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 June 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 2,114,794 shares of Common Stock outstanding as of April 22,
1998.
Transitional Small Business Disclosure Format. Yes __ No X
<PAGE>
COLOROCS INFORMATION TECHNOLOGIES, INC.
Quarterly Report on Form 10-QSB
For the Six Months Ended June 30, 1998
Table of Contents
Item Number Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Operations -
Three Months and Six Months Ended June 30, 1998
and 1997 4
Condensed Consolidated Statement of Cash Flows -
Three Months and Six Month Ended June 30, 1998
and 1997 5
Notes to Condensed Consolidated Financial Statements -
June 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
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
Item 1. Financial Statements
Colorocs Information Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997
(Unaudited)
June 30, 1998 December 31, 1997
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 203,654 $ 29,381
Short term investments -- 31,875
Receivables 963,356 829,387
Prepaid expenses 133,027 135,003
---------- ---------
TOTAL CURRENT ASSETS 1,300,037 1,025,646
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $52,740 and $43,399 at
June 30, 1998 and December 31, 1997,
respectively 29,222 32,888
INVESTMENT IN NETCHANNEL, INC. -- 180,189
GOODWILL AND INTANGIBLE ASSETS, net 92,842 107,020
DEPOSITS 450 1,950
---------- ----------
$1,422,551 $1,347,693
========== ==========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Short-term borrowings $1,005,717 $1,505,717
Note payable to director/shareholder -- 37,500
Notes payable 250,000 1,190,380
Accounts payable and accrued liabilities 1,033,345 1,256,646
---------- ----------
TOTAL CURRENT LIABILITIES 2,289,062 3,990,243
DEFERRED LICENSING INCOME 875,000 875,000
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' DEFICIT
Common stock; no par value; 10,000,000
shares authorized; 2,114,794 shares issued
and outstanding at June 30, 1998 and
December 31, 1997 1,802,738 1,802,738
Warrants 100,000 100,000
Additional paid in capital 1,374,039 1,374,039
Retained deficit (5,018,288) (6,794,327)
---------- ----------
Total stockholders' deficit (1,741,511) (3,517,550)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,422,551 $1,347,693
========== ==========
</TABLE>
<PAGE>
<TABLE>
Colorocs Information Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
<S> <C> <C> <C> <C>
Revenues:
Software $ 155,329 $ 64,301 $ 390,398 $ 528,726
Copier and consumables -- 268,316 -- 209,506
--------- --------- ---------- -----------
Total revenue 155,329 332,617 390,398 738,232
Operating expenses:
Cost of copier and consumables product -- 188,317 -- 719,591
Research and development 28,973 252,633 66,869 1,315,179
Selling, general and administrative 189,902 527,630 478,406 1,826,782
--------- --------- ---------- -----------
Total operating expenses 218,875 968,580 545,275 3,861,552
Operating (loss) (63,546) (635,963) (154,877) (3,123,320)
Other income (expense) net 1,950,197 1,487,663 1,930,916 1,447,653
---------- --------- ---------- -----------
Net income (loss) $1,886,651 $ 851,700 $1,776,039 $(1,675,667)
========== ========= ========== ===========
Net Income (loss) per share
Basic $ .90 $ .40 $ .84 $ (.79)
Fully Diluted $ .82 $ .38 $ .78 $ (.79)
========== ========= ========== ===========
Weighted average shares outstanding
Basic 2,114,794 2,105,739 2,114,794 2,114,794
Fully Diluted 2,299,958 2,231,548 2,269,319 2,114,794
========== ========= ========= ===========
</TABLE>
<PAGE>
<TABLE>
Colorocs Information Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
<S> <C> <C> <C> <C>
Operating Activities:
Net income (Loss) 1,886,651 851,700 $ 1,776,039 $(1,675,667)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 11,917 43,918 23,520 94,554
Minority interest -- (117,500) -- (117,500)
Changes in assets and liabilities:
Receivables, net (892,188) (1,184,305) (133,969) (1,061,585)
Inventories -- 109,242 -- 113,053
Prepaid expenses 172 21,883 1,975 48,354
Deposits (450) -- 1,500 --
Accounts payable, accrued expenses,
and deferred income (167,976) (2,307,707) (223,301) (1,870,548)
--------- ---------- ----------- -----------
Cash provided by (used in)
operating activities 838,126 (2,582,769) 1,445,764 (4,469,339)
Investing Activities:
Write-off of prepaid license fees -- 161,030 -- 161,030
Write-off of intangible assets -- 841,773 -- 950,000
Investment in affiliate -- 33,276 -- 38,276
Investment in NetChannel 180,189 -- 180,189 --
Sale (purchase) of marketable securities 100,000 -- 31,875 64,716
Disposition (Purchase) of equipment, net (5,675) 1,019,369 (5,675) 1,048,766
--------- ---------- ----------- -----------
Cash provided by (used in)
investing activities 274,514 2,055,448 206,389 2,257,788
Financing Activities:
Repayment of short term borrowings -- -- (500,000) --
Repayment of notes payable (940,380) -- (940,380) --
Repayment of payable to director/shareholder -- -- (37,500) --
Proceeds from exercise of stock options -- 21,000 -- 50,702
Proceeds from short-term notes -- 569,508 -- 1,967,058
--------- ---------- ----------- -----------
Cash provided by financing
activities (940,380) 590,508 (1,477,880) 2,017,760
Net increase (decrease) in cash and
cash equivalents 172,260 63,187 174,273 (193,791)
Cash and cash equivalents, beginning of period 31,394 25,618 29,381 282,596
--------- ---------- ----------- -----------
Cash and cash equivalents, end of period $ 203,654 $ 88,805 $ 203,654 $ 88,805
========= ========== =========== ===========
</TABLE>
<PAGE>
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1998 and the results of its operations and cash
flows for the three and the six months ended June 30, 1998 and 1997 have
been included. Operating results for the three and six months ended June
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.
<PAGE>
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.
<PAGE>
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 $155,329 and $390,398 for the three and six months
ended June 30, 1998 respectively, and $332,617 and $738,232 for the three
and six months ended June 30, 1997 respectively, a decrease of $177,288 and
$347,834 or approximately 53% and 47% 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 24%.
Cost of Copier and Consumables Products
The Company incurred no cost of copier and consumables products during
the three and six months ended June 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 $66,869 for the six months
ended June 30, 1998, compared to $1,315,179 for the six months ended June
30, 1997. Research and development expenses decreased for the six months
ended June 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 $478,406 for the six
months ended June 30, 1998, compared to $1,826,782 for the six months ended
June 30, 1997, a decrease of 74%. The decrease was due to the termination
of VCA's on-line service.
Other income
Other income was $1,930,916 for the six months ended June 30, 1998
compared to other income of $1,447,653 for the six months ended June 30,
1997, an increase of approximately 33%.
Other income of $1,930,916 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.
<PAGE>
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 $203,654 as of
June 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.
<PAGE>
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
(b) Reports on Form 8-K.
The following current report on Form 8-K was filed by the Company
during the quarter ended June 30, 1998:
<TABLE>
Date of Form 8-K Description Financial
Report Item No. Statements filed
<S> <C> <C> <C>
6/15/98 2 Acquisition of NetChannel, Inc. by AOL N/A
</TABLE>
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 August 13, 1998.
Colorocs Information Technologies, Inc.
(Issuer)
By: /s/ Rudolph P. Russo
Rudolph P. Russo
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Sharon P. Conte
Sharon P. Conte
Chief Accounting Officer
(Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
27 Financial Data Schedule 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 203,654
<SECURITIES> 0
<RECEIVABLES> 963,356
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,300,037
<PP&E> 81,962
<DEPRECIATION> 52,740
<TOTAL-ASSETS> 1,422,551
<CURRENT-LIABILITIES> 2,289,062
<BONDS> 0
0
0
<COMMON> 1,802,738
<OTHER-SE> 1,474,039
<TOTAL-LIABILITY-AND-EQUITY> 1,422,551
<SALES> 390,398
<TOTAL-REVENUES> 390,398
<CGS> 0
<TOTAL-COSTS> 545,275
<OTHER-EXPENSES> 1,930,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,776,039
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,776,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776,039
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
