U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14392
COLOROCS INFORMATION TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER 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, INCLUDING ZIP CODE)
(770) 447-3570
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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 if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure
will be contained, to be best of the issuer's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. __.
The issuer's revenues for the fiscal year ended December 31, 1997
were $1,235,429. Based on the closing bid price of the Common Stock on
March 19, 1998, the aggregate market value of the outstanding Common
Stock held by non-affiliates of the issuer on March 19, 1998 was
$1,982,840. There were 2,113,902 shares of Common Stock outstanding as
of March 19, 1998.
Check whether the issuer has 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___.
Transitional Small Business Disclosure Format Yes ___ No X.
Portions of the issuer's Proxy Statement for the 1998 Annual
Meeting of Shareholders to be held on May 29, 1998 are incorporated by
reference in Part III hereof.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN THIS DOCUMENT, THE 1997 COLOROCS
ANNUAL REPORT AND IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN,
INCLUDING MATTERS DISCUSSED UNDER THE CAPTION "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION," MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS FOR PURPOSES OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND AS SUCH MAY
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF COLOROCS
INFORMATION TECHNOLOGIES, INC. (THE "COMPANY") TO BE MATERIALLY
DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE WORDS "EXPECT,"
"ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE,"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS DUE TO A
VARIETY OF FACTORS, INCLUDING WITHOUT LIMITATION THOSE DISCUSSED IN
"COLOR COPIERS AND PRINTERS," "NETWORK PRINTING SOFTWARE BUSINESS
(COPS) AND "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION." ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRELY BY THESE CAUTIONARY STATEMENTS.
GENERAL
The Company was incorporated under the name Colorocs Corporation
on July 14, 1982 under the laws of Georgia. On December 13, 1995, the
Company's name was changed from Colorocs Corporation to Colorocs
Information Technologies, Inc. to reflect changes in the Company's
business focus. The Company was originally founded to capitalize on
the trend toward the use of color in business communications, and the
Company's principal operations historically were primarily the design,
manufacture and sale of full color copiers and color printers.
Beginning in 1994, the Company's principal business focus shifted to
product support of color copiers and printers previously manufactured
and sold by the Company and to the licensing of the Company's patented
color printing and copier technology. In 1995 and 1996 the Company
used the revenues generated from patent licensing to develop two
new technology based lines of business; the delivery of the Internet
through the television through the Company's majority-owned subsidiary
ViewCall America, Inc. ("VCA"), and the provision of network printing
and file sharing software products through the Company's wholly owned
subsidiary COPS, Inc. ("COPS"). As described below, in May 1997, the
Company shifted its line of business when it sold the assets of VCA to
NetChannel, Inc. ("NetChannel") a privately held company based in
south San Francisco, California. In that same month, the Company also
sold the assets of the color copying and printing business to SC
Distributions, Inc.
The Company currently generates revenue from the licensing of its
patented printer and copier technology and the sale of network
printing and file sharing software products. Unless the context
indicates otherwise, the "Company" refers to Colorocs Information
Technologies, Inc. and its subsidiaries VCA and COPS.
SALE OF THE ASSETS OF VIEWCALL AMERICA
On May 9, 1997, NetChannel purchased from VCA substantially all
of the assets which comprised the business of VCA and assumed most of
the liabilities of VCA in exchange for 555,556 shares of NetChannel
Series C Preferred Stock. In addition, NetChannel issued 2,700,000
shares of Series B Preferred Stock and 414,280 shares of Series C
Preferred Stock to the Company in consideration of advances made by
the Company to VCA and the relinquishment of the Company's liens on
VCA assets. All of the NetChannel preferred stock is convertible by
the holders into shares of NetChannel common stock on a
share-for-share basis. The liabilities assumed and satisfied by
NetChannel (subject to certain conditions) totalled $2,031,482. Prior
to the consummation of the transaction, the Company's carrying value
of its investment in VCA was approximately $6,800,000.
<PAGE>
SALE OF THE COLOR COPYING AND PRINTING ASSETS
On May 1, 1997 SC Distribution, Inc., a privately held company
based in Norcross, Georgia, purchased substantially all of the assets
of the Company's color copying and printing business. In consideration
for such assets, SC Distribution, Inc. agreed to assume approximately
$160,000 of liabilities associated with the color copying and printing
business and pay the Company a portion of the revenues generated from
the sale of certain color printers. SC Distribution, Inc. is owned by
Sharon P. Conte, who was formerly employed in the Company's color
copying and printing business until the date of the transaction.
BUSINESS
At the beginning of 1997, the Company operated three significantly
different businesses, each of which was at a different stage of its
product life cycle. The development of, and business strategy for,
each of the businesses is described in more detail below.
INTERNET TV ON-LINE SERVICE (VCA)
In the beginning of 1997, the Company operated an internet TV
on-line service business through VCA where its business strategy was
to develop an on-line service for the forthcoming Internet-televisions
and Internet set top boxes. These devices, either built into the
television or designed as an add-on to the television, enable a
consumer to connect to the Internet through a standard telephone line
and then surf the Internet from the comfort of their armchair. VCA
developed an on-line service, On-TV( that enhances the Internet
by providing original televisual content that is highly personalized,
localized and customized for the television viewer. VCA's initial
strategy was to develop and enhance On-TV( and provide it to consumers
bundled with Internet access devices from major consumer electronics
companies. However, management believed that the market for
Internet-TV service was consolidating rapidly, and in May 1997,
determined it was in the best interest of the Company to sell the
Internet-TV on-line service business to NetChannel as previously
described.
COLOR COPIERS AND PRINTERS
As of January 1, 1997, the Company had sold substantially all of
its existing color copier and printer inventory, and the Company did
not plan to develop or manufacture new color copiers and printers. The
Company recognized that its installed base of copiers and printers
would decline over time as these copiers and printers are replaced by
more technologically advanced and/or inexpensive color copiers and
printers manufactured by others. As a result, in May 1997 the Company
decided to sell the assets of the color copying and printing business
to SC Distributions, Inc. The Company however retained the patent
rights of its color imaging system and recorded patent license
revenues of $1,500,000 in 1997. The Company's business strategy
is to market its patented double transfer, single pass to paper, color
imaging system on a non-exclusive basis to manufacturers and
developers of color copiers and printers that desire to use the
Company's patents in new or existing electrophotography and printing
devices. A number of new potential licenses were identified but not
closed during the year and these opportunities are being aggressively
pursued. The Company has deferred $875,000 in connection with patent
license agreements in 1997 (See "Item 7. Financial Statements").
Specifically with regard to the patents, the Company's color
copier and printer products are based on technology currently used in
black and white copiers and laser printers. The Company's copiers and
printers incorporate many applications and refinements of that
technology that the Company believes to be innovative. The Company
holds United States patents with respect to certain of those
refinements in order to maximize its rights in such technology. The
United States Patent Office has granted Colorocs 22 patents.
The Company has entered into several non-exclusive, permanent,
worldwide technology licensing agreements with certain manufacturers
that develop or manufacture color print engines. The Company believes
that there may be other companies interested in licensing this
technology from the Company and continues to aggressively pursue these
opportunities.
<PAGE>
NETWORK PRINTING SOFTWARE BUSINESS (COPS)
COPS software products provide cross-platform and networking
utilities and applications designed primarily for file and print
sharing. These software products, which have end user list prices
ranging from $179 to $500 per copy, are described in greater detail
below.
COPSTALK
COPSTalk is a Windows based software utility which allows IBM
compatible personal computers to print to Postscript printers and to
share files with Apple Macintosh computers. COPS is currently shipping
versions of COPSTalk for Windows 3.x and Windows 95. A version of
COPSTalk for Windows NT is under development.
COPS LOCALTALKtrademark
The Company believes that COPS is the world's only manufacturer
of LocalTalktrademark network interface cards for personal
computers. The COPS LocalTalk( family of products includes 8-bit
industry standard architecture ("ISA") and micro-channel cards that
allow Microsoft NT servers, Novell Netware servers or stand alone
workstations to access Apple Macintosh LocalTalk( networks for
printing and file sharing.
PRODUCT RESEARCH AND DEVELOPMENT
COPS' products have been substantially developed internally. COPS
development staff is responsible for modifying and enhancing the COPS
products and for the development of new products. Development of the
Windows NT version is being performed by a combination of COPS staff
and external contractors.
SALES AND MARKETING
COPS sells its products to a wide range of industries through
three principal marketing channels: distributors, OEMs and direct
sales. As of December 31, 1997, COPS sold its products through 28
international independent distributors, 3 major catalog distributions,
1 OEM, and two employees engaged in sales and marketing. COPS
identifies prospective customers for its products through a
combination of direct mail, telemarketing, media, catalog and Internet
advertising and trade show participation.
CUSTOMER SUPPORT AND SERVICES
COPS offers software maintenance and support and custom development
services to its customers. Generally, the COPS software products
include a 60-day warranty. Maintenance and support services include
telephone installation assistance, telephone support and maintenance
updates. These support services are provided free of charge. COPS also
provides custom development service to customers for the purpose of
developing features or capabilities not then available in its
products.
COMPETITION
The computer software industry in general is highly competitive.
COPS faces direct competition from two other companies which market
third party network printing related software products. These
competitors, as well as a number of potential competitors, have larger
technical staffs, more established and larger marketing and sales
organizations, and greater financial resources than the Company. COPS
also faces competition from developers of networking software
applications which incorporate some of the functionality provided by
COPS' software products. To the extent that the developers of
networking software applications improve their network software
applications that provide print spooler and cross network printing
functionality, demand for COPS' software products may decline. Also,
the declining market share of the Apple Macintosh and the widespread
adoption of TCP/IP-based networks in preference to AppleTalk networks
at Macintosh-oriented sites continues to reduce the market for COPS'
current products.
<PAGE>
The Company believes that price, functionality, performance, ease
of use, environments supported and customer support are the primary
competitive factors in the industry. The Company believes that its
COPS products compete primarily on the basis of price, ease of use and
performance.
PRODUCT PROTECTION
The Company regards its COPS software and hardware products as
proprietary. COPS enters into written "shrink-wrap" license agreements
with its customers which limit the use and copying of its software.
COPS relies principally on copyright law and trade secret protection
to protect its proprietary property, and all of its products are
copyrighted. The software is usually furnished in object code only,
although source code licenses are granted in certain situations. COPS
has not applied for any patents for its software and does not believe
that patent laws will be a source of protection of its software
products. Employees and technical consultants are required to execute
agreements providing for the non-disclosure of information and the
assignment of proprietary property developed on behalf of COPS.
There can be no assurances that the steps taken by COPS to
protect its proprietary property will be adequate to prevent
misappropriation or unlawful copying of its technology or software
programs. Additionally, copyright and trade secret laws do not limit
the right of others to independently develop similar technology and
software programs. In addition, the laws of some foreign countries do
not protect software to the same extent as do the laws of the United
States. Furthermore, the software licenses may not be enforceable in
all jurisdictions. Although COPS believes that its software products
do not infringe on any proprietary rights of others, there can be no
assurances that third parties will not assert infringement claims
in the future.
EMPLOYEES
As of February 28, 1998, the Company employed 6 persons on a full
time basis which consisted of 2 in sales and marketing, 1 in technical
support, 1 in product development and 2 in general and administrative
positions. None of the Company's employees is represented by a union.
The Company has experienced no work stoppage attributable to labor
disputes.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 9,500 square feet of office and
warehouse space in Norcross, Georgia for its corporate offices. The
lease for the space expires on May 31, 1999, with an option to
terminate in May 1998 which the Company does not currently intend to
exercise. The Company believes that these facilities are suitable and
adequate for their respective uses and are adequately covered by
insurance. The Company engages in no real estate investment
activities.
ITEM 3. LEGAL PROCEEDINGS
On December 16, 1996, Melton Harrell, a former director of the
Company, filed a lawsuit against VCA in the Superior Court of Gwinnett
County, Georgia. Mr. Harrell sought a declaratory judgment that VCA
wrongly terminated a warrant agreement pursuant to which Mr. Harrell
was entitled to purchase 750,000 shares of Common Stock of VCA at a
price of $0.70 per share. Mr. Harrell also claimed that he was
relieved of his obligations under a related guaranty agreement,
entered into at the same time as the warrant agreement, under which
Mr. Harrell agreed to guarantee and supply sufficient collateral to
secure financing for VCA of up to $1,500,000. Mr. Harrell's lawsuit
was dismissed without prejudice on September 2, 1997.
On December 15, 1997, Crocker Realty Trust ("Crocker") filed a
lawsuit against the Company in the Superior Court of Gwinnett County,
Georgia. Crocker seeks damages of $643,483.69 for breach of a lease
agreement in connection
<PAGE>
with the lease of certain office space which the Company's
subsidiary, VCA, never occupied. The lease agreement requires lease
payments of approximately $640,000 over 3 years. The Company intends
to vigorously defend the lawsuit filed by Crocker.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of its
shareholders during the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICE AND DIVIDEND INFORMATION
The Company's Common Stock is traded on the OTC Bulletin Board
system under the symbol "CLRC." The following table sets forth the
range of high and low bid information during each quarter of 1996 and
1997. The quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not represent actual
transactions.
<TABLE>
1996 HIGH LOW 1997 HIGH LOW
<S> <C> <C> <C> <C> <C>
First Quarter $ 4.15 $2.75 First Quarter $8.50 $2.00
Second Quarter 14.50 7.25 Second Quarter 5.00 2.06
Third Quarter 17.50 5.00 Third Quarter 2.50 1.50
Fourth Quarter 9.00 3.75 Fourth Quarter 1.97 1.06
</TABLE>
At December 31, 1997, there were approximately 645 record holders
of the Company's Common Stock. This number does not include beneficial
owners of the Common Stock whose shares are held in the names of
various dealers, clearing agencies, banks, brokers and other
fiduciaries.
The Company has never paid cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable
future.
RECENT SALES OF UNREGISTERED SECURITIES
To facilitate the sale of VCA to NetChannel, Rudolph P. Russo
agreed to the termination of his warrant to purchase 1,062,500 shares
of common stock of VCA and his security interest in substantially all
of the assets of the Company. In consideration of such actions, on May
8, 1997, the Board of Directors of the Company issued Mr. Russo a
warrant to purchase 225,000 shares of Common Stock of the Company. The
warrant has a term of 5 years and is exercisable at an exercise price
of $0.25 per share (subject to certain adjustments).
The issuance of securities described above was made in reliance
on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, as a transaction by an issuer not
involving a public offering. No underwriter was involved in the
transaction and no commissions were paid.
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is:
Chase Mellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders will be held on May 29,
1998. A formal notice of the meeting together with a proxy statement
and form will be mailed to shareholders with a copy of this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In 1997, the Company's operations were focused on three separate
lines of business:
VCA
During 1997, prior to the sale of its assets to, and assumption
of most of its liabilities by NetChannel, VCA continued its
development activities. These activities were focused on development
of the On-TVtrademark service and electing to partner with leading
technology companies to make their hardware/software combinations work
with the On-TVtrademark service. On-TVtrademark provided original
personalized content, including news, sports and television listings,
together with full access to the Internet which is delivered to an
Internet access device over a telephone line and displayed on
a television screen.
COPS
During 1997, COPS updated its product line with the release of
COPSTalk 2.5, a new version of the Company's file sharing product,
designed to take advantage of capabilities in Apple's AppleShare IP
server products, thus increasing the market for its software. COPS
continued to reduce the cost of sales of its products by enhancing its
presence on the Internet at its web-site (http://www.copstalk.com),
which now accounts for over 17% of COPSTalk product sales. COPS also
benefited from an agreement with Apple Computer, Inc., to include
COPSTalk 2.x with every AppleShare 4.2.x or 5.x server sold.
COLOR COPIERS AND PRINTERS
During 1997, prior to the sale of the assets and assumption of
certain liabilities of its color copying and printing business, the
Company sold a number of refurbished copiers and printers. The
remainder of its revenue came from the sale of consumables as well as
maintenance and cost per copy contracts. However, because of the
continued decline in the installed base, the sale to SC Distribution,
Inc. was consummated on May 1, 1997.
The sale to SC Distribution, Inc. did not include the patent
rights to the color copying and printing process held by the Company.
Accordingly, the results for the year include a technology licensing
agreement for $1,500,000 to use the Company's patented double
transfer, single pass paper color imaging system. In addition, the
Company continues to aggressively pursue other technology license
agreements with other major copier and print engine manufacturers.
However, there can be no assurances that any further licenses can be
obtained.
<PAGE>
RESULTS OF OPERATIONS
The following table presents the percentage relationships of
certain statement of operations items to total revenues for the years
ended December 31, 1996 and 1997:
<TABLE>
1997 OVER
1996 1997 1996
<S> <C> <C> <C>
Total revenues from income statement 100.0% 100.0% (56.9)%
Cost of copier and consumables product 28.6 11.1 (83.2)
------ ------ -------
Gross margin 71.4 88.9 (46.3)
Selling, general and administrative expenses 174.1 221.0 (45.2)
Research and development 172.6 163.0 (59.3)
------ ------ -------
Loss from operations (275.3) (295.1) (53.8)
Other income (expense), net (3.4) 95.4 (1292.9)
Income (loss) before provision for income taxes
and minority interest (278.8) (199.7) (69.1)
Minority interest 28.7 0.0 (100.0)
------ ------ -------
Income (loss) before provision for income taxes (250.1) (199.7) (65.5)
Provision for income taxes -- -- --
------ ------ -------
Net (loss) income (250.1)% (199.7)% (65.5)%
====== ====== =======
</TABLE>
Total revenues for the year ended December 31, 1997 were $1,235,429
compared to total revenues of $2,863,448 for the year ended December
31, 1996, a decrease of approximately 57%. The decrease was due to the
asset sale of both VCA and the color copying and printing business.
COPS revenue for the year ended December 31, 1997 was $1,011,995, an
increase of approximately 10.7% from $914,535 for the year ended
December 31, 1996.
Cost of copier consumables was $137,122, in the year ended
December 31, 1997, compared to $817,717 for the year ended December
31,1996. This decline of 83% is due to the aforementioned asset sale
of the color copying and printing businesses.
Selling, general and administrative expenses were $2,730,554 for
the year ended December 31, 1997 compared to $4,986,318 for the year
ended December 31, 1996, a decrease of approximately 45%. This
decrease was primarily due to the sale of assets of the VCA business,
the operation of which during the year ended December 31, 1996
accounted for substantial expenditures on payroll, consulting,
professional fees and sales and marketing costs.
Research and development expenses were $2,013,360 for the year
ended December 31,1997 compared to $4,943,639 for the year ended
December 31, 1996, a decline of over 59%. During 1996, most of these
expenses related to the development of VCA's On-TV( service, which
development and related expenses were no longer incurred following the
asset sale of VCA in May 1997.
Other income (expense) relates to income generated from a patent
technology licensing agreement, net of interest expenses, and net of
expense of $100,000 recorded for the issuance of warrants. For the
year ended December 31, 1997, other income from the patent technology
licensing agreement of $1,178,109 was generated, compared to ($98,764)
for the previous year. During 1997, one patent licensing agreement was
signed. No such agreement was signed during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is current cash
balances, cash equivalents and cash generated from operations,
supplemented from time to time by borrowings under the Company's bank
line of credit and from advances from directors of the Company. Cash
and cash equivalents of $282,596 and short term investments of $94,685
at December 31,1996 had declined to cash and cash equivalents of
$29,381 and short term investments of $31,875 at
<PAGE>
December 31, 1997. Management recognizes that the Company must
obtain additional financing or significantly reduce operating costs to
enable it to continue operations with available resources. If the
Company's investment in NetChannel is not sufficiently liquid to
provide funds to finance its present business operations, the Company
may be required to obtain additional capital through debt or equity
financing. No assurances can be given that the Company will be
successful in controlling costs or in obtaining the necessary
financing to maintain operations. Further, there can be no
assurance, assuming the Company successfully controls costs or
receives timely additional financing, that the Company will achieve
profitability or positive cash flow. If the Company is unable to
obtain adequate additional funding, management may be required to
curtail the Company's operations. If the Board of Directors of the
Company determines to obtain additional capital through the issuance
of additional equity securities of the Company, any such future equity
financing could be dilutive to shareholders of the Company.
The Company's independent certified public accountants, in their
opinion set forth on page 11 of the Form 10-KSB, have stated that
there are conditions which may indicate that the Company may be unable
to continue as a going concern, and they have qualified their opinion
accordingly. See "Item 7. Financial Statements." As stated in the
report, the Company has experienced substantial 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 amount
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.
FACTORS AFFECTING FUTURE PERFORMANCE
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN
SKILLED PERSONNEL. The Company's future performance depends to a
significant extent upon the continued service of members of senior
management and key technical personnel. The Company does not maintain
key-person life insurance on any of its key employees. None of the
Company's employees is bound by an employment agreement. The loss of
the services of one or more key employees could have a material
adverse effect on Company. The Company's future financial results also
will depend upon its ability to attract on a timely basis and retain
highly-skilled technical, engineering, managerial and marketing
personnel, the ability of its officers and key employees to develop a
successful growth strategy for the Company and to continue successful
developments of new products and enhancements to existing products.
The Company competes in the market for such personnel against numerous
companies, including larger, more established companies with
significantly greater financial resources than the Company. If the
Company is unable to hire and retain qualified personnel in the
future, such inability could have a material adverse effect
on the Company's business, financial condition and results of
operations. See "Item 1. Business-Employees" and "Item 9. Executive
Officers."
NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The market for the
Company's COPS' software products is characterized by rapid,
technological advances, evolving industry standards in computer
hardware and software technology, changes in customer requirements and
frequent new product introductions and enhancements. The Company's
future success will depend upon its ability to continue to enhance its
COPS products and to develop and introduce new products that keep pace
with technological developments, satisfy increasingly sophisticated
customer requirements and achieve market acceptance. In particular,
the Company must continue to anticipate and respond adequately to
advances in networking software applications which provide print
spooler and cross network printing functionality. There can be no
assurance that the Company will be successful in developing and
marketing, on a timely and cost-effective basis, functioning product
enhancements or new products that respond to technological advances by
its competitors or that its new products will achieve market
acceptance.
ANTI-TAKEOVER PROVISIONS. The Amended and Restated Bylaws of the
Company contain provisions requiring super majority shareholder
approval of any merger, consolidation, disposition of all or a
substantial part of the assets of the Company or a subsidiary of the
Company, certain exchanges of securities or a liquidation of the
Company, if any person who, together with his or her affiliates and
associates, owns beneficially 10% or more of any voting stock of the
Company ("Interested Shareholder") is a party to the transaction and
the transaction does not satisfy certain fair price requirements.
These provisions make it more difficult to effect a merger,
sale of control or similar transaction even
<PAGE>
though a majority of the Company's shareholders may vote in favor
of such transaction. These provisions may further provide a minority
of shareholders with a veto power over a merger that a majority of the
shareholders may believe is desirable and beneficial. Such provisions
could also give incumbent management the power to prevent certain
mergers or other business combinations proposed by a substantial
holder of stock.
LACK OF GROWTH STRATEGY. Since the sale of the Company's Internet
TV on-line services business as well as its color copiers and printers
business, the only remaining lines of business of the Company are the
licensing of its patented color imaging system and the provision of
network printing and file sharing software products through its
wholly- owned subsidiary COPS Inc. The Company must develop a
successful growth strategy to expand the COPS business and/or pursue
and successfully develop alternate business lines. If the Company is
unable to expand its COPS division and successfully develop new lines
of business, such inability could have a material adverse effect on
the Company's business, financial condition and results of
operations.
LIMITED TRADING VOLUME. On September 6, 1991, the Company's
Common Stock ceased quotation on the NASDAQ National Market. Price
information on the Company's Common Stock is now available on the OTC
Bulletin Board. The Company has experienced limited trading volume in
its stock historically. There is no assurance that a public market for
the Company's securities will continue to be made or that shareholders
will be able to avail themselves of a public trading market for the
Common Stock in the future.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company
and the related report of independent public accountants are included
on pages 11 through 27:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997.
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997.
Consolidated Statements of ShareholdersiEquity (Deficit)
for the year ended December 31, 1996 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997.
Notes to Consolidated Financial Statements as of December
31, 1996 and 1997.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Colorocs Information Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
COLOROCS INFORMATION TECHNOLOGIES, INC. (a Georgia corporation) AND
SUBSIDIARIES as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' 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 audit 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 accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Colorocs Information Technologies, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and
their 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 1 to the financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 11, 1998
<PAGE>
<TABLE>
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 29,381 $ 282,596
Short-term investments 31,875 94,685
Receivables, net of allowance for doubtful accounts
of $0 and $141,033 in 1997 and 1996, respectively 829,387 475,060
Inventories 0 128,876
Prepaid expenses 135,003 192,560
----------- -----------
Total current assets 1,025,646 1,173,777
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
OF $43,399 AND $154,596 IN 1997 AND 1996, RESPECTIVELY 32,888 1,165,525
INVESTMENT IN VIEWCALL EUROPE 0 250,000
INVESTMENT IN VIEWCALL CANADA 0 1,529
INVESTMENT IN NET CHANNEL, INC. 180,1890 0
GOODWILL AND INTANGIBLE ASSETS 107,020 1,092,177
OTHER ASSETS 0 161,030
DEPOSITS 1,950 6,516
----------- ----------
$ 1,347,693 $3,850,554
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings from bank $ 1,505,717 $ 712,500
Payable to director/shareholder 37,500 0
Note payable to director/shareholder 0 500,000
Notes payable 1,190,380 0
Accounts payable and accrued liabilities 1,256,646 2,589,224
Deferred income 0 257,084
----------- ----------
Total current liabilities 3,990,243 4,058,808
----------- ----------
DEFERRED LICENSING INCOME 875,000 875,000
----------- ----------
MINORITY INTEREST 0 117,500
----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' DEFICIT:
Common stock; no par value; 10,000,000 shares authorized,
2,114,794 and 2,071,544 shares issued and outstanding
at December 31, 1997 and 1996, respectively 1,802,738 1,802,738
Warrants 100,000 0
Additional paid-in capital 1,374,039 1,323,337
Retained deficit (6,794,327) (4,326,829)
----------- ----------
Total shareholders' deficit (3,517,550) (1,200,754)
----------- ----------
Total liabilities and shareholders' deficit $ 1,347,693 $3,850,554
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE>
<TABLE>
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
<S> <C> <C>
REVENUES:
Copier and consumables $ 223,434 $ 1,080,403
Software 1,011,995 914,535
License of technology 0 691,176
Other 0 177,334
----------- -----------
Total revenues 1,235,429 2,863,448
----------- -----------
OPERATING EXPENSES:
Cost of copier and consumables product 137,122 817,717
Selling, general, and administrative 2,730,554 4,986,318
Research and development 2,013,360 4,943,639
----------- -----------
Total operating expenses 4,881,036 10,747,674
----------- -----------
LOSS FROM OPERATIONS (3,645,607) (7,884,226)
----------- -----------
OTHER INCOME (EXPENSE), NET:
SALE OF LICENSED TECHNOLOGY 1,500,000 0
OTHER (321,891) (98,764)
----------- -----------
Total other income (expense), net 1,178,109 (98,764)
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST (2,467,498) (7,982,990)
MINORITY INTEREST 0 822,500
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (2,467,498) (7,160,490)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET LOSS $(2,467,498) $(7,160,490)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (1.17) $ (3.51)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 2,108,532 2,042,839
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
<TABLE>
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
TOTAL
ADDITIONAL RETAINED SHAREHOLDERS
PAID-IN EARNINGS EQUITY'
SHARES AMOUNT WARRANTS CAPITAL (DEFICIT) (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1995 2,031,394 $1,802,738 $ 0 $1,283,000 $ 2,833,661 $ 5,919,399
Stock options exercised 40,1500 0 0 47,860 0 47,860
Repurchase of fractional
shares 0 0 0 (13,273) 0 (13,273)
Deferred compensation 0 0 0 5,750 0 5,750
Net loss 0 0 0 0 (7,160,490) (7,160,490)
--------- ----------- -------- ---------- ----------- -----------
BALANCE AT
DECEMBER 31, 1996 2,071,544 1,802,738 0 1,323,337 (4,326,829) (1,200,754)
Stock options exercised 43,2500 0 0 50,702 0 50,702
Issuance of warrants 0 0 100,000 0 0 100,000
Net loss 0 0 0 0 (2,467,498) (2,467,498)
--------- ----------- -------- ---------- ----------- -----------
BALANCE AT
DECEMBER 31, 1997 2,114,794$ 1,802,738 $100,000 $1,374,039 $(6,794,327) $(3,517,550)
========== =========== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
<TABLE>
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,467,498) $(7,160,490)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 309,809 135,361
Expense for warrants issued 100,000 0
Minority interest 0 117,500
Noncurrent deferred income 0 250,000
Changes in assets and liabilities
Receivables (406,684) 2,222,524
Inventories 19,770 211,216
Prepaid expenses 41,646 (5,846)
Deposits 4,566 14,451
Other assets (132,691) (161,030)
Accounts payable and accrued expenses 897,867 2,172,945
Current deferred income (257,084) (5,063)
----------- -----------
Net cash used in operating activities (1,890,299) (2,208,432)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of property and equipment 39,975 (1,265,401)
Sale of marketable securities 62,810 1,876,127
Investment in ViewCall Canada 0 (1,529)
Purchase of technology 0 (950,000)
----------- -----------
Net cash provided by (used in) investing activities 102,785 (340,803)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of line of credit 793,217 712,500
(Repayment of) proceeds from payable to director/shareholder note (500,000) 500,000
Stock options exercised 50,702 47,860
Repurchase of fractional shares 0 (13,273)
Deferred compensation 0 5,750
Proceeds from bridge loans 1,190,380 0
----------- -----------
Net cash provided by financing activities 1,534,299 1,252,837
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (253,215) (1,296,398)
CASH AND CASH EQUIVALENTS, beginning of year 282,596 1,578,994
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 29,381 $ 282,596
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
COLOROCS INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Colorocs Information Technologies, Inc. (the "Company") is
incorporated in the state of Georgia. The Company operates using
the name of Colorocs Information Technologies ("Colorocs") for
its copier business and COPS, Inc. ("COPS") for the sale of its
network printing and file sharing software. The Company and its
subsidiaries operate primarily in the United States. During 1997,
the Company sold the assets of its copier business and ViewCall
America, Inc. ("VCA"), a majority owned subsidiary of the
Company, that was developing on-line services and access to the
Internet through the television. Prior to the sale of VCA, some
of the Company's subsidiaries and affiliates had certain
distribution rights for the ViewCall technology in Asia, Europe,
South America, and Canada; however, there were no significant
operations in these locations.
COPS generates revenue through the sale of network printing and
file sharing software products. Prior to the sale of the copier
business, the Company's principal operations through Colorocs
were product support of color copiers and printers, previously
manufactured and sold by the Company, and the licensing of its
patented color printing and copier technology. Colorocs generated
income through the licensing of its technology, the sale of spare
parts, supplies and other consumables, maintenance of its
installed base of color copiers and printers, the cost per copy
("CPC") program, and the sales of remaining inventory of color
copiers and printers. Prior to the sale of VCA, the Company
generated revenue from VCA related to the sale of license
agreements for its ViewCall technology.
GOING CONCERN
At December 31, 1997, the Company's ability to continue as a
going concern is subject to several business and market risks, as
stated below:
* The Company has not generated significant revenue or cash
flow from its current operations, and the expectation of
future revenues or cash flow cannot be assumed.
* The Company must obtain significant additional financing in
order to satisfy its liability obligations and fund
continued operations of the Company.
* There is uncertainty as to the continued existence of a
profitable market in which the Company may sell the COPS
software.
* Competition includes other companies with significantly
greater resources for product development and marketing.
Management's plans regarding the above risks are as follows:
* The Company holds an investment in NetChannel, Inc.
("NetChannel"), as a result of the sale of VCA, discussed
below. Upon this investment becoming liquid, management has
the intention of using the proceeds to settle outstanding
liabilities and obligations, fund continued operations, and
review potential acquisitions. There can be no assurances,
however, that this investment will become liquid or that it
will be sufficient to fund continuing operations or pay
existing obligations.
* The Company continues to focus on revenue maximization and
cost control efforts related to COPS.
<PAGE>
The Company incurred a net loss of approximately $2,367,000 for
the year ended December 31, 1997 and has an accumulated deficit
of approximately $6,694,000 at December 31, 1997. The Company
currently has no source of additional cash, which has a material
adverse effect on the Company's ability to service its debts. The
Company's working capital deficit at December 31, 1997, plus the
extinguished revenue from product sales from its color copier and
consumables business as a result of the sale, noted above,will
not allow the Company to meet its obligations or to continue to
fund the operations of COPS through 1998. Management recognizes
that the Company must obtain additional financing. Management's
plans, as noted above, are controlling costs as well as obtaining
additional funds to support the operations of COPS. No assurances
can be given that the Company will be successful in controlling
costs or in obtaining the necessary financing to maintain
operations. Further, there can be no assurance, assuming the
Company successfully controls costs or receives timely additional
financing, that the Company will achieve profitability or
positive cash flow. If the Company is unable to obtain adequate
additional funding, management may be required to curtail the
Company's operations.
The above factors raise substantial doubt about the ability of
the Company to continue as a going concern. The accompanying
financial statements have been prepared under the assumption that
the Company will continue as a going concern and do not include
any adjustments relating to the recoverability and classification
of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable
to continue in existence.
INCORPORATION OF VIEWCALL AMERICA, INC. AND RELATED ENTITIES
In 1995, the Company purchased 250,000 shares of common stock
(approximately 3%) of ViewCall Europe PLC ("VCE"), a publicly
traded company based in the United Kingdom, for $1 per share. The
Company accounted for this investment under the cost method and
recorded an investment of $250,000 in the accompanying
consolidated balance sheet at December 31, 1996. VCE developed a
low-cost television set top box ("STB") that provides users with
direct access to the Internet through a television and ordinary
telephone line. In connection with the investment in VCE, the
Company obtained a six-month exclusive license and an option to
acquire a permanent license from VCE and Walzer Corporation
("Walzer"), a British Virgin Islands corporation related by
common ownership to VCE, to distribute the STBs in North America.
In June 1996, the Company incorporated VCA as a wholly owned
subsidiary to exercise the option to acquire the permanent
exclusive license noted above. In connection with the
organization of VCA and the exercise of the permanent exclusive
license, the Company contributed $5,000,000 to VCA, inclusive of
the investment to date in the STB. VCA then issued to Walzer
1,000,000 shares of its common stock, valued at $700,000 and
representing 16.9% of the outstanding common stock to exercise
the option for the permanent exclusive license and acquired
rights to the STB. The value associated with the VCA technology
acquired of $700,000 was included in goodwill and intangible
assets in the accompanying consolidated balance sheet at December
31, 1996. VCA's principal operations included developing and
providing services and products that are designed for delivering
on-line services and access to the Internet for display on the
television in the United States. The Company consolidated the
operations of VCA, as the Company owned 83.1% of VCA common
stock. No minority interest is accounted for as VCA had
significant losses during 1996.
Also in June 1996, VCA and Walzer organized ViewCall South
America, Inc., a Georgia corporation ("VCSA"), of which 51% of
the common stock was owned by VCA and the remaining stock was
owned by Walzer. VCSA's principal operations included developing
and providing services and products that are designed for
delivering on-line services and access to the Internet for
display on television using the VCA technology in South America.
VCSA was consolidated with VCA for presentation purposes and a
minority interest was recorded for the amount of the original
investment owned by the minority holders. The minority holders'
portion of the net loss in VCSA for the year ended December 31,
1996 was approximately $122,500. VCSA paid $250,000 to Walzer for
the exclusive rights and recorded this amount in goodwill and
intangible assets in the accompanying consolidated balance sheet
at December 31, 1996.
<PAGE>
In December 1996, VCA, along with MTS Advanced, Inc. ("MTS"), an
unrelated entity entered into an agreement to form ViewCall
Canada, Inc. ("VCC"), a Canadian corporation. VCC was formed to
operate the On-TVtrademark service in Canada. VCA contributed
$1,529 for a 20% ownership in VCC. VCA accounted for this
investment under the equity method and recorded $1,529 in the
accompanying consolidated balance sheet at December 31, 1996.
As of December 31, 1997 and 1996, the revenue from the operations
of VCA, VCSA, and VCC were not material. The majority of
operations entailed research and development expenses of the
technology associated with television Internet access.
SALE OF ASSETS OF VCA AND RELATED ENTITIES
On May 9, 1997, NetChannel, a privately held company, purchased
from the Company substantially all of the assets and assumed most
of the liabilities of VCA in exchange for 555,556 shares of
NetChannel convertible preferred stock. In addition, NetChannel
issued 3,144,280 shares of convertible preferred stock to the
Company (approximately 10%) in consideration of advances made by
the Company to VCA and all liens over VCA assets possessed by the
Company. The investment of approximately $180,189 in NetChannel
is recorded at cost in the accompanying consolidated balance
sheet at December 31, 1997. In connection with the sale of VCA,
Colorocs also removed the values assigned to the Company's
investments in VCSA, VCE, and VCC, as the future realizability of
these investments had been impaired.
SALE OF ASSETS OF COPIER BUSINESS
On May 1, 1997, the Company sold to SC Distributions, Inc.
("SC"), a privately held company, substantially all of the assets
of its 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 previously purchased color
printers. The transaction resulted in an immaterial gain recorded
in the accompanying consolidated statement of operations for the
year ended December 31, 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary and two majority-owned
subsidiaries for the period ended December 31, 1996, and the
accounts of the Company and its wholly owned subsidiary for the
period ended December 31, 1997 and two majority-owned
subsidiaries for the period from January 1, 1997 to May 9, 1997.
All significant intercompany accounts and transactions have been
eliminated.
ACCOUNTING FOR INVESTMENTS AND MINORITY INTEREST
The Company consolidated the operations of VCA and VCSA for the
period ended December 31, 1996 and for the period from January 1,
1997 to May 9, 1997. The minority interest included in the
accompanying consolidated balance sheet at December 31, 1996
represents the minority interest in the intangible assets at
VCSA. The minority interest in the accompanying consolidated
statement of operations for the year ended December 31, 1996 of
$822,500 represents the minority holders' share of the net loss
of VCA up to the original investment of the minority holder. Any
additional losses of the minority holder above the original
investment were included in the net loss of the consolidated
company.
REVENUE RECOGNITION
COPS records the revenue from the sales of software in accordance
with the AICPA Statement of Position 91-1 on software revenue
recognition. Revenue from software licenses is recognized upon
delivery if no significant vendor obligations exist. Prior to
thesale to SC in 1997 as noted above, revenue from Colorocs'
product sales
<PAGE>
was recognized at the time the product was shipped. Revenue from
servicing Colorocs' copiers was recognized as the services were
performed. Revenue realized by Colorocs from license agreements
is recognized when the agreement is consummated and is included
in other income in the accompanying consolidated statements of
operations. VCA, VCSA, and VCC had no significant revenue for the
year ended December 31, 1997 or 1996.
CASH AND CASH EQUIVALENTS
The Company considers cash on deposit and investments with an
original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of U.S. Treasury
obligations and certificates of deposit with original maturities
at the date of purchase beyond 3 months and less than 12 months.
Such short-term investments are carried at cost, which
approximates fair value.
RECEIVABLES
Receivables at December 31, 1997 and 1996 consist of the
following:
1997 1996
Trade accounts receivable $ 79,303 $ 188,052
Notes receivable 0 157,325
Employee receivables 0 19,500
License and other receivables 750,084 251,216
-------- ---------
829,387 616,093
Less allowance for doubtful accounts 0 (141,033)
-------- ---------
$829,387 $ 475,060
======== =========
The Company periodically evaluates the requirement for providing
for credit losses on its accounts receivable. Criteria used by
management to evaluate the adequacy of the allowance for doubtful
accounts include, among others, the creditworthiness of the
customer, prior payment performance, and the age of the
receivable.
INVENTORIES
Inventories consisted of consumable supplies and repair parts of
the copier business sold to SC in 1997. Inventories were valued
using the first-in, first-out method. The majority of the
inventory at December 31, 1996 consisted of finished goods for
resale or use in the consumables service business of Colorocs.
PROPERTY AND EQUIPMENT
The Company's property and equipment are mainly comprised of
office equipment, furniture, and leasehold improvements. The
useful lives of this property and equipment are between one and
seven years.
GOODWILL AND INTANGIBLE ASSETS
Goodwill of approximately $107,000 and $142,000 for the purchase
of COPS are included at December 31, 1997 and 1996, respectively,
and is being amortized over a five year period. Goodwill and
intangible assets at December 31, 1996 also include the value
assigned to the exclusive rights to the STB from VCSA of $250,000
and the value assigned to the exclusive rights for the STB from
Walzer, a related party, of $700,000, all of which were removed
as discussed above as a result of the sale of the assets of VCA.
<PAGE>
OTHER ASSETS
Other assets at December 31, 1996 consist primarily of a prepaid
license fee of approximately $161,000 paid by VCA to Acorn
Computers Limited ("Acorn"), an unrelated entity, for the use of
Acorn's operating system in the VCA STB. The remaining balance at
May 9, 1997 was removed in the sale of VCA.
INCOME TAXES
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under the asset
and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss and tax credit
carryforwards. A valuation allowance is recorded when it appears
it is more likely than not that some or all of deferred tax
assets will not be realized.
ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1997 and
1996 consist of the following:
1997 1996
Trade accounts payable $ 890,929 $2,339,128
Accrued liabilities 340,717 39,987
Accrued bonus 0 111,109
Accrued taxes, legal and
professional 25,000 99,000
---------- ----------
$1,256,646 $2,589,224
---------- ----------
USE OF ESTIMATES
The preparation of 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 at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
BASIC AND DILUTED EARNINGS PER SHARE
The computation of basic and diluted earnings per share is based
on the weighted average number of shares of common stock
outstanding during the period. Common equivalent shares were
antidilutive for 1997 and 1996 and therefore not reflected.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is
designed to improve the reporting of changes in equity from
period to period. The Company will adopt SFAS No. 130 effective
with its fiscal year ending December 31, 1998. Management does
not expect SFAS No. 130 to have a significant impact on the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 requires that an enterprise
disclose certain information about operating segments. The
Company will adopt SFAS No. 131 effective with its fiscal year
ending December 31, 1998. The Company does not expect that SFAS
No. 131 will require significant revision of prior disclosures.
The American Institute of Certified Public Accountants has issued
SOP 97-2, "Software Revenue Recognition." This SOP is effective
for the Company for transactions entered into after December 31,
1997. The Company will adopt the SOP in the first quarter of
1998. The adoption of the standard is not expected to have a
significant impact on the Company's financial statements.
<PAGE>
2. SHORT-TERM BORROWINGS
Prior to the sale of VCA, VCA had a $1,500,000 line of credit
from a bank, which bore interest at the prime rate. The line of
credit expired on May 23, 1997. The outstanding balance of the
line at December 31, 1996 was $712,500. Upon the sale of VCA on
May 9, 1997, the outstanding balance on the line of $1,500,000
was transferred to a new line of credit under Colorocs' control.
The new line of credit bears interest at the prime rate (8.50% at
December 31, 1997). The line of credit expires on May 31, 1998.
The outstanding balance of the line at December 31, 1997 is
$1,505,717. The line of credit is guaranteed and 100%
collateralized by the chairman of the board of directors of
Colorocs for up to $1,505,717. Subsequent to year-end, the
Company repaid $500,000 of the line of credit.
On November 11, 1996, the Company borrowed $500,000 from the
chairman of the board of directors. The note was due on May 12,
1997 and bore interest of prime plus 2% (10.25% as of December
31, 1996) and was collateralized by all of the assets of the
Company. The Company paid interest to the director in connection
with this loan of approximately $43,000 and $4,000 in 1997 and
1996, respectively. The principle amount of the loan was repaid
to the director in July 1997. Prior to the sale of VCA, VCA
received bridge financing in the amount of $940,000 from
NetChannel. The bridge financing carried no collateral, was due
August 31, 1997, and carried an interest rate of 8%. VCA also
received approximately $250,000 from an additional third party
manufacturer as a bridge loan. This bridge loan was due May 27,
1997, carried an interest rate of 8%, and was collateralized by
all of the accounts receivable of VCA. These amounts are
reflected as current notes payable in the accompanying balance
sheet at December 31, 1997.
3. LICENSING AGREEMENTS
Prior to the sale of VCA, VCA entered into a technology licensing
agreement with VCC, a related entity, in December 1996, which
allowed VCC to use VCA's On-TVtrademark. This agreement had an
original term of three years and was renewable upon agreement by
both parties. The Company recorded approximately $433,000 in
license revenue in the accompanying consolidated statements of
operations for the year ended December 31, 1996. No such revenue
was recorded in 1997.
In November 1996, VCA entered into an agreement with Boca
Research, Inc. ("Boca"), an unrelated entity, to license the STB
reference design to Boca. Boca agreed to pay $500,000 for this
license. As of December 31, 1996 Boca had paid $250,000 of this
amount and the Company recognized this amount as license revenue
in the accompanying consolidated statement of operations for the
year ended December 31, 1996. The Company deferred the remaining
$250,000 and included this amount as current deferred income in
the accompanying consolidated balance sheet at December 31, 1996.
Boca was required to pay the remaining amount by August 1997;
however, the payment was never made. The deferred revenue was
removed upon the sale of VCA.
The Company has entered into certain licensing agreements to use
the Colorocs' patented double transfer, single pass to paper
color imaging system. In 1997, the Company licensed its patent
for $1,500,000 and recorded this amount in other income in the
accompanying statement of operations for the year ended December
31, 1997. The Company received 50% of the license fee upon
signing of the agreements and received the remainder subsequent
to December 31, 1997. The Company sold no such licenses in 1996.
The Company has deferred approximately $875,000 at December 31,
1997 and 1996 of income under certain license agreements entered
into in 1995. The deferred license fee was not sold to SC as part
of the sale of the color copying business. Upon signing the
agreement, the remainder was paid subsequent to year end.
<PAGE>
4. JOINT VENTURE
Prior to the sale of VCA, VCA and VCE formed a 50/50 joint
venture, ViewCall Technology, Inc. ("VCT"), in June of 1996, to
develop the browser technology that VCA would use in its STB
reference design. VCA, VCE, and Walzer transferred all their
rights to the browser technology to VCT. VCA invested $1,000,000
during 1996 for the development and implementation of the
technology. VCT granted a royalty-free perpetual exclusive
license for North America to VCA and granted a royalty-free
perpetual exclusive license for Europe to VCE and also granted a
license to the rest of the world to Walzer upon payment of
certain royalties, as defined. The investment of $1,000,000 was
included in the 1996 research and development expense in the
accompanying consolidated statement of operations. VCT had no
operations for the years ended December 31, 1996 and 1997.
5. INCOME TAXES
There were no provisions for or benefits from income taxes for
the years ended December 31, 1997 and 1996 as a result of the
establishment of a valuation allowance.
At December 31, 1997 and 1996, the Company had net operating loss
carryforwards and research and development tax credit
carryforwards for federal income tax purposes of approximately
$23,066,000 and $20,126,000 and $393,000 and $403,000,
respectively, which are available to offset future taxable
income, if any, through 2009. The Company has approximately
$47,000 in foreign tax credit carryforwards, which expire in
1999. If there is a change in ownership of greater than 50% of
the outstanding shares of the Company's capital stock, as
defined, the Company's ability to utilize its net operating
losses will be subject to the limitations imposed by Internal
Revenue Code Section 382. These limitations could significantly
affect the Company's utilization of those losses.
The tax effect of temporary differences that give rise to
deferred tax assets and liabilities as of December 31, 1997 and
1996 is as follows:
<TABLE>
1997 1996
<S> <C> <C>
Deferred tax assets:
Inventory reserves $ 0 $ 97,000
Research and development credit carryforward 393,000 403,000
Net operating loss carryforwards 8,765,000 7,648,000
Foreign tax credit carryforwards 47,000 47,000
Other asset basis differences:
Deferred licensing income 333,000 333,000
Patents 0 67,000
Other, net 71,000 103,000
Gross deferred tax assets 9,609,000 8,698,000
Deferred tax liabilities:
Depreciation (12,000) (21,000)
Stock Options (180,000) 0
----------- -----------
Total deferred tax assets 9,417,000 8,677,000
Valuation allowance (9,417,000) (8,677,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
<PAGE>
The change in valuation allowance for deferred tax assets for the
years ended December 31, 1997 and 1996 was as follows:
1997 1996
Balance, beginning of year $8,677,000 $7,350,000
Increase in valuation allowance 740,000 1,327,000
----------- ----------
$9,417,000 $8,677,000
========== ==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income by the Company during the
periods in which those temporary differences become deductible.
Management considers the projected future taxable income and tax
planning strategies in determining the valuation allowance.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under a noncancellable lease agreement
for its corporate office space. In addition, the Company leases
office equipment at its corporate office under noncancellable
lease agreements expiring in May 1999. Following is a schedule of
future minimum payments under the agreements:
1998 $56,000
1999 21,000
-------
$77,000
=======
In addition to the above commitments, VCA was given a notice of
default in relation to an operating lease agreement for the lease
of certain space. The lease agreement requires lease payments of
approximately $18,000 per month for a term of three years with a
total commitment of approximately $640,000. The Company has not
entered the space, has not paid any amounts under the lease for
1997. The Company and the lessor are in negotiations to settle
the lease. The Company has accrued at December 31, 1997, an
amount which represents management's estimate of the exposure
under the lease agreement that will be required to settle the
disputed lease.
Rent expense for the year ended December 31, 1997 and 1996 was
$124,955 and $85,708, respectively.
LITIGATION
The Company is subject to legal proceedings and claims which have
arisen in the normal course of business. In the opinion of
management, the amount of potential liability with respect to
these actions will not materially affect the financial position
or results of operations of the Company.
7. LONG-TERM INVESTMENTS
During 1995, the Company purchased 250,000 shares of common stock
at $1 per share or approximately 3% of VCE. VCE developed and
marketed a low-cost television set top box that provides users
with direct access to the Internet through a television and an
ordinary telephone line. In connection with its investment in
VCE, the Company obtained a six-month exclusive license and an
option to acquire a permanent exclusive license to distribute the
STB in North America and Mexico. This investment was included in
the accompanying consolidated balance sheet as of December 31,
1996. As a result of the sale of the assets of VCA, the long-term
investment was removed.
<PAGE>
8. SHAREHOLDERS' EQUITY
In 1996, the Company paid $13,273 to repurchase certain
fractional shares as a result of a 1-for-20 reverse stock split
in April 1995.
In 1996, an executive of the Company sold Colorocs common stock
prior to holding the stock for six months. The profit of $5,750
on that sale was paid to the Company by the executive.
WARRANTS
During 1996 and the period from January 1, 1997 to May 9, 1997,
VCA issued certain warrants to purchase shares of VCA common
stock. All outstanding warrants at May 9, 1997 were cancelled
with the sale of VCA.
During 1997, Colorocs issued warrants to purchase 225,000 shares
of common stock of Colorocs at an exercise price of $.25 per
share to the chairman of the board of Colorocs in consideration
of canceling his lien on the assets of VCA in favor of
NetChannel, allowing the sale of VCA to occur. These warrants
expire May 8, 2002 and were fully vested at December 31, 1997.
The Company recorded the value of these warrants of $100,000 in
the accompanying statement of stockholder's equity.
9. STOCK OPTIONS
During 1994, the Company adopted the 1994 Director Stock Option
Plan, ("Colorocs Director Plan") which provides for the issuance
of up to 156,250 shares of the Company's common stock, and the
1994 Employee Stock Option Plan, ("Colorocs Employee Plan")
which, as amended in 1995, provides for the issuance of up to
62,500 shares of Colorocs' common stock. During 1996, VCA adopted
the ViewCall America, Inc. 1996 Long-Term Incentive Plan (the
"1996 VCA Plan"), which provides for the issuance of options for
up to 2,500,000 stock options for common stock of VCA, stock
appreciation rights, restricted stock awards, performance share
awards, dividend equivalent awards, or other stock-based award
issued under this plan. The options in the 1996 VCA Plan were
cancelled with the sale of VCA. A summary of the stock option
activity under all plans is as follows:
COLOROCS DIRECTOR AND EMPLOYEE PLANS
<TABLE>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE RANGE PRICE
<S> <C> <C> <C>
Outstanding at December 31, 1995 269,275 $1.95-$3.32 $1.31
Granted in 1996 58,846 $5.20-$7.75 6.50
Exercised in 1996 (40,150) $0.95-$3.32 1.19
Canceled in 1996 (25,025) $3.32-$7.75 7.57
-------
Outstanding at December 31, 1996 262,946 $0.95-$7.75 1.89
Granted in 1997 50,000 $2.88 2.88
Exercised in 1997 (43,250) $0.95-$1.75 1.18
-------
Outstanding at December 31, 1997 269,696 $0.95-$7.75 2.19
Vested and exercisable options at December 31, 1997 249,696 $0.95-$7.75 2.14
=======
Vested and exercisable options at December 31, 1996 227,789 $0.95-$7.75 1.92
=======
Options available for future grants at December 31,1997 32,329
=======
</TABLE>
<PAGE>
<TABLE>
1996 VCA PLAN
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE RANGE PRICE
<S> <C> <C> <C>
Outstanding at December 31, 1995 0 $0.00 $.00
Granted in 1996 2,210,225 $0.70-$4.00 $.77
Exercised in 1996 0 $0.00 $.00
Canceled in 1996 0 $0.00 $.00
---------
Outstanding at December 31, 1996 2,210,225 $0.70-$4.00 $.77
Granted in 1997 0 $0.00 $.00
Exercised in 1997 0 $0.00 $.00
Canceled in 1997 0 $0.00 $.00
Canceled in sale of VCA 2,210,225 $0.70-$4.00 $.77
---------
Outstanding at December 31, 1997 0
=========
</TABLE>
The following table summarizes the range of exercise price,
weighted average exercise price and weighted average contractual
lives for options outstanding at December 31, 1997:
<TABLE>
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING
PRICE OF SHARES PRICE CONTRACTUAL LIFE
<S> <C> <C> <C>
$0.95-$1.75 183,250 $1.34 1.96 years
$2.88-$3.32 51,600 $2.89 3.05 years
$5.20-$7.75 34,846 $5.64 3.65 years
269,696
</TABLE>
All options granted under the Colorocs director and employee
plans in 1997 and 1996 were granted at fair market value on the
date of grant. All VCA options granted during 1996 had a fair
market value of $0.70 per share.
During 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation" which defines
a fair value-based method of accounting for an employee stock
option plan or similar equity instrument. However, it also allows
an entity to continue to measure compensation cost of those plans
using the method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net
income (loss) and, if presented, earnings (loss) per share, as if
the fair value-based method of accounting defined in the
statement had been applied.
The Company has elected to account for the Colorocs Director
Plan, the Colorocs Employee Plan, and the 1996 VCA Plan under APB
No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1995,
1996, and 1997 using the Black-Scholes option pricing model as
prescribed by SFAS No. 123 using the following weighted average
assumptions used for grants in 1997 and 1996:
1997 1996
Risk-free interest rate 6.62% 5.37-7.00%
Expected dividend yield 0 0
Expected lives 6 YEARS 6 years
Expected volatility 64% 64%
<PAGE>
The total value of the options granted during the years ended
December 31, 1997 and 1996 were computed as approximately
$695,000 and $277,000, respectively, which would be amortized
over the vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS No. 123, the
Company's reported pro forma net loss and pro forma basic and
diluted net loss per share for the years ended December 31, 1997
and 1996 would have changed to the following pro forma amounts
(in thousands):
1997 1996
Net loss:
As reported in the financial statements $2,467 $7,160
Pro forma in accordance with SFAS No. 123 3,143 7,437
Basic and diluted net loss per share:
As reported in the financial statements 1.12 3.51
Pro forma in accordance with SFAS No. 123 1.49 3.64
As noted above, the 1996 VCA Plan provides for the issuance of
stock appreciation rights, performance share awards, dividend
equivalent awards, or other stock based awards. No such awards
were issued in 1996 or 1997.
10. RELATED-PARTY TRANSACTIONS
Colorocs has a consulting agreement with the chief executive
officer and chairman of the board of Colorocs. Colorocs paid
approximately $154,000 and $200,000 in consulting fees to the
director for the years ended December 31, 1997 and 1996,
respectively. At December 31, 1997, $37,500 of the consulting
fees had not been paid and is accrued for in the accompanying
consolidated balance sheet.
In connection with the sale of VCA in 1997, the Company received
legal assistance from a relative of a director of the Company.
Fees for the professional services of $110,000 were paid in 1997
and they represent the fair value of the services provided.
As noted in Note 2, Colorocs and certain shareholders of the
Company entered into agreements to guarantee VCA debt in 1996,
prior to the sale of VCA, subject to certain conditions. In
connection therewith, VCA granted warrants to purchase shares of
VCA common stock (Note 8). The warrants granted to the chief
executive officer and chairman of the board of directors in
relation to this guarantee were cancelled on May 8, 1997, and the
debt was transferred to Colorocs. Colorocs granted warrants to
purchase Colorocs common stock (Note 8) as consideration for the
cancellation of the lien on VCA assets discussed above and the
chief executive officer and chairman of the board guaranteed the
debt transferred to Colorocs.
As discussed in Note 2, in 1996 the Company borrowed $500,000
from the chief executive officer and chairman of the board of
directors, a related party. The note was collateralized by all of
the assets of the Company and its subsidiaries. During 1997 and
1996, the Company paid approximately $32,000 and $4,000,
respectively, in interest to the chairman of the board of
directors in connection with this note payable. The principle of
the note was paid to the chairman of the board in July 1997.
Reference is herein made to Notes 1, 4, and 8 for transactions
related to the Company, VCA, VCSA, VCC, VCT, VCE and the related
ownership and accounting for each.
11. CONCENTRATION OF CREDIT RISK AND SUPPLY OF INVENTORY
In connection with an agreement with Sharp Corporation ("Sharp"),
the Company is repurchasing 54,082 shares of Colorocs common
stock issued to Sharp as a result of the Company's bankruptcy
proceedings for a sum of approximately $200,000 unless the
agreement is previously terminated by either party. According to
the agreement, the full sum of money must be paid before the
shares are returned. The Company has paid approximately $125,000
to Sharp for these shares as of December 31, 1997. This amount is
included in prepaid expenses in the accompanying consolidated
balance sheets.
<PAGE>
VCA sold two technology license agreements to VCC and Boca in
1996 for approximately $933,000 and recognized approximately
$683,000 as license revenue in the accompanying statements of
operations for the year ended December 31, 1996. At December 31,
1996, the Company had receivables of $250,000 related to these
license agreements included in the accompanying consolidated
balance sheet. The Company sold several technology licenses
relating to or useful for the manufacture of, electrophotographic
printers to Mitsubishi Electric Corporation in 1997 for
approximately $1,500,000 and recognized the total amount as other
income in the accompanying consolidated statement of operations
for the year ended December 31, 1997. At December 31, 1997, the
Company had receivables of $750,000 related to these license
agreements included in the accompanying consolidated balance
sheet. No other customer accounted for more than 10% of income in
1997 or 1996.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $154,459 and $8,679 for the years
ended December 31, 1997 and 1996, respectively.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by Item 401 of Regulation S-B regarding
the directors of the Company is set forth under the caption "Proposal
1 - Election of Directors - Nominees" in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders to be held on
May 29, 1998. Such information is incorporated herein by reference.
Information required by Item 401 of Regulation S-B regarding the
executive officers of the Company is set forth below. Information
required by Item 405 of Regulation S-B regarding compliance with the
reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934 by the Company's directors and executive officers and
beneficial owners of more than ten percent of the Company's
Common Stock is set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement
referred to above. Such information is incorporated herein by
reference.
EXECUTIVE OFFICERS
RUDOLPH P. RUSSO, AGE 68, CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER. Mr. Russo, age 68, has served as Chairman of the
Board of the Company since 1994 and as Chief Executive Officer of the
Company since March 1995. He served as Co-Chairman of the Board from
December 1993, when he was first elected as a director, to 1994. Mr.
Russo has been in private practice as an attorney in Poughkeepsie, New
York since 1957.
ALAN B. CATHERALL, AGE 43, CHIEF FINANCIAL OFFICER. Mr. Catherall
has served as Chief Financial Officer on a part-time basis since
joining the Company in August 1997. Mr. Catherall has been a partner
in Tatum CFO since April 1996. Tatum provides an alternative means of
fulfilling the role of Chief Financial Officer. From 1995 to 1996, Mr.
Catherall served as the Chief Financial Officer of Syncordia Services,
a joint venture company between MCI Communications Corporation ("MCI")
and BT plc ("British Telecommunications") . Mr. Catherall joined MCI
in 1982 in Washington, DC and moved to Atlanta, Georgia in 1992 as
Vice President of Finance of the Business Markets Division of MCI.
Prior to MCI, Mr. Catherall worked in public accounting in the United
Kingdom.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item regarding executive
compensation is set forth under the captions "Proposal 1 - Election of
Directors - Director Compensation" and "Executive Compensation" in the
Proxy Statement referred to in Item 9 above. Such information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item regarding ownership of the
Company's Common Stock by certain persons is set forth under the
captions "Voting - Principal Shareholders" and "Proposal 1 - Election
of Directors - Nominees" in the Proxy Statement referred to in Item 9
above. Such information is incorporated herein by reference.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain
relationships and transactions between the Company and certain of its
affiliates is set forth under the captions "Executive Compensation"
and "Certain Transactions" in the Proxy Statement referred to in Item
9 above. Such information is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with or incorporated by
reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any exhibit
upon request to the Controller, Colorocs Information
Technologies, Inc., 5600 Oakbrook Parkway, Suite 240, Norcross,
GA 30093-1843, (770) 447-3570. There is a charge of $0.50 per
page to cover expenses of copying and mailing. See the Index of
Exhibits included with the exhibits filed as part of this report.
2.1 Plan of Reorganization, as amended and restated on March 17,
1993, and as modified by Modification filed on June 2, 1993
(Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 30, 1991)
2.2 Asset Acquisition Agreement, dated April 26, 1997, between
NetChannel Inc., ViewCall America, Inc., the Company and
Rudolph P. Russo (Exhibit 2 to the Company's Current Report
on Form 8-K dated May 24, 1997)
2.3 Agreement of Sale, dated May 1, 1997, among the Company, SC
Distribution, Inc., d/b/a Colorocs Sales and Service, and
with respect to Section 4 of the Agreement, Sharon Conte -
filed herewith
3(i) Articles of Incorporation of the Company, as amended through
December 21, 1995 (Exhibit 3.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
(a) Articles of Amendment to the Articles of Incorporation
effective as of May 9, 1995
(b) Articles of Amendment to the Articles of Incorporation
effective as of December 13, 1995
3(ii) Bylaws of the Company, as amended through June 7, 1990
(Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1990)
10.1 Lease Agreement by and between AP Southeast Portfolio
Partners, L.P. and the Company dated February 14, 1994.
(Exhibit 10.6 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1993)
10.2 Lease Agreement by and between The Northwestern Mutual Life
Insurance Company and VCA dated October 21, 1996 (Exhibit
10.2 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996)
10.3 Spare Parts and Consumables (Partscon) Agreement dated
October 1, 1994 between the Company and Sharp Corporation
(Exhibit 10.5 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994)
10.4 Asset Purchase Agreement among the Company, Guy Mariande and
CoOperative Printing Solutions, Inc. dated December 5, 1995
(Exhibit 10.5 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995)
<PAGE>
10.5 Management Compensation Agreements:
(a) 1994 Employee Stock Option Plan (Exhibit 10.6(a) to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995)
(b) 1994 Director Stock Option Plan (Exhibit 10.6(b) to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995)
(c) Employment Agreement, as amended, between the Company
and Alan B. McKeon dated April 4, 1995 (Exhibit 10.6(c)
to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995)
10.6 Debt guarantee agreements:
(a) Agreement dated June 7, 1996 between VCA and Rudolph P.
Russo (Exhibit 10.6(a) to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996)
(b) Agreement dated June 7, 1996 between VCA and Colorocs
Information Technologies, Inc. (Exhibit 10.6(b) to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996)
10.7 Warrant agreements:
(a) Agreement dated June 7, 1996 between VCA and Rudolph P.
Russo (Exhibit 10.7(a) to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996)
(b) Agreement dated June 7, 1996 between VCA and Colorocs
Information Technologies, Inc. (Exhibit 10.7(b) to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996)
(c) Agreement dated July 15, 1997 between the Company and
Rudolph P. Russo - filed herewith.
10.8 Warrants:
(a) Warrant dated January 16, 1997 for the purchase of VCA
Common stock by Rudolph P. Russo (Exhibit 10.8(a) to
the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996)
(b) Warrant dated April 2, 1997 for the purchase of VCA
Common stock by Rudolph P. Russo (Exhibit 10.8(b) to
the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996)
(c) Warrant dated April 2, 1997 for the purchase of VCA
Common stock by Colorocs Information Technologies, Inc.
(Exhibit 10.8(c) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996)
(d) Warrant dated July 15, 1997 for the purchase of the
Company's Common stock by Rudolph P. Russo - filed
herewith
10.9 Indemnification and Escrow Agreement among the Company,
ViewCall America, Inc. and NetChannel, Inc. (Exhibit 10.1 to
the Company's Current Report on Form 8-K dated May 24, 1997)
21 Subsidiaries of the Issuer (Exhibit 21 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996)
23 Consent of Independent Accountants - filed herewith
27 Financial Data Schedule, December 31, 1997 - filed herewith
27.1 Financial Data Schedule, December 31, 1996 - filed herewith
(b) Reports on Form 8-K
(a) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission dated December 1, 1997
which reported, pursuant to Item 7, certain unaudited
pro-forma financial information regarding the disposition of
substantially all the assets and liabilities of the VCA
business and the color copying and printing business.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) 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 March 25, 1998.
Colorocs Information Technologies, Inc.
By:/s/ Rudolph P. Russo
Rudolph P. Russo
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Alan B. Catherall
Alan B. Catherall
Chief Financial Officer
(Principal Financial and
Accounting Officer)
In accordance with the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Issuer and in the capacities indicated on
March 25, 1998.
SIGNATURES
/s/ Rudolph P. Russo /s/Alan B. McKeon
Rudolph P. Russo, Chairman of the Alan B. McKeon, Director
Board and Chief Executive Officer
/s/ Nicholas M. Russo /s/Joseph E. Wallace
Nicholas M. Russo, Director Joseph E. Wallace, Director
<PAGE>
EXHIBIT 2.3
AGREEMENT OF SALE
THIS AGREEMENT is entered into this___ day of June, 1997,
effective as of May 1, 1997, among COLOROCS INFORMATION TECHNOLOGIES,
INC., a Georgia corporation, with its principal office located at 5600
Oakbrook Parkway, Suite 240, Norcross, GA, 30093-1843 ("Colorocs"), SC
DISTRIBUTION, INC., d/b/a Colorocs Sales and Service, a Georgia
corporation, with its principal office located at 5600 Oakbrook
Parkway, Suite 260, Norcross, Georgia 30093-1843 ("SCD"), and with
respect to the provisions of Section 4 of this agreement, SHARON
CONTE, an individual resident of Georgia ("Conte").
WHEREAS, Colorocs is engaged in the business of selling
and servicing color copiers and printers together with the sale of
parts and consumables relating thereto (the "Business"); and,
WHEREAS, Colorocs is desirous of selling the Business to
SCD and SCD is desirous of purchasing said Business from Colorocs.
NOW THEREFORE, in consideration of the mutual covenants
and conditions contained herein, the parties hereto agree as follows:
1. AGREEMENT TO SELL.
Colorocs agrees to transfer and deliver the following assets
and grant the following rights to SCD upon the terms and conditions
hereinafter set forth;
a) The assets of the Business, including the entire
inventory of copiers and printers, together with all
related parts and consumables presently in the
possession of Colorocs and listed on the attached
Appendix "A";
b) The use of the furniture, fixtures and leasehold
improvements, set forth on Appendix "A" attached
hereto, of the office and warehouse space located at
5600 Oakbrook Parkway, Suite 260, Norcross, Georgia, to
be subleased from Colorocs to SCD, together with a
right of first refusal to purchase said furniture,
fixtures and leasehold improvements if Colorocs decides
to sell such assets;
c) The right and license to use the name "Colorocs", but
only in connection with the operation of the Business
being sold to SCD for so long as SCD operates the
Business and for no other purpose;
d) The right to use the telephone number 1-800-242-2579,
together with the right to use the telephone number
770-447-3570;
e) The good will of the business; and
f) The right to use accounting and shipping software,
currently owned and used by Colorocs, until at least
December 31, 1997, together with a right of first
refusal to purchase the accounting and shipping
software if Colorocs moves its remaining business from
the address listed in the preamble to this agreement.
The right to use such software shall include the right
use all related manuals and documentation. If Colorocs
ceases to use the accounting and shipping software and
there is no outstanding offer in writing from a third
party to purchase the software, SCD shall be allowed to
purchase the software from Colorocs for $1.00.
<PAGE>
2. PURCHASE PRICE.
As consideration (the "Purchase Price") for the assets
transferred and the rights granted to SCD under Section 1 above,
SCD shall assume certain liabilities of Colorocs and make certain
payments to Colorocs as follows:
a) SCD shall assume and agree to pay and/or resolve those
accounts payable of Colorocs, in the approximate sum of
$156,000.00, as more fully set forth on "Appendix B"
attached hereto, and SCD shall not assume any other
liabilities or obligations of Colorocs, whether trade,
tax or other, except as set forth in this Section 2(a);
b) SCD shall pay to Colorocs 50% of all revenues received
from the sale of six (6) new Colorocs color printers,
(Model No. CP4007), net of shipping expenses,
consumables and the manufacturer's 12.5% surcharge; and
c) For the right to use the telephone number
1-800-242-2579, SCD shall pay all charges beginning on
the date that the telephone system is moved to SCD's
principal office. For the right to use the telephone
number 770-447-3570, SCD shall pay to Colorocs 50% of
all monthly basic charges and for all long distance
calls made by SCD.
3. ACCOUNTS RECEIVABLE.
Colorocs agrees to assign to SCD all of the Colorocs
accounts receivable in the approximate sum of $70,783.97, as the same
are more fully set forth on "Appendix C" attached hereto.
4. SECURITY FOR PAYMENT OF ACCOUNTS PAYABLE.
In order to secure payment of the accounts payable by SCD,
Conte agrees as follows:
a) Conte shall pledge to Colorocs 8,500 shares of the
common stock of Colorocs presently owned by Conte and
held in street name by Charles Schwabe & Co, Inc.
("Schwabe"). Conte shall deliver a letter to Schwabe,
in form satisfactory to Colorocs, stating that the
shares are subject to a security interest held by
Colorocs and that such shares may not be sold or
otherwise transferred without the written consent of an
officer of Colorocs. Such shares shall be held for the
benefit of Colorocs until such time as the aforesaid
accounts payable are paid in full at which time
Colorocs shall notify Schwabe in writing of the release
of its security interest. In the event SCD fails to pay
such accounts payable by May 1, 2002, then Colorocs
shall direct Schwabe to liquidate or transfer to
Colorocs that number of shares the value of which is
equal to the amount of the accounts payable remaining
unpaid, and Colorocs shall direct Schwabe to
immediately release to Conte the shares in excess of
the amount needed to satisfy the unpaid accounts
payable.
b) Conte shall, with the consent of Colorocs, which
consent shall not be unreasonably withheld, have the
right to substitute other collateral of equal value for
the Colorocs shares. If such collateral is substituted,
Colorocs shall notify Schwabe of the substitution and
direct the release of its security interest in the
Colorocs shares.
c) At least semi-annually during the period when the
accounts payable remain unpaid, Conte and Colorocs
shall determine the value of the Colorocs shares or
collateral substituted for the Colorocs shares. Upon
the determination of the value of the shares or
collateral, the parties shall determine the value of
the accounts payable remaining unpaid. Colorocs hereby
agrees to release its security interest in the shares
or substitute collateral the value of which is in
excess of the accounts payable then outstanding. Conte
and Colorocs agree that the current value of the
Colorocs shares is $25,000.00.
<PAGE>
d) Conte agrees to execute and deliver to Colorocs a
financing statement in suitable form under the Uniform
Commercial Code for recording in the Gwinnett County
Clerk's Office so as to grant Colorocs a first lien on
all of the assets of the Business, including, but not
limited to, the inventory being transferred hereunder.
Such financing statement shall be terminated upon
payment of the accounts payable.
e) Conte hereby personally guarantees the payment of the
accounts payable assumed by SCD and listed on the
attached Appendix "B".
5. SALES TAX.
If any sales tax becomes due or payable at or subsequent to
the closing in connection with the transfer of the assets of the
Business pursuant to this agreement, SCD agrees to pay the same and
shall indemnify and hold Colorocs harmless from and against any and
all liability in connection therewith. This provision shall survive
closing.
6. WAIVER OF BULK TRANSFER REQUIREMENTS.
The parties waive compliance with the bulk transfer
provisions of the Georgia Code which may be applicable to this
transaction, and Colorocs agrees to indemnify SCD against all claims
made by the creditors of Colorocs for failure to comply.
7. REPRESENTATIONS OF COLOROCS.
a) Colorocs represents that the sale contemplated hereunder
does not involve all or substantially all of the assets of
Colorocs;
b) Colorocs is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of
its incorporation.
c) Colorocs has full power and authority (including full
corporate power and authority) to execute and deliver this
agreement and to perform its obligations hereunder. Without
limiting the generality of the foregoing, the board of
directors of Colorocs has duly authorized the execution,
delivery, and performance of this Agreement by Colorocs.
This agreement constitutes the valid and legally binding
obligation of Colorocs, enforceable in accordance with its
terms and conditions.
d) Neither the execution and the delivery of this agreement,
nor the consummation of the transactions contemplated
hereby, will (i) violate any statute, regulation, order,
decree, ruling, or other restriction of any government,
governmental agency, or court to which Colorocs is subject,
or (ii) conflict with, result in a breach or default under
any agreement, contract, lease, license, or other
arrangement to which Colorocs is a party or by which it is
bound or to which any of the assets of the Business being
transferred hereunder is subject. Colorocs does not need to
give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or
governmental agency in order for the parties to consummate
the transactions contemplated by this agreement.
e) Colorocs has good, valid and marketable title to all of the
assets of the Business being transferred hereunder, free and
clear of all liens, security interests, adverse claims or
encumbrances.
<PAGE>
8. REPRESENTATIONS OF SCD.
a) SCD is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction of its
incorporation.
b) SCD has full power and authority (including full corporate
power and authority) to execute and deliver this agreement
and to perform its obligations hereunder. Without limiting
the generality of the foregoing, the board of directors of
SCD has duly authorized the execution, delivery, and
performance of this Agreement by SCD. This agreement
constitutes the valid and legally binding obligation of SCD,
enforceable in accordance with its terms and conditions.
c) Neither the execution and the delivery of this agreement,
nor the consummation of the transactions contemplated
hereby, will (i) violate any statute, regulation, order,
decree, ruling, or other restriction of any government,
governmental agency, or court to which SCD is subject, or
(ii) conflict with, result in a breach or default under any
agreement, contract, lease, license, or other arrangement to
which SCD is a party or by which it is bound or to which any
of the assets of the Business being transferred hereunder is
subject. SCD does not need to give any notice to, make any
filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order
for the parties to consummate the transactions contemplated
by this agreement.
9. INDEMNIFICATION BY COLOROCS.
Colorocs agrees to indemnify SCD and Conte, from and against
any and all actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders,
decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, liabilities, obligations, Taxes, liens, losses,
expenses, and fees, including court costs and reasonable attorneys'
fees and expenses, arising out of or incident to (i) any
misrepresentation or breach of any warranty, covenant or agreement
made Colorocs pursuant to this agreement; (ii) any claim or purported
claim against Colorocs which is asserted against SCD or Conte as the
result of the failure to comply with the Georgia Bulk Sales Act; (iii)
any liabilities or obligations of Colorocs other than those
liabilities assumed by SCD hereunder and listed on Appendix
"C"attached hereto and; or (iv) any claims or actions against Colorocs
or its officers or directors, or Colorocs' subsidiaries or the
officers and directors of such subsidiaries, by its shareholders or
shareholders of its subsidiaries.
10. INDEMNIFICATION BY SCD.
SCD agrees to indemnify and hold harmless Colorocs from and
against any and all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines,
costs, amounts paid in settlement, liabilities, obligations, Taxes,
liens, losses, expenses, and fees, including court costs and
reasonable attorneys' fees and expenses, arising out of or incident to
(i) any misrepresentation or breach of any warranty, covenant or
agreement made SCD pursuant to this agreement; and (ii) any
liabilities or obligations whatsoever of SCD the liabilities assumed
by SCD and listed on Appendix "C" for periods after May 1, 1997.
11. RETROACTIVE EFFECT.
The parties mutually acknowledge and agree that SCD has been
in possession of and has been operating the aforesaid Business as of
the 1st day of May, 1997, and both parties acknowledge and agree that
the sale contemplated hereunder shall be made retroactively effective
as of that date.
<PAGE>
12. ENTIRE AGREEMENT.
This agreement contains all of the terms agreed upon between
Colorocs and SCD with respect to the subject matter hereof.
13. GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia.
14. ASSIGNMENT.
This Agreement may not be assigned without consent of
Colorocs.
15. BINDING EFFECT.
This agreement shall not be considered an offer or an
acceptance of an offer by Colorocs and shall not be binding upon
Colorocs until executed and delivered by both Colorocs and SCD. Upon
such execution and delivery, this agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and permitted assigns.
IN WITNESS WHEREOF, parties have executed this agreement
the date first above written.
COLOROCS: COLOROCS INFORMATION TECHNOLOGIES, INC.
By:_____________________________________
RUDOLPH P. RUSSO
Chairman and Chief Executive Officer
STATE OF NEW YORK )
)ss:
COUNTY OF DUTCHESS )
On the _____ day of __________, 1997, before me personally
came and appeared RUDOLPH P. RUSSO to me known and known to me to be
the individual described in and who executed the foregoing instrument
and who duly acknowledged to me that he executed same.
___________________________________
NOTARY PUBLIC
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE>
SCD: SC DISTRIBUTION, INC.
By:_____________________________________
SHARON CONTE, President
STATE OF GEORGIA )
)ss:
COUNTY OF GWINNETT )
On the _____ day of __________, 1997, before me personally
came and appeared SHARON CONTE to me known and known to me to be the
individual described in and who executed the foregoing instrument and
who duly acknowledged to me that she executed same.
___________________________________
NOTARY PUBLIC
CONTE: With respect to the obligations set forth
under Section 4 hereof:
__________________________________________
SHARON CONTE, Individually
STATE OF GEORGIA )
)ss:
COUNTY OF GWINNETT )
On the _____ day of __________, 1997, before me personally
came and appeared SHARON CONTE to me known and known to me to be the
individual described in and who executed the foregoing instrument and
who duly acknowledged to me that she executed same.
___________________________________
NOTARY PUBLIC
<PAGE>
EXHIBIT 10.7(C)
ELECTION TO PURCHASE
TO COLOROCS INFORMATION TECHNOLOGIES, INC.:
The undersigned, Holder of the attached Warrant, hereby
irrevocably elects to exercise the purchase right represented by such
Warrant for, and to purchase thereunder, two hundred twenty-five
thousand (225,000) shares of Common Stock of Colorocs Information
Technologies, Inc. (or other securities or property) to which such
Holder is entitled thereunder, and herewith makes payment of $
therefor in cash or by certified or bank check. The undersigned hereby
requests that the certificate(s) for such shares be issued in the
name(s) and delivered to the address(es) as follows:
If the foregoing Election to Purchase evidences an
exercise of the attached Warrant to purchase fewer than all the Shares
(or such other securities or property) to which the undersigned is
entitled under such Warrant, please issue a new warrant, of like
tenor, for the remaining Shares (or other securities or property) in
the name(s), and deliver the same to the address(es), as follows:
Dated:____________________________, 19__.
_________________________________________
(Name of Holder)
_________________________________________
(Signature of Holder or
Authorized Signatory)
<PAGE>
EXHIBIT 10.8(D)
VOID AFTER 5:00 P.M., E.D.T., ON MAY 8, 2002.
COLOROCS INFORMATION TECHNOLOGIES, INC.
225,000 SHARES OF COMMON STOCK
PURCHASE WARRANT
NO. 1
Colorocs Information Technologies, Inc., a Georgia corporation
(the "Company"), hereby agrees that, for value received, Rudolph P.
Russo, a resident of the State of New York (the "Holder"), is
entitled, subject to the terms and conditions set forth below, to
purchase from the Company up to two hundred twenty-five thousand
(225,000) fully paid and nonassessable shares (the "Shares") of the
common stock, no par value (the "Common Stock"), of the Company, at a
purchase price per Share of five dollars ($.25) (the "Purchase
Price"), subject to certain adjustments contained in Section 3
herein, and prior to the Expiration Date (as defined below). This
Warrant shall expire and be of no further force or effect at the
earlier of the time when it has been exercised with respect to all
Shares which the Holder is or may become entitled to purchase
hereunder or on May 8, 2002 (the "Expiration Date"). The number and
character of the Shares and the Purchase Price are subject to
adjustment as herein provided.
1. EXECUTION; REGISTRATION. This Warrant is executed on behalf
of the Company by its Chief Executive Officer and Chairman and
attested by its Controller under its corporate seal. The Company shall
keep or cause to be kept a register of the Holder of this Warrant (the
"Warrant Register"). Prior to due presentment of this Warrant for
transfer in accordance with Section 7 hereof, the Company shall treat
the Holder in whose name or names this Warrant is registered as the
absolute owner or owners hereof for all purposes.
2. EXERCISE. This Warrant may be exercised, in whole or in
part, from time to time by the Holder subject to the vesting schedule
set forth in this Section 2 by delivering this Warrant, together with
an Election to Purchase in the form attached hereto properly completed
and duly executed by or on behalf of the Holder, to the Company or
such person as the Company may have appointed as warrant agent,
at its principal office (or at the office of such agent), accompanied
by payment in cash or by certified or bank check, payable to the order
of the Company, in an aggregate amount equal to the Purchase Price as
then adjusted multiplied by the number of Shares as to which this
Warrant is then exercised. The Company shall cancel this Warrant on
any such exercise and, if such exercise is partial, shall issue and
deliver to the Holder a new Warrant, of like tender, with respect to
the Shares as to which this Warrant has not then been exercised.
The Company will, or will direct its transfer agent to, issue, as
soon as practicable after any exercise of this Warrant, and in any
event within 15 days thereafter, at the Company's expense (including
the payment by it of any applicable issue taxes), in the name of and
deliver to the Holder, or as the Holder may direct (on payment by the
Holder of any applicable transfer taxes and compliance with Section 7
hereof), a certificate or certificates for the number of fully paid
and nonassessable Shares as to which this Warrant is so exercised,
plus, in lieu of any fractional shares to which the Holder would
otherwise be entitled, cash equal to such fraction multiplied by the
greater of (i) the then fair market value of such shares or (ii) the
Purchase Price as then adjusted.
Any Shares as to which this Warrant is exercised shall be deemed
issued on and as of the date of such exercise and the Holder or the
person or persons designated by the Holder as therein provided shall
thereupon be deemed to be the owner or owners of record thereof.
<PAGE>
Shares of Common Stock purchased pursuant to this Warrant shall
bear a restrictive securities legend similar in substance to the one
at the head of this Warrant.
This Warrant shall vest and be exerciseable immediately following
approval by the Board of Directors of the Company.
3. ADJUSTMENTS.
3.1 STOCK DIVIDENDS, SPLITS, ETC. The number of Shares
purchasable on exercise of this Warrant and the Purchase Price
shall be subject to adjustment from time to time in the event
that the Company shall (a) pay a dividend in, or make a distribution
of, shares of Common Stock (or securities convertible into,
exchangeable for or otherwise entitling a holder thereof to receive
Common Stock), (b) subdivide its outstanding shares of Common Stock
into a greater number of shares or (c) combine its outstanding shares
of Common Stock into a smaller number of shares. In any such case, the
total number of Shares and the number of shares or other units of such
other securities purchasable upon exercise of this Warrant immediately
prior thereto shall be adjusted so that the Holder shall be entitled
to receive at the same aggregate purchase price the number of shares
of Common Stock and the number of shares or other units of such other
securities which the Holder would have owned or would have been
entitled to receive immediately following the occurrence of any of the
events described above had this Warrant been exercised in full
immediately prior to the occurrence (or applicable record date) of
such event. An adjustment made pursuant to this Section 3.1 shall, in
the case of a stock dividend or distribution, be made as of the record
date therefor and, in the case of a subdivision or combination, be
made as of the effective date thereof.
3.2 REORGANIZATION, RECAPITALIZATION, CONSOLIDATION, MERGER OR
SALE OF ASSETS. In the event of any reorganization or recapitalization
of the Company or in the event the Company consolidates with or merges
with or into another corporation or transfers all or substantially all
its assets to another entity, then and in each such event, the Holder,
upon exercise of this Warrant at any time after the consummation
of such reorganization, recapitalization, consolidation, merger or
transfer, shall be entitled to receive the stock or other securities
or property to which the Holder would have been entitled if the Holder
had exercised this Warrant immediately prior thereto. In such case,
the terms of this Warrant shall survive the consummation of any such
reorganization, recapitalization, consolidation, merger or transfer
and shall be applicable to such shares of stock or other securities or
property receivable on the exercise of this Warrant after such
consummation.
3.3 ISSUANCE OF ADDITIONAL SHARES. Subsequent to the execution
of this Warrant, in the event the Company issues any shares of Common
Stock (or securities convertible into, exchangeable for or otherwise
entitling a holder thereof to receive Common Stock) at a price (or
conversion exchange or strike price) less than twenty-five cents
($0.25) per share, the Purchase Price shall be adjusted immediately
thereafter so that it shall equal the price (or conversion, exchange,
or strike price) at which such shares (or securities convertible into,
exchangeable for or otherwise entitling a holder thereof to receive
Common Stock) were issued.
3.3 NOTICE OF ADJUSTMENT. Upon the occurrence of any event
requiring an adjustment of the Purchase Price or the Shares, then and
in each such case, the Company shall promptly deliver to the holder of
this Warrant an Officer's Certificate stating the Purchase Price or
Shares resulting from such adjustment and setting forth in reasonable
detail the method of calculation and the facts upon which such
calculation is based; provided, however, that no notice to holders of
this Warrant or of any part hereof shall be required before the
earlier of the public announcement or notice to shareholders of the
same.
4. FURTHER ASSURANCES. The Company will not, by amendment of
its articles of incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issuance or sale of securities or any other voluntary
action, avoid or seek to avoid the performance of any terms of this
Warrant, but will at all times in good faith take all necessary action
to carry out all such terms. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any
shares of stock receivable on exercise of this Warrant above the
amount payable therefor on such exercise, and (b) will take all such
action as may be necessary or
<PAGE>
appropriate so that the Company may validly and legally issue fully
paid and nonassessable Shares (or other securities or property
deliverable hereunder), free of all liens, encumbrances, security
interests and claims whatsoever, upon the exercise of this Warrant.
This Warrant shall bind the successors and assigns of the Company.
5. NOTICES OF RECORD DATES, ETC.
(a) If the Company shall fix a record date of the holders of
its Common Stock (or other securities at the time deliverable upon the
exercise of this Warrant) for the purpose of entitling or enabling
them to receive any dividend (including a stock dividend) or other
distribution, or to receive any right to subscribe for or to purchase
any shares of any class of any securities, or to receive any
other right, or
(b) in the event of any reorganization or recapitalization of
the Company, any reclassification of the capital stock of the Company,
any consolidation or merger of the Company with or into another
corporation or any transfer of all or substantially all the
assets of the Company to another entity, or
(c) in the event of the voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any such event, the Company shall mail or cause to be mailed
to the Holder of this Warrant a notice specifying, as the case may be,
(i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right and stating the amount and character
of such dividend, distribution or right or (ii) the date on which a
record is to be taken for the purpose of voting on or approving such
reorganization, recapitalization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding up and the
date on which such event is to take place and the time,
if any is to be fixed, as of which the holders of record of
Common Stock (or any other securities at the time deliverable upon
exercise of this Warrant) shall be entitled to exchange their shares
of Common Stock (or such other securities) for securities or other
property deliverable upon such reorganization, recapitalization,
reclassification, consolidation, merger, conveyance, dissolution,
liquidation or winding up. Such notice shall be mailed promptly after
definitive information (such as, for example, approval of the Board of
Directors or the signing of a letter of intent) with respect to such
proposed action becomes known to the Company, but in any event at
least 10 days prior to the record date therein specified;
provided, however, that no notice to holders of this Warrant or any
part hereof shall be required before the earlier of the public
announcement or notice to shareholders of the same.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon delivery of any indemnity bond (or, in
the case of any institutional holder, an indemnity agreement)
reasonably satisfactory in form and amount to the Company or, in the
case of any mutilation, upon surrender and cancellation of this
Warrant, the Company at its expense will execute and deliver, in lieu
thereof, a new Warrant of like tenor.
7. TRANSFERS.
7.1 The Holder shall not transfer or assign this Warrant, by
operation of law or otherwise, except by court order, provided,
however, that any such transfer shall be subject to compliance with
applicable securities laws. Any attempted or purported assignment
or transfer of this Warrant without compliance with the preceding
sentence shall be void. In the event of any transfer permitted by this
Section 7, the Company shall register or shall cause its agent to
register the transfer or assignment on its Warrant Register upon
surrender of this Warrant, duly endorsed, or accompanied by a written
instrument of transfer duly executed by the Holder or by the duly
appointed legal representative or attorney thereof. On any such
registration of transfer, the Company shall issue a new Warrant or
Warrants, of like tenor, in lieu of the transferred or assigned
Warrant. In no event will the Company be required to effect any
registration of transfer, assignment or exchange that would result in
the issuance of a fraction of a Share. Any action by the Company
required under this Section 7 shall be taken at its own expense.
<PAGE>
7.2 No holder of this Warrant may sell, transfer, assign,
pledge, hypothecate or otherwise dispose of this Warrant, or
any part hereof, unless (i) a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and all
applicable state securities laws then in effect with respect to this
Warrant and the Shares, (ii) the holder delivers to the Company a
written opinion of counsel, satisfactory to counsel for the Company,
to the effect that an exemption from registration under the Securities
Act and any applicable state securities laws is available with respect
to such disposition of this Warrant and that no such registration is
required or (iii) the Company is satisfied that registration under
such acts is not required.
8. ISSUE TAX. The issuance of this Warrant and certificates for
Shares upon the exercise of this Warrant shall be made without charge
to the Holder of such Shares for any issuance tax in respect thereof,
provided that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the
issuance and delivery of any Warrant or certificate in a name other
than that of the Holder.
9. RESERVATION OF SHARES. The Company shall reserve, for the
purpose of issuance upon exercise of this Warrant, such number of its
duly authorized and unissued shares of Common Stock or such
class or classes of capital stock or other securities as shall
from time to time be sufficient to comply with this Warrant. If at any
time the authorized and unissued shares of Common Stock or such other
class or classes of capital stock or other securities are not
sufficient for the exercise of this Warrant, the Company shall
immediately take such corporate action as may be necessary to increase
its authorized and unissued shares of Common Stock or such other class
or classes of capital stock or other securities to such number as
shall be sufficient for that purpose.
10. SURVIVAL. All agreements, covenants, representations and
warranties contained herein shall survive the execution and delivery
of this Warrant and any investigation at any time made by or on
behalf of any party hereto and the exercise, sale and purchase of
this Warrant and the Common Stock (and any other securities or
property) issuable upon exercise hereof.
11. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle the
Holder hereof, in such capacity, to any voting rights or
other rights as a shareholder of the Company.
12. NOTICES. All demands, notices, consents and other
communications to be given hereunder shall be in writing and
shall be deemed duly given when delivered personally or five days
after being mailed by registered or certified mail, postage prepaid,
addressed as follows:
If to the Company: Colorocs Information Technologies, Inc.
Suite 260
5600 Oak Brook Parkway
Norcross, Georgia 30093
with a copy to: Alston & Bird
1201 W. Peachtree Street
Atlanta, Georgia 30309
Attn: M. Hill Jeffries
If to the Holder: Rudolph P. Russo
35 Market Street, Bardavon Bldg.
Poughkeepsie, NY 12601
The Company or the Holder may change their respective addresses
at any time or times by notice hereunder actually received by the
other
14. REMEDIES. The Company agrees that the remedies at
law of the Holder, in the event of any default or threatened
default by the Company in the performance of or compliance with
any of the terms of this Warrant, are not
<PAGE>
and will not be adequate and such terms may be specifically
enforced by a decree of specific performance of any agreement
contained herein or by an injunction against a violation of any terms
hereof or otherwise.
15. GENERAL. This Warrant and any term hereof may be amended,
modified, waived or terminated only by an instrument in writing signed
by the party against which enforcement of such amendment,
modification, waiver or termination is sought. This Warrant shall
be governed by and construed in accordance with the laws (other than
the conflict of laws rules) of the State of Georgia. The invalidity or
unenforceability of any provision hereof shall not affect the validity
or enforceability of any other provision hereof. The headings in this
Warrant are for convenience of reference only and are not part of this
Warrant.
Dated: July 15th, 1997.
COLOROCS INFORMATION TECHNOLOGIES, INC.
By: /s/ Rudolph P. Russo
Rudolph P. Russo,
CEO and Chairman
Attest: /s/ Ty Dealy
Ty Dealy,
Controller
(CORPORATE SEAL)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-KSB, into the
Company's previously filed Registration Statement File No. 333-11421.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 25, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,381
<SECURITIES> 31,875
<RECEIVABLES> 829,387
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