2,090,288
FINANCING ACTIVITIES:
Repayment of short term borrowings (750,000) -0- (1,250,000) -0-
Repayment of notes payable -0- -0- (940,380) -0-
Repayment of payable to director/shareholder -0- -0- (37,500) -0-
Proceeds from exercise of stock options -0- -0- -0- 50,702
Proceeds from short-term notes -0- (500,000) -0- 1,477,880
--------- --------- ----------- -----------
Cash provided by financing activities (750,000) (500,000) (2,227,880) 1,528,582
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (87,418) (64,575) 86,855 (258,366)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 203,654 88,805 29,381 282,596
--------- --------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 116,236 $ 24,230 $ 116,236 $ 24,230
========= ========= =========== ===========
</TABLE>
5
<PAGE> 6
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Colorocs Information Technologies, Inc. (the "Company") is incorporated in the
state of Georgia. On December 13, 1995, the Company's name was changed from
Colorocs Corporation to Colorocs Information Technologies, Inc. The Company
operates using the name Colorocs Information Technologies for its technology
licensing business and COPS, Inc. ("COPS") for the sale of its network printing
and file sharing software. It also licenses the name Colorocs for the outside
sales of copying hardware, consumables, and parts. See Note 2 below. ViewCall
America, Inc. ("VCA") developed and sold on-line service and access to the
Internet through the television. Substantially all of the assets of VCA were
sold in May 1997 to NetChannel, Inc. See Note 3 below.
Financial Statements
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30, 1998
and the results of its operations and cash flows for the three and the nine
months ended September 30, 1998 and 1997 have been included. Operating results
for the three and nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
2. SALE OF ASSETS OF COPIER BUSINESS
On May 1, 1997 SC Distribution, Inc., a privately held company based in
Norcross, Georgia purchased from Colorocs Information Technologies, Inc.
substantially all of the assets of the color copying and printing business in
exchange for the assumption of certain liabilities as well as a portion of the
revenues from the future sale of certain color printers.
6
<PAGE> 7
3. SALE OF ASSETS OF VCA
On May 9, 1997, NetChannel, Inc. ("NetChannel"), a privately held company based
in South San Francisco, California, purchased from VCA substantially all of its
assets and assumed most of the liabilities of VCA in exchange for 555,556 shares
of NetChannel preferred stock. In addition, NetChannel issued 3,114,280 shares
of preferred stock to the Company in consideration of advances made by the
Company to VCA and all liens over VCA assets possessed by the Company. All of
the NetChannel preferred stock was convertible by the holders into shares of
NetChannel common stock on a share-for-share basis. VCA received bridge
financing in the sum of $690,380 from NetChannel in connection with the
transaction which was accounted for as notes payable. The investment of
approximately $180,189 in NetChannel was recorded at cost.
NetChannel was subsequently acquired by America On Line. As a result of that
transaction, the Company received proceeds in the form of cash, foregone debt
and assumed liabilities in the amount of $1,925,906 realizing a gain on the
disposition of the investment in NetChannel in the amount of $1,745,717.
4. LICENSING AGREEMENT
In June 1997, the Company entered into a technology licensing agreement to use
the Company's patented double transfer, single pass paper color imaging system.
The Company recorded other income for technology licensing of $1,500,000 for the
quarter ended June 30, 1997. Income from licensing agreements is shown net of
other expenses in the accompanying condensed consolidated statement of
operations. The Company received $750,000 of the technology license fee in July
1997 and the balance in January 1998.
5. LEGAL PROCEEDING
On December 15, 1997, Crocker Realty Trust ("Crocker") filed a lawsuit against
the Company in the Superior Court of Gwinnett County, Georgia. Crocker sought
damages of $643,483.69 for breach of a lease agreement in connection with the
lease of certain office space which the Company's subsidiary, VCA, never
occupied. The lease agreement required lease payments of approximately $640,000
over 3 years. The lawsuit was settled in June of 1998 for $150,000. 50% of this
liability is the responsibility of the Company and 50% is the responsibility of
AOL/NetChannel.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains forward looking information that is
subject to a number of uncertainties that could cause actual results to differ
materially from those projected.
RESULTS OF OPERATIONS
Revenues
Revenues were $134,410 and $524,908 for the three and nine months ended
September 30, 1998 respectively, and $284,191 and $1,022,423 for the three and
nine months ended September 30, 1997 respectively, a decrease of $149,681 and
$497,515 or approximately 53% and 49% respectively. The decrease in revenues
is attributable to the sale of the assets of the color copying business in May
1997, and a decline in revenues from COPS software sales of approximately 35%.
Cost of Copier and Consumables Products
The Company incurred no cost of copier and consumables products during the
three and nine months ended September 30, 1998 due to both the sale of the
assets of the color copying business in May 1997 and the termination of VCA's
on-line service following the sale of substantially all of the assets of VCA to
NetChannel in May 1997.
Research and Development
Research and development expenses were $104,072 for the nine months ended
September 30, 1998, compared to $1,334,155 for the nine months ended September
30, 1997. Research and development expenses decreased for the nine months
ended September 30, 1998 from the comparable period in 1997 due to the
termination of VCA's on-line service.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $616,638 for the nine
months ended September 30, 1998, compared to $2,128,727 for the nine months
ended September 30, 1997, a decrease of 71%. The decrease was due to the
termination of VCA's on-line service.
Other income
Other income was $1,924,122 for the nine months ended September 30, 1998
compared to other income of $1,384,481 for the nine months ended September 30,
1997, an increase of approximately 39%.
Other income of $1,924,122 is comprised primarily of a gain of $1,745,717
resulting from the acquisition of NetChannel by America-On-Line. As part of
this transaction, NetChannel agreed to forego repayment of notes payable from
the Company in the amount of $690,380. NetChannel also satisfied a note
payable to Curtis Mathis in the sum of $250,000 and contributed $75,000 toward
the settlement of the Crocker Realty litigation. In addition, the acquisition
of NetChannel by America-On-Line resulted in a gain to the Company in the
amount of $730,337 representing proceeds in excess of carrying cost.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are current cash balances and
cash equivalents and cash generated from operations, supplemented from time to
time by borrowings under the Company's bank line of credit and from directors
of the Company. Cash and cash equivalents were $116,236 as of September 30,
1998. Management believes that these sources of funds, together with
anticipated cash from operations, will be sufficient to fund the Company's
network and printing software business for the remainder of 1998.
The report of the Company's independent auditors on the consolidated
financial statements of the Company as of December 31, 1997 and for the two
years in the period ended December 31, 1997 contains an explanatory paragraph
as to the Company's ability to continue as a going concern. As stated in the
report, the Company has experienced losses, a capital deficit and cash flow
deficiencies that raise substantial doubt about the Company's ability to
continue as a going concern. Certain of the Company's assets might be worth
substantially less than the amounts shown on the Company's balance sheet if the
Company is unable to continue as a going concern and the financial statements
have not been adjusted to reflect the outcome of this uncertainty. There can
be no assurance that future revenues will exceed operating expenses to enable
the Company to continue as a going concern.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
The proxy statement solicited by management of the Company with respect to
the 1999 Annual Meeting of Shareholders will confer discretionary authority to
vote on any proposals of shareholders of the Company intended to be presented
for consideration at such Annual Meeting that are submitted to the Company 45
days prior to the 1998 proxy mailing date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the issuer has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on.
Colorocs Information Technologies, Inc.
(Issuer)
Date: November 5, 1998 By: /s/ Rudolph P. Russo
---------------- -----------------------------
Rudolph P. Russo
Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1998 By: /s/ Sharon P. Conte
---------------- -----------------------------
Sharon P. Conte
Chief Accounting Officer
(Accounting Officer)
10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------------------- --------
<S> <C> <C>
27 Financial Data Schedule (for SEC use only). 12
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COLOROCS INFORMATION TECHNOLOGIES, INC. FOR THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 116,236
<SECURITIES> 100,000
<RECEIVABLES> 172,673
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 420,419
<PP&E> 87,362
<DEPRECIATION> 62,408
<TOTAL-ASSETS> 523,183
<CURRENT-LIABILITIES> 1,437,413
<BONDS> 0
0
0
<COMMON> 1,802,738
<OTHER-SE> 1,474,039
<TOTAL-LIABILITY-AND-EQUITY> 523,183
<SALES> 524,908
<TOTAL-REVENUES> 524,908
<CGS> 0
<TOTAL-COSTS> 720,710
<OTHER-EXPENSES> 1,924,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,728,320
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,728,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,728,320
<EPS-PRIMARY> .82
<EPS-DILUTED> .76
</TABLE>
