<PAGE> 1
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, 1998
[ ] 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, 1998 were $644,189.
Based on the closing bid price of the Common Stock on March 23, 1999, the
aggregate market value of the outstanding Common Stock held by non-affiliates of
the issuer on March 23, 1999 was $2,643,493. There were 2,114,794 shares of
Common Stock outstanding as of March 23, 1999.
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 1999 Annual Meeting of
Shareholders to be held on May 21, 1999 are incorporated by reference in Part
III hereof.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document, the 1998 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 which 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.
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
investment of approximately $180,189 in NetChannel was recorded at cost.
NetChannel was subsequently acquired by America Online. As a result of that
transaction, the Company received proceeds in the form of cash, foregone debt
and assumed liabilities in the amount of $2,350,526 of which 136,579
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was placed in escrow. The Company realized a gain on disposition of the
investment in NetChannel in the amount of $2,033,758.
BUSINESS
At the beginning of 1998, the Company operated two significantly different
businesses. The development of, and business strategy for, each of the
businesses is described in more detail below.
COLOR IMAGING TECHNOLOGY
The Company retained the patent rights of its color imaging system and recorded
patent license revenues of $450,000 in 1998. 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. Of the potential licenses identified as
of December 31, 1997, only one was closed during 1998. The remaining
opportunities are being aggressively pursued. The United States Patent Office
has granted Colorocs 22 patents.
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 was released in
October, 1998.
COPS LocalTalk (TM)
The Company believes that COPS is the world's only manufacturer of
LocalTalk(TM) network interface cards for personal computers. The COPS
LocalTalk (TM) 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<C153>
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 was 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,
1998, 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.
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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 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.
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 January 1, 1999, 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. The Company is currently searching for new accommodations to
better suit its needs. The Company engages in no real estate investment
activities.
ITEM 3. LEGAL PROCEEDINGS
On December 15, 1997, Crocker Realty Trust ("Crocker") filed a lawsuit against
the Company in the Superior Court of Gwinnett County, Georgia. Crocker sought
damages of $643,483.69 for breach of a lease agreement in
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connection with the lease of certain office space which the Company's
subsidiary, VCA, never occupied. The lease agreement required lease payments of
approximately $640,000 over 3 years. The lawsuit was settled in June of 1998 for
$150,000. 50% of this liability was the responsibility of the Company, and 50%
was the responsibility of America Online/NetChannel.
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, 1998.
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 1997 and 1998. The quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
1997 HIGH LOW 1998 HIGH LOW
------------------ ------ ----- ----------------- ------- ------
<S> <C> <C> <C> <C> <C>
First Quarter $8.50 $2.00 First Quarter $3.00 $.53
Second Quarter 5.00 2.06 Second Quarter .88 .41
Third Quarter 2.50 1.50 Third Quarter .47 .22
Fourth Quarter 1.97 1.06 Fourth Quarter .75 .22
</TABLE>
At December 31, 1998, there were approximately 637 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
There were no sales of unregistered securities during 1998.
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
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ANNUAL MEETING
The 1999 Annual Meeting of Shareholders will be held on May 21, 1999. 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 1998, the Company's operations were focused on two separate lines of
business:
COPS
During 1998, COPS updated its product line with the release of COPSTalk for
Windows NT, the Windows NT version of COPSTalk AppleTalk client software for
Windows designed to allow Windows NT users to connect to any AppleTalk Filing
Protocol compliant file server, thus increasing the market for its software.
While COPS has successfully enhanced its presence on the Internet at its
web-site (http://www.copstalk.com), sales have declined in part due to the late
release of COPSTalk for Windows NT, and due to the expiration of an agreement
with Apple Computer, Inc. to include COPSTalk 2.x with every AppleShare 4.2x or
5.x server sold. Also, Apple sales of AppleShare 4.2x or 5.x servers (with
COPSTalk 2.x) declined, thereby decreasing royalties paid to the Company.
Color Imaging Technology
The Company continues to aggressively pursue other technology license agreements
with other major copier and print engine manufacturers. While one license was
acquired during 1998, there can be no assurances that any further licenses can
be obtained.
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, 1997 and
1998:
<TABLE>
<CAPTION>
1998 OVER
1997 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Total revenues from income statement 100.0% 100.0% (47.9%)
Cost of sales 11.1 1.5 (93.1)
Gross margin -------- -------- --------
Selling, general and administrative expenses 88.9 98.5 (42.2)
Research and development 221.0 130.3 (69.3)
Loss from operations 163.0 21.4 (93.1)
Other income (expense), net -------- -------- --------
Net income (loss) (295.1) (53.2) (90.6)
95.4 379.1 107.3
(199.7%) 325.9 (185.1%)
</TABLE>
Total revenues for the year ended December 31, 1998 were $644,189 compared to
total revenues of $1,235,429 for the year ended December 31, 1997, a decrease of
approximately 48%. The decrease was due to the sale of the color copying and
printing business, and a decline in revenues from COPS software sales of
approximately 36%.
Cost of sales was $9,483, in the year ended December 31, 1998, compared to
$137,122 for the year ended December 31,1997, a decrease of approximately 93%
due to the aforementioned sale of the color copying and printing businesses.
Selling, general and administrative expenses were $839,282 for the year ended
December 31, 1998 compared to $2,730,554 for the year ended December 31, 1997, a
decrease of approximately 70%. This decrease was primarily due to the sale of
assets of the VCA business.
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Research and development expenses were $138,130 for the year ended December
31,1998 compared to $2,013,360 for the year ended December 31, 1997, a decline
of over 93%. During 1997, most of these expenses related to the development of
VCA's On-TV(TM) service, which development and related expenses were no longer
incurred following the asset sale of VCA in May 1997.
Other income was $2,442,249 for the year ended December 31, 1998, comprised
primarily of a gain of $593,752 resulting from the acquisition of NetChannel by
America Online, license fees of $450,000, and the release of a liability for
advances made to VCA of $1,440,000.
As part of the gain of $2,033,758 resulting from the acquisition of NetChannel
by America Online, NetChannel agreed to forego repayment of notes payable from
the Company in the amount of $1,190,000. NetChannel also satisfied a note
payable to Curtis Mathis in the sum of $250,000. In addition, the acquisition of
NetChannel by America Online resulted in a gain to the Company in the amount of
$593,758 representing proceeds in excess of carrying cost.
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 were $524,760 as of December
31, 1998.
The Company's independent certified public accountants, in their opinion set
forth on page 9 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.
YEAR 2000
Management has assessed the impact of any year 2000 issues which could impact
our Company. We have reviewed the software products which we sell and determined
that they are not date sensitive; and therefore, pose no potential year 2000
problems. Also, the operating systems with which our products interact have
indicated year 2000 compliance. Additionally, software systems utilized in the
administration of our Company have either been tested and found to be compliant,
have been identified as year 2000 compliant by the supplier, or are impacted by
year 2000 issues but are easily remedied at minimal cost. The critical of these
systems impacted by year 2000 issues is the accounting software and was upgraded
in February 1999 and is year 2000 compliant.
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
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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 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 9 through 22:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998.
Consolidated Statements of Operations for the years ended December 31, 1997
and 1998.
Consolidated Statements of Shareholders' Deficit for the years
ended December 31, 1997 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998.
Notes to Consolidated Financial Statements as of December 31, 1997 and
1998.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the 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, 1998 and 1997 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, 1998 and 1997, 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 sold the majority of operating assets and
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, 1999
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COLOROCS INFORMATION TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 524,364 $ 29,381
Short-term investments 0 31,875
Receivables, net of allowance for doubtful accounts of $0 in 1998 and 1997 24,210 829,387
Inventories 1,305 0
Prepaid expenses 12,106 135,003
----------- -----------
Total current assets 561,985 1,025,646
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION OF $67,925 AND $43,399 IN 1998
AND 1997, RESPECTIVELY 19,436 32,888
INVESTMENT IN NETCHANNEL, INC 0 180,189
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $38,255 AND $35,157 IN 1998
AND 1997, RESPECTIVELY 68,765 107,020
DEPOSITS 337 1,950
----------- -----------
$ 650,523 $ 1,347,693
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings from bank $ 255,717 $ 1,505,717
Accounts payable and accrued liabilities 887,813 1,256,646
Payable to director/shareholder 50,000 37,500
Notes payable 0 1,190,380
----------- -----------
Total current liabilities 1,193,530 3,990,243
----------- -----------
DEFERRED LICENSING INCOME 875,000 875,000
COMMITMENTS AND CONTINGENCIES (NOTE 6) =========== ===========
SHAREHOLDERS' DEFICIT:
Common stock; no par value; 10,000,000 shares authorized, 2,114,794 shares issued
and outstanding at December 31, 1998 and 1997 1,802,738 1,802,738
Warrants 100,000 100,000
Additional paid-in capital 1,374,039 1,374,039
Retained deficit (4,694,784) (6,794,327)
----------- -----------
Total shareholders' deficit (1,418,007) (3,517,550)
----------- -----------
Total liabilities and shareholders' deficit $ 650,523 $ 1,347,693
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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COLOROCS INFORMATION TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Software $ 644,189 $ 1,011,995
Copier and consumables 0 223,434
OPERATING EXPENSES:
Cost of sales 9,483 137,122
Selling, general, and administrative 839,282 2,730,554
Research and development 138,130 2,013,360
----------- -----------
Total operating expenses 986,895 4,881,036
----------- -----------
(LOSS) FROM OPERATIONS (342,706) (3,645,607)
----------- -----------
OTHER INCOME (EXPENSE), NET:
Sale of licensed technology 450,000 1,500,000
Gain on sale of NetChannel Stock (Note 1) 593,758 0
Release of liability for advances made to VCA (Note 1) 1,440,000 0
Other (41,509) (321,891)
----------- -----------
Total other income, net 2,442,249 1,178,109
----------- -----------
NET INCOME (LOSS) $ 2,099,543 $(2,467,498)
=========== ===========
BASIC NET INCOME (LOSS) PER SHARE $ 0.99 $ (1.17)
=========== ===========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.99 $ (1.17)
=========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 2,114,794 2,108,532
=========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 2,117,651 2,108,532
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
11
<PAGE> 12
COLOROCS INFORMATION TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL (DEFICIT) (DEFICIT)
------ ------ -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 2,071,544 $1,802,738 $ 0 $1,323,337 $(4,326,829) $(1,200,754)
Stock options exercised 43,250 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)
Net income 0 0 0 0 2,099,543 2,099,543
--------- ---------- -------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 2,114,794 $1,802,738 $100,000 $1,374,039 $(4,694,784) $(1,418,007)
========= ========== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
12
<PAGE> 13
COLOROCS INFORMATION TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,099,543 $(2,467,498)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 57,381 309,809
Release of liability for advances made to VCA (1,440,000) 0
Gain on sale of NetChannel stock (593,758) 0
Expense for warrants issued 0 100,000
Changes in assets and liabilities
Receivables 805,177 (406,684)
Inventories (1,305) 19,770
Prepaid expenses 122,897 41,646
Deposits 1,613 4,566
Other assets 0 (132,691)
Accounts payable and accrued expenses (368,833) 897,867
Current deferred income 0 (257,084)
----------- -----------
Net cash provided by (used in) operating activities 682,715 (1,890,299)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of property and equipment (6,054) 39,975
(Purchase) sale of marketable securities 31,875 62,810
Sale of investment in NetChannel stock 773,947 0
----------- -----------
Net cash provided by investing activities 799,768 102,785
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of line of credit (1,000,000) 793,217
(Repayment of) proceeds from payable to director/shareholder note 12,500 (500,000)
Stock options exercised 0 50,702
Proceeds from bridge loans 0 1,190,380
----------- -----------
Net cash provided by (used in) financing activities (987,500) 1,534,299
----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 494,983 (253,215)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,381 282,596
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 524,364 $ 29,381
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE> 14
COLOROCS INFORMATION TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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"). The Company operations consist of the sale of its
network printing and file sharing software through its subsidiary COPS Inc.,
("COPS"). The Company operates 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. The Company operates
in one segment as defined by Statement of Financial Accounting Standards
("SFAS") No. 131 "Disclosures About Segments of an Enterprise and Related
Information." Additionally, the Company does not have any significant foreign
operations.
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. In 1997, 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. In 1998, the Company
generated income through the licensing of its technology and through the sales
of software products by COPS.
GOING CONCERN
At December 31, 1998, 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 continues to focus on revenue maximization and
cost control efforts related to COPS.
The Company had an operating loss of approximately $343,000 for the year ended
December 31, 1998 and has an accumulated deficit of approximately $4,695,000 at
December 31, 1998. The Company currently has no source of
14
<PAGE> 15
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, 1998,
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 1999. Management recognizes that the Company must obtain additional
financing. Management's plans, as noted above, are controlling costs as well as
obtaining additional funds. 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.
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. Upon the sale of
VCA to NetChannel in 1997, VCA retained certain liabilities associated with
trade accounts payable of approximately $800,000. Additionally, NetChannel had
advanced certain funds to VCA in the amount of approximately $1,190,000 and
Curtis Mathis advanced VCA approximately $250,000. The investment of
approximately $180,189 in NetChannel was recorded at cost in the accompanying
consolidated balance sheet at December 31, 1997. In 1998, Net Channel was
purchased by America Online. The Company received cash of $773,947 and placed an
additional $136,579 in escrow awaiting resolution of certain liabilities. The
Company did not record the escrow amount at December 31, 1998, but will record
it upon the termination agreement and release of the escrowed amounts. The
Company recorded a gain of $593,758 on the sale of the investment in Net
Channel. This gain is included in other income in the accompanying statement of
operations for the year ended December 31, 1998. Included in the sale to America
Online, NetChannel agreed to forgive payments of the advances discussed above
and America Online paid the amount due Curtis Mathis. Therefore, the Company
reversed approximately $1,440,000 in advances and recorded this amount as other
income in the accompanying Statement of Operations.
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, 1997, and the accounts of the Company and its wholly owned
subsidiary for the year ended December 31, 1998. All significant intercompany
accounts and transactions have been eliminated.
15
<PAGE> 16
REVENUE RECOGNITION
COPS records the revenue from the sales of software in accordance with the AICPA
Statement of Position 97-2 on software revenue recognition. Revenue from
software licenses is recognized upon delivery if no significant vendor
obligations exist. Prior to the sale to SC in 1997 as noted above, revenue from
Colorocs' product sales 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.
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 at December 31, 1998, 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, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Trade accounts receivable $ 24,210 $ 79,303
License and other receivables 0 750,084
----------- -----------
$ 24,210 $ 829,387
=========== ===========
</TABLE>
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 computer cards that hold software information.
Inventories were valued using the first-in, first-out method.
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.
INTANGIBLE ASSETS
Intangible assets consist of goodwill from the purchase of COPS and is being
amortized over a five year period.
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
16
<PAGE> 17
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, 1998 and 1997 consist
of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Trade accounts payable $ 867,813 $ 890,929
Accrued liabilities 20,000 365,717
----------- -----------
$ 887,813 $ 1,256,646
=========== ===========
</TABLE>
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 earnings per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share includes the effect of common stock equivalents for 1998 of 2,857
shares. Common equivalent shares were antidilutive for 1997 and therefore not
reflected.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Financial Instruments." SFAS No. 133 established accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
No. 133 is effective for all fiscal quarters beginning after June 15, 1999. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's operations.
2. SHORT-TERM BORROWINGS
The Company has a line of credit that bears interest at the prime rate (7.75% at
December 31, 1998). The line of credit expires May 31, 1999. The outstanding
balance of the line at December 31, 1998 was $255,717. The line of credit is
guaranteed and 100% collateralized by the chairman of the board of directors of
Colorocs.
3. LICENSING AGREEMENTS
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 has deferred approximately $875,000 at December 31, 1998 and 1997 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. In 1998, the Company licensed its patent for $450,000 and recorded
this amount as other income in the accompanying statement of operations for the
year ended December 31, 1998.
17
<PAGE> 18
4. INCOME TAXES
There was no provision for income taxes for the year ended December 31, 1998 as
the company used a net operating loss carryforward to cover any taxes due. For
the year ended December 31, 1997, there was no benefit for income taxes as a
result of the establishment of a valuation allowance.
At December 31, 1998 and 1997, the Company had net operating loss carryforwards
and research and development tax credit carryforwards for federal income tax
purposes of approximately $20,963,000 and $23,066,000, respectively, which are
available to offset future taxable income, if any, through 2009. 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, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Research and development credit carryforward $ 393,000 $ 393,000
Net operating loss carryforwards 7,966,000 8,765,000
Foreign tax credit carryforwards 47,000 47,000
Other asset basis differences:
Deferred licensing income 333,000 333,000
Other, net 76,000 71,000
----------- -----------
Gross deferred tax assets 8,815,000 9,609,000
Deferred tax liabilities:
Depreciation (7,000) (12,000)
Stock Options (180,000) (180,000)
----------- -----------
Total deferred tax assets 8,628,000 9,417,000
Valuation allowance 8,628,000 (9,417,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
The change in valuation allowance for deferred tax assets for the years ended
December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Balance, beginning of year $ 9,417,000 $8,677,000
Change in valuation allowance (789,000) 740,000
----------- ----------
$ 8,628,000 $9,417,000
=========== ==========
</TABLE>
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.
18
<PAGE> 19
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under a noncancellable lease agreement for its
corporate office space and certain office equipment at its corporate office.
Future minimum lease payments total $21,000 in 1999.
In 1998, the Company sublet certain portions of its office space to SC
Distribution and NetChannel. Total sub lease expenses paid by SC Distribution
and NetChannel was approximately $21,000 for the year ended December 31, 1998.
Net rent expense recorded by the Company for the year ended December 31, 1998
and 1997 was $23,423 and $124,955, respectively.
6. WARRANTS
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.
7. STOCK OPTIONS
During 1994, the Company adopted the 1994 Director Stock Option Plan, ("Colorocs
Director Plan") and the 1994 Employee Stock Option Plan, ("Colorocs Employee
Plan") which, as amended in 1995, provides for the issuance of up to 368,327
shares of Colorocs' common stock. A summary of the stock option activity under
all plans is as follows:
19
<PAGE> 20
COLOROCS DIRECTOR AND EMPLOYEE PLANS
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE RANGE PRICE
------- ----------- -----
<S> <C> <C> <C>
Outstanding at December 31, 1996 262,946 $0.95-$7.75 1.89
Granted in 1997 50,000 $0.50 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
=======
Granted in 1998 10,000 $0.50 0.50
Exercised in 1998 0 0.00
-------
Outstanding at December 31, 1998 279,696 $0.50-$7.75 1.26
=======
Vested and exercisable options at
December 31, 1998 279,696 $0.50-$7.75 1.26
=======
Options available for future grants at
December 31, 1997 35,381
=======
</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, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING
PRICE OF SHARES PRICE CONTRACTUAL LIFE
----------- --------- ----- ----------------
<S> <C> <C> <C>
$0.50 180,750 $0.50 1.65 years
$0.95-$3.32 64,100 $1.01 2.65 years
$5.20-$7.75 34,846 $5.64 2.05 years
279,696
</TABLE>
All options granted under the Colorocs director and employee plans in 1998 and
1997 were granted at fair market value on the date of grant.
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 and the
Colorocs Employee Plan under APB No. 25; however, the Company has computed for
pro forma disclosure purposes the value of all options granted during 1997, and
1998 using the Black-Scholes option pricing model as prescribed by SFAS No. 123
using the following weighted average assumptions used for grants in 1998 and
1997:
20
<PAGE> 21
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Risk-free interest rate 5.74% 6.62%
Expected dividend yield 0.00 0.00
Expected lives 5 years 6 years
Expected volatility 191.00% 64.00%
</TABLE>
The total value of the options granted during the years ended December 31, 1998
and 1997 were computed as approximately $5,000 and $695,000, 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 income (loss) and pro forma basic and diluted net income
(loss) per share for the years ended December 31, 1998 and 1997 would have
changed to the following pro forma amounts (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss):
As reported in the financial statements $ 2,010 $ (2,467)
Pro forma in accordance with SFAS No. 123 1,991 (3,143)
Basic net income (loss) per share:
As reported in the financial statements $ 0.99 (1.17)
Pro forma in accordance with SFAS No. 123 0.99 (1.49)
Diluted net income (loss) per share:
As reported in financial statements 0.94 (1.17)
Pro forma in accordance with SFAS No. 123 0.94 (1.49)
</TABLE>
8. RELATED-PARTY TRANSACTIONS
Colorocs has a consulting agreement with the chief executive officer and
chairman of the board of Colorocs. Colorocs paid approximately $150,000 in
consulting fees to the director for the years ended December 31, 1998 and 1997.
At December 31, 1998 and 1997, $50,000 and $37,500, respectively, of the
consulting fees had not been paid and are accrued for in the accompanying
consolidated balance sheets.
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, in management's
opinion, they represent the fair value of the services provided.
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, the
Company paid approximately $32,000 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.
As noted in Note 6, 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 6). 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 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.
21
<PAGE> 22
9. CONCENTRATION OF CREDIT RISK AND SUPPLY OF INVENTORY
In connection with an agreement with Sharp Corporation ("Sharp"), the Company
was 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 had paid approximately $125,000, classified as a
prepaid asset, to Sharp for these shares as of December 31, 1998. The Company
decided to write off the balance related to the Sharp repurchase agreement to
Selling, General and Administration Expenses in the accompanying Statements of
Operations during 1998.
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. During 1998, the Company sold several technology
licenses relating to or useful for the manufacture of, electrophotographic
printers to Canon for approximately $450,000 and recognized the total amount as
other income in the accompanying consolidated statement of operations for the
year ended December 31, 1998. No other customer accounted for more than 10% of
revenues in 1998 or 1997.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $61,146 and $154,459 for the years ended December 31,
1998 and 1997, respectively.
11. SUBSEQUENT EVENT
On February 1, 1999, the Company purchased a 13% interest in PrimeCom
Interactive, Inc. for $400,000. The Company also has an option to purchase an
additional 27% of PrimeCom Interactive, Inc., a private company located in
Gurnee, Illinois, which is engaged in the development and marketing of software
and other Internet related products and services to the small business
community.
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.
22
<PAGE> 23
EXECUTIVE OFFICERS
RUDOLPH P. RUSSO, AGE 69, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. Mr.
Russo, age 69, 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.
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.
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 (Exhibit
2.3 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997)
23
<PAGE> 24
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)
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 (Exhibit 10.7(c) to the Company's Annual
Report on Form 10-KSB for the year ended December 31,
1997)
24
<PAGE> 25
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 (Exhibit
10.8(d) to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997)
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, 1998 - 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.
25
<PAGE> 26
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 23, 1999.
Colorocs Information Technologies, Inc.
By: /s/ Rudolph P. Russo
---------------------------------------------------
Rudolph P. Russo
Chairman of the Board and Chief Executive Officer
(Principal Executive 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 23, 1999.
<TABLE>
<CAPTION>
SIGNATURES
- ----------
<S> <C>
/s/ Rudolph P. Russo /s/ Alan B. McKeon
- ---------------------------------------- ----------------------------------------
Rudolph P. Russo, Chairman of the Board Alan B. McKeon, Director
and Chief Executive Officer
/s/ Nicholas M. Russo /s/ Joseph E. Wallace
- ---------------------------------------- ----------------------------------------
Nicholas M. Russo, Director Joseph E. Wallace, Director
</TABLE>
26
<PAGE> 1
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, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COLOROCS INFORMATION TECHNOLOGIES, INC. FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<INVENTORY> 1,305
<CURRENT-ASSETS> 561,985
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0
0
<COMMON> 1,802,738
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<TOTAL-LIABILITY-AND-EQUITY> 650,323
<SALES> 644,189
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<TOTAL-COSTS> 986,895
<OTHER-EXPENSES> 2,442,249
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